Trina Solar Q3 2007 Earnings Call Transcript

| About: Trina Solar (TSL)

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

AdenCroft

Tez Tupez

AdamSinclair

PavelMolkofov

Doug Ulchner

Max Lee

Jay Spindel

Charles Yonts - CLSA

Michael Hunt - Oso Partners

Operator

Good day ladies and gentlemen and welcome to the Trina SolarThird Quarter 2007 Earnings Call. My name is Lisa and I will be yourcoordinator 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 thisconference. (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 thirdquarter 2007 earnings conference call. My name is Thomas Young, and I am TrinaSolar's Director of Investor Relations. With us today are Trina Solar'sChairman and CEO, Jifan Gao; Chief Financial Officer, Sean Shao; ChiefOperating Officer, Sean Tzou; Vice President of Business Development, AndyKlump; Vice President of Sales and Marketing, Arturo Herrero; and VicePresident of Silicon, David Seburn.

Before I turn the call over to Mr. Gao, may I remind ourlisteners that in this call, management's prepared remarks containedforward-looking statements which are subject to risks and uncertainties, andmanagement may make additional forward-looking statement in response to yourquestions. Therefore, the company claims the protection of the Safe Harborstatement for forward-looking statements that is contained in the PrivateSecurities Litigation Reform Act of 1995. Actual results may differ from thosediscussed today and, therefore, we refer you to a more detailed discussion ofthe risks and uncertainties in the company's filing with the Securities andExchange Commission.

In addition, any projections as to the company's futureperformance represent management's estimates as of today, November 21, 2007.Trina Solar assumes no obligation to update these projections in the future, asmarket conditions change.

For those of you unable to listen to the entire call at thistime, a recording will be available via webcast for 90 days at the InvestorRelations section of Trina Solar's website at http://www.trinasolar.com.

And now it is my pleasure to turn the call over to TrinaSolar's Chairman and CEO, Mr. Jifan Gao, and Vice President of BusinessDevelopment, 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 theexecution of our business plans as we move towards our goal of becoming aleader in the global solar PV industry.

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

We signed agreements with industry leading equipmentsuppliers to build our fully integrated capacity to 350 megawatts by the end of2008. We've received approval from the company's Board to expand our fullyintegrated production to upstream poly-silicon production. And we strengthenour management team with the focus on improving quality management andevaluating upstream poly-silicon investment opportunities to support thelong-term growth of our business in the quarters to come.

(inaudible) of the solar PV energy business remained verystrong as a number of countries in Europe andelsewhere continued to successfully implement policies to accelerate adoptionof solar PV energy, creating significant opportunities for the profitablegrowth of our business.

As we look towards the future, we remain confident thatTrina Solar is well positioned with a vertically integrated business model, aseasoned 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 toour customers, shareholders and employees, for many quarters to come.

Finally in October 2007, we were very honored to be ranked numberone in the "Deloitte Technology Fast 50 China 2007" program. Thisaward is a testament to the hard work of all of our employees, and reaffirmsour commitment to establish Trina Solar as a leader in the global solar PVindustry.

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 moredetail.

Sean Tzou

Thank you, Andy. As Mr. Gao mentioned, Trina Solar deliveredsolid results for the third quarter, as we benefited from improved ASP andstrong 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 from20.33 megawatts in second quarter of 2007.

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

Subsequent to the end of the third quarter, we have launcheda commercial production of our new cell lines, number 3 and number 4, whichthis month reached a production rate of 100% capacity, with cell efficiencylevel of 16.4%.

We are also in an advanced test phase to prepare our new celllines, number 5 and 6, for commercial production of 156 millimeter cells madefrom our self-produced multi-crystalline ingots and wafers. And we will alsodrive our new module production line to offer module power, ranging from 200 to220 watts, up from our current maximum of 185 watts.

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

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

Moving on to our technology roadmap, during the thirdquarter, we reduced our silicon wafer thickness from 220 to 200 microns for100% of our monocrystalline wafer production capacity. As we continue ourefforts to increase efficiency and reduce silicon requirement per watt, we areworking to further reduce our wafer thickness to 180 microns in the thirdquarter of 2008.

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

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

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

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

Subsequent to the end of the quarter, we secured twoimportant long-term polysilicon supplier agreements with the Nitol Group, and SichuanYongxiang Polysilicon. Nitol Group is a Moscowbased chemical company which currently produces trichlorosilane, and in buildinga polysilicon production facility, with initial output expected in 2008. It hasannounced the agreement will supply to Trina Solar, with virgin polysilicon sufficientto produce over 200 megawatt of module in aggregate over a [six years] period,starting in 2009. The agreement also includes the opportunity to purchasepolysilicon from the pool of unallocated production in 2008.

The company also recently announced a long-term agreementwith Leshan-based Sichuan Yongxiang Polysilicon, whose affiliate companycurrently manufactures and supplies trichlorosilane gas to well-establishedpolysilicon producers in China.Under the agreement, Sichuan Yongxiang will supply Trina Solar with virginpolysilicon, sufficient to produce approximately 1,300 megawatt of modules overa six years period. Sichuan Yongxiang will also deliver voluntarily 50 metrictons of virgin polysilicon in 2008, with the remainder spread over the 2009 to2013 timeframe.

With these contracts, and company's existing supplyagreements with Wacker Chemie, DC Chemical and others, we have now securedapproximately 70% of the polysilicon requirements for our 2008 plannedproduction. The company has also ordered and secured supplier allocations to itsglobal 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, wehave continued investment to strengthen our management team. In the thirdquarter, we appointed Mr. Anthony Chia, as Vice President of Quality. Mr. Chiabrings to Trina Solar over 21 years of experience in quality management, andwill lead our efforts to maintain our focus on quality as we rapidly scale ourproduction capacity.

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

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

Trina Solar will continue to be a net purchaser of feedstockmaterials in future years and will continue to work with its long-termpolysilicon supply partners. The project is a part of the company's long-termportfolio strategy, to secure its polysilicon feedstock in the most efficientand cost effective manner. With that, I will turn the call over to our ChiefFinancial Officer, Sean Shao, who will discuss our financial results in moredetail.

Sean Shao

Thank you, Sean. We are very pleased with our third quarterresults. Our net revenues in the quarter were $82.6 million, an increase of9.7% 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 inthe 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 of2007, 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 thirdquarter of 2007, up from 18.9% in the second quarter of 2007 and down from26.2% in the third quarter of 2006. The sequential improvement in gross marginresulted from a higher module ASP. The year-over-year decline in gross marginwas primarily the result of lower ASPs and higher silicon costs.

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

Depreciation was approximately $1.8 million for the quarter.This was mainly from the cost of revenues. Operating income in the thirdquarter was $6.9 million, a decrease of 14.3% sequentially and an increase of50.6%, 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 quarterof 2006. The sequential and year-over-year declines in operating margin weredue to the increased costs associated with our current and future expansion ofoperations and staffing, incurred during the course.

Interest expense was $2.1 million in the third quarter of2007, compared to $1.6 million in the second quarter of 2007, and $0.4 millionin the third quarter of 2006. The sequential and year-over-year increases weredue to the addition of bank borrowings, higher average borrowing balance, andhigher interest rates on our borrowings compared to the second quarter of 2007and the third quarter of 2006.

The company recorded income tax of approximately $15,000 inthe third quarter, compared to a $55,000 tax benefit in the second quarter of2007, and $236,000 tax expense in the third quarter of 2006.

Net income was $7.2 million in the third quarter of 2007, anincrease of 0.5% sequentially, and 86.8% year-over-year. Earnings per fullydiluted ADS were $0.29 in the third quarter of 2007, compared to $0.32 in thesecond 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 inworking capital, and $122.9 million in short-term debt.

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

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

Inventory valuation: In response to the recent concerns withrespect to inventory valuation in the solar PV industry in China, thecompany 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 fairvaluation of its inventories in a timely manner. The company's inventoriesinclude reclaimable silicon feedstock, some of which, after going throughquality review, may not meet Trina Solar's requirements. At the end of eachquarter, Trina Solar writes down the value of its inventory from theircorresponding book value, if any unusable silicon feedstock is identified.Trina Solar's financial statements are prepared in conformity with accountingprinciples, generally accepted in the United States. We believe we haveadequate controls in place and that our silicon valuation is fair andreasonable.

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

Andy Klump

Thanks, Sean. In summary, we are very pleased with ourresults in the quarter and remain very confident in opportunities ahead to growour business successfully. As we move into next year, [we bring] a highvisibility into our revenue. The company has signed sales contractsrepresenting approximately 100% and 50% of its planned first and second half2008 module production, respectively.

Our sales efforts will be distributed throughout establishedand 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 marketingactivities in the United States,Korea, and Greece.

In addition, we have approximately 70% of our siliconrequirements secured for next year, and have agreements with leading equipmentsuppliers to expand our fully-integrated capacity to 350 megawatts by year'send. We will continue to take every opportunity to create value for ourshareholders, customers and employees, as we execute on a vertically integratedstrategy. And we look forward to report on our progress in the quarters andyears to come.

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

Question-and-Answer Session

Operator

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

Rob Stone - Cowen and Company

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

Sean Shao

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

Rob Stone - Cowen and Company

So, does that mean that operatingexpenses should stay at this level in the fourth quarter? In connection withthat in the past, Trina has mentioned and then reiterated goals for revenue innet income for 2007. I noticed that you did not have any mention of those goalsin 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 apercentage of the revenue. And I think this year, I think for 2007 as apercentage of revenue will go down to the extent we can see I think that's some8% to 9% as a percentage of revenue OpEx as a whole. So the main part of theOpEx 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 thequestion, I think I probably confused you by putting two things together. Inthe past, for example in Q2, Trina cited a particular goal for revenue and netincome for full year 2007. I noticed that was not mentioned in the pressrelease this time or in your prepared remarks. So, do you have any comments onyour expected range of revenue and net income for 2007, now that there is justone quarter left to go?

Sean Shao

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

Rob Stone - Cowen and Company

Great, thank you.

Operator

Our next question comes from PaulClegg. Please proceed.

Paul Clegg - Jefferies

Hi, good evening. Can you hearme?

Thomas Young

Yes, we hear clear, hello.

Paul Clegg - Jefferies

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

Sean Shao

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

Paul Clegg - Jefferies

Okay. And I had a question alsoregarding your comments before about where you are seeing strength in themarket? Did you say that Italywould be 20% of your projected output for 2008?

Andy Klump

Arturo, perhaps you could takethis question.

Paul Clegg - Jefferies

And if you could just maybecomment 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 mentionedabove 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 acouple of the new countries, we don't hear a lot about this, can you just talkmaybe momentarily about where you are seeing a lot of strength outside of Italy and Germanyand Spain?

Sean Tzou

Okay, we currently are very strongin Spain and no questionabout that, that also we are working on Italy, which is our market. We seea lot of potential and we have tightened a lot of our strong relationship withcurrent distributors as well as the power company [earning] power. So we engage[quite well] on that. We also work on Belgiumand Netherlands.

Paul Clegg - Jefferies

Okay, I'll jump back in thequeue. Thank you.

Operator

Our next question comes from [LeeYin] please proceed.

Liu Yang - Merrill Lynch

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

Sean Shao

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

Liu Yang - Merrill Lynch

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

Sean Shao

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

Liu Yang - Merrill Lynch

And how should we think aboutpolysilicon cost in the fourth quarter?

Sean Shao

Fourth quarter, as I discussedearlier that it's a fast changing quarter compared to the past two quarters. Alot of things are happening. I think one of them is the polysilicon cost andthe other one is ASP. When we look at the polysilicon costs we do seeindication of increasing trends.

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

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

Liu Yang - Merrill Lynch

And do you have a sense of howmuch gross margin expansion you would get from the fully vertically integratedmodule in the fourth quarter?

Sean Shao

It's -- if you ask me about cellline production ramp ups, that I can tell you for sure is that, we can -- wewere [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, itreally depends upon the changing ASP and also changing the polysilicon cost.So…

Liu Yang - Merrill Lynch

I mean just from the verticalintegration alone, can you -- are you on track to expand the margin from thator?

Sean Shao

Okay. So for the verticalintegration 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 thefourth quarter. I am not saying that we are going to eliminate [100%] of theoutsourcing. But, depending upon the exact timing of the fourth, the fifth andthe sixth production lines, the exact timing of the ramp up, so it will decidehow much we can make in-house.

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

But the last two lines actuallyare currently at the test production stage. So we expect to get them ramped upvery shortly.

Liu Yang - Merrill Lynch

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

Sean Shao

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

Liu Yang - Merrill Lynch

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

Sean Shao

Our output target for the year2008, we are looking at 200, 210 megawatts.

Liu Yang - Merrill Lynch

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

Sean Shao

Yeah. That's correct.

Liu Yang - Merrill Lynch

Okay. Thank you. I'll get backinto the queue.

Operator

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

Aden Croft

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

Sean Shao

Before Sean Tzou clarifies on thenature 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] andR&D, actually it was referred to, compared to last year. Because if youlook 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 of2006.

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

Sean Tzou

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

And also during the waferingarea, we spent tremendous effort not only working on 200 microns, we also arelooking at 180 microns. We spent some of the effort there as well as also theslurry reduction, the recycle slurry that we are trying to reduce the usage ofthe 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 multicrystallinecell manufacturing and also the automation of the line.

So, those are the main activitieswe are working on. As far as the module area, we also are working on the newmaterial. We are testing now a few new materials. We've spend tremendousefforts on the certification of the new materials as well as working with thecustomer. And so, all those are basically a short summary of our R&Dactivities.

Aden Croft

Okay. Thank you. And just onequick follow up. Can you quantify the amount of inventory write-down in thequarter?

Sean Shao

Yes, of course. I think for thirdquarter, 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 [TezTupez]. Please proceed.

Tez Tupez

Good evening. Could you give ussome detail on your polysilicon plants, they [have been a fully inter-plantcruise reactor] technology are you using? What capital costs are you estimatingand 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 respondto that. Yeah, we are looking at constructing the 3,500 metric ton per yearpolysilicon factory. It is a fully integrated design. You have seen theclassical TCS production process with the classical Siemens file, deposition process.We are now ready at this point to talk about the technology providers that weare using for the engineering companies. The time-to-market for the project isexpected to be 24 months after we start.

Tez Tupez

And have you picked the locationfor the plant yet?

David Seburn

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

Tez Tupez

And I am sorry, I might havemissed this. Did you say when you will begin, when you will break ground on theproject?

David Seburn

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

Tez Tupez

Okay. Thank you very much.

Arturo Herrero

This is Arturo Herrero, the VPfor Sales and Marketing. Unfortunately, I couldn't answer your questions. Canyou hear me now?

Sean Shao

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

Arturo Herrero

Okay. Thank you. So, just to letyou know, that I am in line now. So, if any of the investors want to repeatagain 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 myquestion. Just following up on Paul's last question, can you provide us alittle 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 Chinesecompetitors recently commented on the new entry that will be supplying them atbelow $40 a kilo. I was wondering if that's consistent with the agreement longterm for the new poly supply and ultimately, what you think your productioncost will be, from you own internal production?

Sean Tzou

Okay. This is Sean. Let me try toanswer your question. Our agreement with Sichuan Yongxiang is more based on themarket price and we are not ready to release that. However, we can talk aboutthe 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 willyou be at $30 to $35?

Sean Tzou

Would you like me to answer that,Thomas?

Thomas Young

Yeah. I think we have severalquestions here, yeah.

Sean Tzou

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

Adam Sinclair

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

Andy Klump

Yeah. Adam, thanks for thequestion. This is Andy. At this point, we have not yet disclosed any additionaldetails on the pricing and the pricing mechanisms. So, we certainly feel veryconfident about this project and it is inline with our overall trend ofdecreasing prices with similar or other contracts. So, we feel very confidentwith 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 yourpolysilicon project, how should we think about the capital cost for such aproject in terms of per ton or in the aggregate?

Sean Tzou

Dave, you want to answer thequestion?

David Seburn

Sure. I'll address that. Thetargeted capital cost is $120 to $140 per kilogram installed capacity, and whenyou look at that in relation to a 3,500 metric ton per year polysiliconfactory, that's $420 million to $490 million.

Pavel Molkofov

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

Andy Klump

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

Sean Shao

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

Pavel Molkofov

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

Sean Shao

Well, I think we basically havetwo types of cells, in-house made cells and also a small portion is outsourcedfor cells. Now the conversion efficiency of the module really depending uponthe conversion efficiency of the cells and -- for in-house we already hit thelevel of [16.56.6] and for those outsourced is lower. So, I think there is adifference between the module conversion efficiency and the cells approximately2.5% consistent.

Pavel Molkofov

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

Sean Shao

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

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

Sean Tzou

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

So, additionally with the monocrystallinemodules, we are experiencing about 2% to 2.5% efficiency loss. However, withthe new improved process, we used our [FS8] etching process in our lines threeand four. We actually are gaining some of them back, so in our averageconversion 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 expansionsincluding the poly plant, when do you think you'll have to go to the equitymarket 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 makesure [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 havethe plan, and also we are planning on, and are also [trying] to arrange along-term debt to fit such a project which is long-term in nature. So, I meanin respect of the amount of the finance, in the debt financing, we are lookingup to 50% of the total required fund. So, that's the long-term debt, which isthe first thing we need to do and actually we are doing.

The second thing, we need to dobefore we go back to the capital market. I think it’s to make sure, we executeit on our side, sufficiently so that we can sit down with the investors, showthe investors that we are ready. So, we have a whole bunch of things to work onbefore we can even think about that. The last thing, I think that we need toconsider before we go back to the Wall Street, really is to make sure that wekeep a close eye on the market cap and valuation of the company. If thevaluation doesn't make sense, we are not going to jeopardize the interest ofthe existing shareholders to equity finance. So, those are the main things, Ithink 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 thirdquarter, 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, ourtargets for the [shipment], our targets for the top-line and our targets forthe 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 theshipment, we set the range of 75 to 80 megawatts and we are, we estimated arevenue 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 gradepolysilicon manufacturers. So, they are actually in the plan to launch theirplants in the coming months. So, the answer is no, they have not previouslyproduced polysilicon. However, we have a high confidence level they willsucceed with this project, because they have already solved the most difficultproblem which for a lot of companies is the [TCS].

Doug Ulchner

And what percent of Nitol's polywill come from them?

Andy Klump

We have not quoted specificvolumes for the contracts each on a year basis, but just put it in aggregatefigure.

Doug Ulchner

Okay, thank you.

Operator

Our next question comes from MaxLee. Please proceed.

Max Lee

Yeah, good evening guys, thanksfor taking my questions. I would like to understand what was your outsourcingratio in the third quarter?

Sean Shao

Well, the outsourcing ratio, areyou referring to the outsourcing of the cell production?

Max Lee

Yes. It was 50% outsourced in thethird quarter.

Sean Shao

Well, I think the third quarteroutsourcing ratio is consistent to the second quarter which is approximately75%.

Max Lee

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

Sean Shao

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

Max Lee

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

Sean Tzou

We continue to maintain ourmixture of approximately 80% reclaimable polysilicon and about 20% virginpolysilicon.

Max Lee

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

Sean Tzou

We do expect this to be more inline with the same ratio next year as well. As we move out beyond that, thatratio 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 [JaySpindel]. Please proceed.

Jay Spindel

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

Sean Shao

I think we discussed the -- Ithink 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 perwatt production cost. So, I think last quarter in the earnings call we discussedabout our in-house production costs per watt approximately $0.40 and for thefourth quarter we estimated that it can be reduced by approximately $0.10.

Jay Spindel

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

Sean Tzou

Well, the guidance that we'veissued was a 20% increase from '06 to 2007 and then another 10% increase in2008. So, we are maintaining with that same estimate. In terms of the remaining30%, management feels very confident they will be able to fill that gap. We dohave other companies we are discussing with for volumes as part of long-termcontracts, and it’s part of our medium term contract strategy. So, we do feelvery confident that we will be able to reach the remaining 30%.

Jay Spindel

Thank you.

Operator

Our next question comes fromCharles Yonts. Please proceed.

Charles Yonts - CLSA

Hi guys. Could you comment onreturn in 3Q versus 2Q and how that may have impacted OpEx through productreturns?

Sean Shao

You mean the returns of thesales?

Charles Yonts - CLSA

Right, no return exactly returnsof 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 yougo into a little bit more detail about what caused G&A end sales [to gohigh] so much and what makes you confident that in 4Q they will come back down?

Sean Shao

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

But I don't expect that accrualthe bonus can be of the same amount as the one in the third quarter. And whenyou 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 thisis more related to the better management of the scheduling. So that we makesure that we don't have any trucks, they come and go back without to be fullyloaded. So I think there's room for us to make improvement to cut the freightcharge.

Charles Yont - CLSA

Okay. Thank you.

Operator

Our next question comes from PaulClegg. Please proceed.

Paul Clegg - Jefferies

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

Sean Tzou

Dave, we'll let you take thisquestion.

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 yearcapacity number, that will likely happen one to two years after startup. So, wedo have some numbers put in the first year after operation that will allow usto achieve the $30 to $35 per kilogram costs then. The cost was of $30 to $35per 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 withdepreciation. Thanks very much.

Operator

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

Michael Hunt - Oso Partners

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

Sean Tzou

Yes. Please continue.

Michael Hunt - Oso Partners

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

Sean Shao

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

Michael Hunt - Oso Partners

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

Sean Shao

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

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

Michael Hunt - Oso Partners

But in the first quarter, Iremember the tax was affected by local Chinese investments, what was thisnumber?

Sean Shao

The first quarter, the tax was1.1 million. I think, I don't recall exactly what was behind it, but I think Idon't remember if there's anything else in the first quarter. I think firstquarter was a straight, I think tax related to the 18% taxable income. And Ithink the tax rate was not 12%, it's 24%.

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

Michael Hunt - Oso Partners

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

Sean Shao

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

Michael Hunt - Oso Partners

12%, okay.

Sean Shao

Yes.

Michael Hunt - Oso Partners

And so, why was it zero thisquarter?

Sean Shao

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

Michael Hunt - Oso Partners

What are the credits?

Sean Shao

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

Michael Hunt - Oso Partners

And that's the off-balance sheetcompany?

Sean Shao

No. We don't have any off-balancesheet company. The purchase was made by Trina [alone]. Let me clarify this, ourstructure is very straightforward. It's just Cayman company and we have 100% onthe (inaudible) in China andalso 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 firstquarter call, you said you invested in a local company that had a loss, thatwasn't off-balance sheet?

Sean Shao

Our investments in the localcompany, 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 Caymancompany 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, hasthere been any turnover in the senior ranks in purchasing or procurementsrecently?

Sean Shao

No.

Michael Hunt - Oso Partners

People with their internationalpassport 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 addingpeople.

Operator

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

Rob Stone - Cowen and Company

Hi, Sean. I wonder if you couldjust clarify a bit of your comments about the quarter-to-date ASP increase. Ithink 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 notmistaken, the ASP was in the range -- I think was $3.80 to $3.85 and inNovember I think it went up. Like I said it was 2% to 3% based upon the Octobernumber.

Rob Stone - Cowen and Company

Okay. Thanks very much.

Sean Shao

You are welcome.

Thomas Young

In the absence of the Operator, Iwould like to thank everyone. On behalf of the entire Trina Solar managementteam, we want to thank you for your interest and participation on this call. Ifyou have any interest in visiting Trina Solar, please let us know. Again, thankyou for joining us on the call. This concludes Trina Solar's third quarter 2007earnings conference call.

Operator

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

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