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Trina Solar Ltd. (NYSE:TSL)

Q1 2008 Earnings Call

June 6, 2008 8:00 am ET

Executives

Jifan Gao – Chairman and Chief Executive Officer

Terry Wang – Senior Vice President of Finance

Xiyuan Tzou – Chief Operating Officer

Andrew Klump – Vice President of Business Development

Arturo Herrero – Vice President of Sales and Marketing

Analysts

Robert Stone – Cowen & Co.

Mehdi Hosseini – Friedman, Billings, Ramsey & Co.

Adam Krop – Ardour Capital

Vishal Shah – Lehman Brothers

Brian Yerger – Jesup & Lamont Securities Corporation

Paul Lemming – Soleil Securities

[Dan Reese – Colin Stuart]

[Bing Shen] – Goldman Sachs

[Peter Parker – Capital]

[Ricky Lu] – Deutsche Bank Securities

Lu Yeung – Merrill Lynch

 

 

Operator

 

Good morning! My name is Jackie, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Trina Solar’s First Quarter 2008 Earnings Conference Call. (Operator Instructions) Mr. Young, you may begin your conference.

Thomas Young

Hello and welcome to Trina Solar’s First Quarter 2008 Earnings Conference Call. This is Thomas Young, Trina Solar’s Director of Investor Relations. With us today are Trina Solar’s Chairman and CEO, Jifan Gao; Senior Vice President of Finance, Terry Wang; Chief Operating Officer, Xiyuan Tzou; Vice President of Business Development, Andrew Klump; and Vice President of Sales and Marketing, Arturo Herrero.

Before I turn the call over to Mr. Gao, may I remind our listeners that in this call management’s prepared remarks contain forward-looking statements which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today, and therefore we refer you to a more detailed discussion of the risks and uncertainties in the company’s filings with the Securities and Exchange Commission.

In addition, any projections as to the company’s future performance represent management’s estimates as of today, June 6, 2008. Trina Solar assumes no obligation to update these projections in the future as market conditions change.

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

At this time, we also wish to express our deepest sympathies to those affected by the recent Sichuan earthquake. We also wish to confirm that our communities, staff, and operations were not affected at our Changzhou factory or Shanghai office.

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

Jifan Gao [Translation]

 

Welcome everyone, and thank you for joining us on today’s call. We are pleased to report a successful quarter in which we met or exceeded our quarterly operational targets for revenue and shipment, gross margin, and operating margin despite challenges presented by higher polysilicon feedstock costs. The benefits of our vertically integrated business model allowed us to progress towards of our goal of becoming a global leader in the solar PV industry. Our recent accomplishments include the further development of our technology platform, ongoing manufacturing cost reduction resulting from increased vertical integration, and the further establishment and recognition of our brand.

In the first quarter, we continued to executive strategies to extend Trina Solar’s brand recognition in all major and developing PV markets. We introduced market sales in a number of new countries, further penetrated our distribution channels by selling to downstream PV system integrators, and differentiated our brand by offering global service.

In conjunction with our delivery of capacity expansion to 350 megawatt by year’s end, we successfully launched commercial operation of our newest cell processing workshop. The workshop, which will house cell lines 7 to 14 and currently lines 7 and 8 in commercial operation, successfully incorporates both automation and inline cell processing to allow better handling of thinner wafers and improve throughput. Additionally, cell lines 9 through 12 are either presently in installation or pre-test production. The company also achieved full commercial production and has a new multi-story fully-automated wafer workshop.

As we progress in our vertically integrated capacity expansion, we continue to improve production efficiencies throughout our value chain by improving our manufacturing processes to reduce both our silicon and non-silicon production costs. During the quarter, we also reduced our silicone usage due to complete conversion of our monocrystalline and multicrystalline wafer thickness from 200 to 180 microns and from 220 to 200 microns respectively.

In April, we announced our decision to discontinue our in-house polysilicon manufacturing project after extensive evaluation of changes in market conditions related to the acquisition of long-term supply agreements. The decision does not impact our 2008 or 2009 feedstock supplies since the project’s commercial output was scheduled to begin in early 2010. Since this announcement, we continue to successfully negotiate with official long-term suppliers for agreements including those with potential delivery for 2008 and 2009.

With respect to long-term financing for our strategic expansion, we continue to examine market options that include both domestic and international commercial debt and the use of equity or equity-linked methods. As previously stated, these financing options will be acquired in manageable proportion with respect to our cash position and market conditions.

During the first quarter, we were pleased to celebrate our company’s 10th anniversary which featured the dedication of Changzhou Trina Photovoltaic Industrial Park, collocated with our manufacturing campus. In order to achieve a strong long-term cost advantage with our suppliers, we signed 5 LOIs with key partners, including producers of PV module glass, slurry recycling, crucibles, and junction boxes.

Finally, in March, we were very pleased to receive our underwriters’ laboratory certifications that are required to sell our module products into the United States marketplace, where we anticipate initial shipments in the second half of the year.

With that, I will turn the call over to Terry Wang who will share our first quarter financials and operating results.

Terry Wang

 

Thank you, Chairman Gao and Andy. Hello everyone, and welcome to our call today. As previously noted, we are pleased to announce that our first quarter operating results met or exceeded our Q1 guidance for revenue, shipment, gross margin, and operating margin. Before I summarize financial results, I’d like to inform everyone that the company has completed the transition our local operating company’s functional currently from Renminbi to US Dollars in according with FASB 52 as of January 1, 2008, which is reflected in our Q1 operation results as follows. We have experienced significant growth in first quarter of net revenue, which grew by 19% sequentially, and 183.6% year over year to $120.7 million. This increase reflects a strong growth in volume shipments and a slight increase in ASP to $3.95 per watt. This average selling price was in line with our forecast because these prices were fixed in long-term agreement signed in 2007.

Shipments in the first quarter were 29.6 megawatt, a potential increase of 23.3% from 23.9 megawatt and a yearly increase of 180.3% from 10.5 megawatt. Gross profit in the quarter increased 12.6% sequentially and 226.8% year over year to $31.1 million. Gross margin was 25.8% in the first quarter of 2008 exceeding our guidance range of 23% to 25%, an up from 22.3% from a year ago. The sequential decline in the gross margin from 27.2% was due to the increase in our average cost of the polysilicon material, which was partially offset by our reduction in both monocrystalline and the multicrystalline wafer thicknesses during the quarter. The first quarter gross margin also reflects continued gain achieved by increased degree of vertical manufacturing, most notably by achieving full in-house cell processing.

Operating expenses were 9% of first quarter net revenue, an improvement from 11.2% in the fourth quarter of 2007. The decrease was due to strict expense control measures taken by the company. Operating expenses in the first quarter included approximately $1.3 million of share-based compensation expenses. Operating income rose 24.5% sequentially and 342.5% year over year to $20.2 million respectively. Our operating margins were 16.7% exceeding our guidance of 13.5% to 16.5%, an increase from 16% in the fourth quarter of 2007 and 10.5% in the fourth quarter of 2007. The margin expansion sequential and year-over-year operating margin was probably due to manufacturing costs, benefits from the increased level of vertical integration and the expense control programs.

Interest expense in the first quarter of 2008 was $3.5 million compared to $2.6 million in the fourth quarter of 2007, and $1.2 million in the third quarter of 2007 due to additional bank borrowings and higher interest rates to secure additional silicon feedstock and capacity expansion. Our interest income was $1.2 million in the first quarter compared to $3.4 million in the fourth quarter of 2007 and $0.4 million a year ago.

Effective January 1, 2008, the company changed the function of currency of these operating subsidiary, Changzhou Trina Solar Energy Co., Ltd. to “Trina China” from RMB to US dollars. This change is in accordance with FASB Statement No. 52 “Foreign Currency Translation,” and it was based on Trina China's significant and sustained shift in conducting a majority of its business activities in US dollars. During the first quarter of 2008, the Company recorded an exchange loss of $4.0 million, which was primarily associated with Trina China's non-US-denominated obligations that are now required to be remeasured in the US dollar functional currency. Such re-measurements are and will continue to be to the extent we continue to have such non-US denominated obligations, recorded as transaction gains or losses in the consolidated statement of operations. Net income was $12.9 million in the first quarter of 2008 compared to $15.7 million in the fourth quarter of 2007 and $4.8 million in the first quarter of 2007. Net Income of $12.9 million includes a foreign currency exchange loss of $4.0 million primarily associated with re-measurement of Trina Solar’s non-US dollar denominated obligations in the US dollar functional currency. The company’s net margin was 10.7% in the first quarter of 2008, compared to 15.5% in the fourth quarter of 2007 and 11.2% a year ago. Our earnings per fully diluted ADS for fourth quarter were $0.51 per share.

Turning to balance sheet, as of March 31, 2008, the Company had $38.2 million in cash and cash equivalents, which excludes the company's restricted cash balance of $126.0 million. The restricted cash comprises deposits pledged to banks to secure bank borrowings and the letter of credit facilities. The company's working capital balance was $84.8 million. Our total bank borrowings stood at $259.7 million, of which $14.2 million were long-term borrowings. Our capital expenditure for the fourth quarter was approximately $51.5 million. Shareholders' equity at the end of the first quarter was $380.9 million, up from $356.6 million at the end of 2007.

Now I would like to review our guidance for the second quarter and the fiscal year 2008 as follows. For the second quarter of 2008, we expect the shipments between 43 to 45 megawatt of PV modules and achieve total net revenues in the range of $169 million to $177 million. We believe our gross margin for the second quarter will reach between 23% and 25%, and estimate our operating margin will range between 13.5% and 15.5% of total net revenues. For the full year of 2008, we reaffirm that total net revenues will be in the range of $770 million to $808 million with the PV module shipments between 200 megawatt to 210 megawatt. We estimate that gross margin for the year will range between 23% and 25%, and believe operating margin will likely be in the range of 15% to 17% of total net revenues. Now, I’d like to turn the call back to our Chairman and CEO, Mr. Gao for some closing remarks.

Jifan Gao (Translation)

In summary, we are very pleased with our first quarter results and we remain very positive with the opportunities to realize our strategic goals to link our brand, technology platform and low cost integrated model over our PV value chain. As we move forward in 2008, we continue to strengthen and expand our geographic sales distribution in the emerging European PV markets or we have recently signed contracts with Enfinity in Belgium, Giordano and Solargie in France, Pirelli-Solar Utility in Italy, and Worldwide Energy in the United States. Approximately 95% of our target 2008 module production of 200 to 210 megawatt has now been contracted.

Our current sourcing requirements continue to be based on portfolio strategy involving short, medium, and long-term contracts to assure and balance our silicon supply, quality, and price. We currently have approximately 9% of our sourcing requirements secured for 2008 planned module correction of 200 to 210 megawatt as well as 60% to 65% of expected 2009 production. We continue to work with our existing short, medium, and long-term partners to secure our remaining requirements.

For our forward costs and expense reduction, we continue to strength our process management and improve yield while reducing operating expenses. Along with capacity expansion and technology advancement such as continued wafter thickness and cell efficiency improvements, we are confident we will take advantage of our vertical platform to achieve our cost reduction goals.

Going forward into 2009 and beyond, we reiterate our belief that strong market demand will continue as we observe stronger demand from new markets where Trina Solar is already actively selling. These markets are initiating or extending favorable solar energy [inaudible] II which includes France, Korea, Czech Republic, Belgium, and of course Italy and the United States. Due to Trina Solar’s growing brand awareness and ability to successfully expand and diversify in geographic sales, we have either secured or are in negotiations for orders in over 10 countries for approximately 60% of our 2009 sales target.

Addressing cost reduction for 2009 and beyond, our polysilicon supply will benefit from an increasing portfolio of long-term supply contracts that will lower our silicon cost. When combined with further production cost improvements, our total integrated manufacturing costs are expected to exceed our forecasting ASP declines to improve and provide margin expansion.

With that, we’d be happy to open the call for your questions.

Question-and-Answer Session

Operator

[Operator instructions]. Your first question comes from Robert Stone with Cowen & Co.

Robert Stone – Cowen & Co.

 

I think the investors are likely to be puzzled with such a strong performance versus your guidance in Q1, why is it you’re expecting a decline in both growth and operating margins for the second quarter, can you elaborate a little bit?

Terry Wang

Rob, are you asking for second quarter or first quarter?

Robert Stone – Cowen & Co.

 

You outperformed your guidance in the first quarter and your guidance for growth and operating margins for Q2 is very similar to your previous guidance for Q1, but of course it implies about a 200 basis point or more decline from Q1 to Q2 in both growth and operating margins, so I’m wondering why that’s the case, are you expecting that large an increase in silicon cost or that big a decline in ASP or increase in expenses, can you help us understand why your margins are going to be lower in Q2 than in Q1.

Terry Wang

 

Actually this guidance for Q2 is similar to what we gave at this stage for Q1 at the time of the last earnings call, and the reason we remained with a guidance as similar to Q1, we have a couple of reasons, one is given the increase in the cost of the silicon material and this quarter we are expecting that trend to continue from Q1 to Q2 in the range of between 5% or 10% in range; so we think that might have impact on gross margin for Q2. And secondly, for operating margin, as you know, we performed pretty aggressive expense control measures, but also in Q2 we do have one time 10th anniversary activity that might be leading to the operating expense. Secondly, as we hire more key staff and talents, share-based compensation expense will grow, so this guidance I think for sure [inaudible] II so that we are confident to pursue this guidance.

Robert Stone – Cowen & Co.

 

In terms of the operating margin target for the full year which comes up to about 16% at the midpoint, do you believe that this will be a function of higher revenue growth than expenses because I guess the gross margin target for the year and for the second quarter is pretty similar.

Terry Wang

 

Yes, there are two things to come to the conclusion. We think we are seeing a trend to meet the midpoint operating margin of 16%; one is as revenue grows and the operating margin, all the fixed costs will reduce the percentage of total revenue so that we are targeting for operating expense as percentage of revenue will decline over Q3 and Q4 dramatically, this is number 1. Number 2 is you know that we have a pretty good operating margin for Q1 with the 16.7% operating margin, so with these two factors, we think we can meet the year guidance and no change for the midpoint of 16%.

Robert Stone – Cowen & Co.

 

A question for Andy on the silicone supply, 60% to 65% for next year, that does not include any of the short-term sources of reclaimable materials that you have, correct?

Andrew Klump

 

That is correct, it does not include that.

Robert Stone – Cowen & Co.

 

Roughly how much of this year’s 200 to 210 megawatt is coming from that type of source?

Andrew Klump

 

We have roughly about two-thirds which is coming from both short and medium term contracts and roughly one-third that’s coming from long-term contracts. As we look at the second half of the year, as our volume starts to ramp-up, you can count on roughly 50% coming from long-term contracts, most of that which is in ex-pricing.

Robert Stone – Cowen & Co.

 

What I’m trying to get out Andy is the likely availability of that non-contracted short-term material for next year, so if you just got the same amount of short-term reclaimable material, this year and next year, roughly how much coverage would that give you against your 2009 production target?

Andrew Klump

Well, as you know Rob we have a number of short and medium term contracts. These are companies that we continue to work with since as early as 2005, so we have a very strong working relationship with these suppliers, and we do believe that we’ll continue to secure those contracts into 2009, but I think we have very high degree confidence that we’ll be able to secure all of our 2009 requirements based on the goals we set, but the numbers state that majority of those will be coming from long-term contracts. So, I do think, a short answer to your question is, yes we can meet it with both short and medium term contracts and other potential long-term contracts we’re negotiating.

Robert Stone – Cowen & Co.

Final housekeeping question for Terry; can you say what your non-silicon cost was in Q1 and do you still have the same target for the year; I think you were going to get down to $1.5 or something by the end of the year?

Xiyuan Tzou

On the Q1, our non-silicon cost is $1.17 throughout their process. We accounted at the end of the year we will drop down to a target of $1.5.

Operator

 

Next question comes from Mehdi Hosseini with Friedman, Billings, Ramsey & Co.

Mehdi Hosseini – Friedman, Billings, Ramsey & Co.

 

A couple of questions, first, since you have dedicated resources in Spain, I want to get your opinion as to how you see this entire change in Spain and any commentary that you could share with us would be appreciated, and then, as you benefit from recycled poly, is there any difference in the warranty between the module that you make, has the recycled poly with the average warranty of competitors, and if so, what are the differences? And I have a followup question.

Terry Wang

 

Regarding the Spanish market, I think it is interesting because of the uncertainties and questions in the last 2 or 3 months, and we think we’ll continue to have an uncertainty until the government comes to a completion on the registration. So, it is still not released in Spain, it will come probably in July this year, 2008. So far, the feeling is quite positive, better than when the draft that was circulated last year; so we expect a decline on the charges, but not half as the draft that was being circulated.

Mehdi Hosseini – Friedman, Billings, Ramsey & Co.

Can you please remind us what the draft indicated for the decline?

Terry Wang

The draft is indicating 31 cents to the Euro and currently is at 44 cents to the Euro, because Euro’s value is low. So we expect something like [inaudible] and the fact that we’re attending concerts and have done that for the last week and the last month for the second half of 2008 and also even for 2009 and the decline has not been so drastic.

Mehdi Hosseini – Friedman, Billings, Ramsey & Co.

 

How do you see the ceiling changes, would there be a compromise between the season tariff and ceiling?

Terry Wang

 

Can you repeat the question please?

Mehdi Hosseini – Friedman, Billings, Ramsey & Co.

 

How do you see the ceiling …

Terry Wang

 

The GAAP…

Mehdi Hosseini – Friedman, Billings, Ramsey & Co.

 

How the ceiling would change, would there be a trade-off between lowering the ceiling but not declining or not reducing the season tariff as much.

Terry Wang

 

Exactly, you’re completely right. The main discussion now is how to enlarge the GAAP, the ceiling, [inaudible] 400 megawatt that for sure has been already achieved in 2007 last year. Now, they are discussing is if they can reach it or increase it in a flexible way according to the speed of installations. So, we are expecting that 500 megawatt per year is quite doable, and 500 megawatt per year is quite an interesting figure for the Spanish market.

Andrew Klump

 

I just wanted to say that we’ve been in monocrystalline production over the last 4 years and have had no strong usage of reclaimables and had no impact to the quality of the products we produce, our end modules. So, we’ve actually done extensive benchmarking. These are the other competitors. So at our previous scrap usage levels and our current levels, there is no difference in quality. In fact we’re seeing quite high quality that has actually exceeded some of our competitors.

Mehdi Hosseini – Friedman, Billings, Ramsey & Co.

 

So, are you actually providing the 20-year warranty that the end customer is receiving?

Terry Wang

 

From the point of view of the customers, just for your information, we are providing not 20 years warranty but 25 for power. This is for our Trina Solar brand modules.

Mehdi Hosseini – Friedman, Billings, Ramsey & Co.

 

The reason I asked this question is actually some of your competitors who are incorporating metallurgical quality, they are not providing more than 10 years of warranty, so in a way, are you able to capitalize on it, not as you actually are operating 2-1/2 times or longer warranty, is this something that has created a differentiation down the road?

Terry Wang

 

We are evaluating the use of the metallurgical but we are not using currently metallurgical silicon in our modules.

Mehdi Hosseini – Friedman, Billings, Ramsey & Co.

 

Well, but some of your competitors who are doing it already are not offering more than a 10-year warranty, is this what you’re seeing in the market?

Terry Wang

 

You’re asking me what they see in the market? That will depend on the negotiations between the customer and the supplier.

Operator

Your next question comes from Adam Krop with Ardour Capital.

Adam Krop – Ardour Capital

My question revolves around the US market. Now that you have UL certification, can you just comment on what your growth strategy is over here. Are you looking into downstream acquisitions or should we be looking for more partnerships like the Worldwide Energy partnership?

Xiyuan Tzou

Yes. Correct. The second option is the one we are looking at; so we are starting with partners and well-known companies, and there probably will be a release in the next month, and we’re starting to enter the US markets with these partners. So, Worldwide Energy is one of them. And our current expectation for the second half of the year is to sell around 6-8 megawatts in the US market and for 2009 we expect to reach up to 40 megawatts in the US market.

Adam Krop – Ardour Capital

Just one followup. What should we be looking for for a tax rate for 2008?

Terry Wang

For this year, we’re right now running 4.92%, and we’re still enjoying the Chinese tax holiday.

Operator

Your next question comes from Vishal Shah with Lehman Brothers.

Vishal Shah – Lehman Brothers

I wanted to ask you about your 2009 outlook. You said about 60% of your 2009 production you have already entered into some sort of an order or contract. Where is the demand coming from; is it from Spain and Germany traditional markets or some new markets?

Terry Wang

For 2009, we are following the same kind of strategy of diversification in different countries worldwide that we have been doing and selling as we did last year long-term concepts. So, mainly we are keeping in countries like Germany, Italy, and also Spain, but entering in new countries with higher volumes and higher percentage from the geographical diversification like USA, Korea, France, Czech Republic, and even we are selling currently in Australia, in Mongolia, and in Greece.

Vishal Shah – Lehman Brothers

So, if you were to just think about Germany, Italy, and Spain, what would that represent next year in terms of your booked orders; would that be 30% or would it be more than that or less than that?

Terry Wang

We have booked orders mainly for Germany and Italy, but also some in Spain, and the percentages are around 20% for Germany, around 25% for Italy, and around 12% to 13% for Spain.

Vishal Shah – Lehman Brothers

I must have missed this, but do you provide any guidance or any actual shipment number for Spain in Q1 and Q2.

Terry Wang

In terms of percentage? For the first half of the year or for the first quarter?

Vishal Shah – Lehman Brothers

Yes. Both, first quarter as well as second quarter.

Terry Wang

What I can provide you is the percentage from the first quarter, mainly around roughly 65% has been Spain, Germany 17%, Italy 5%, France 1.5%, Belgium 3%, and the rest of the world almost 4%.

Vishal Shah – Lehman Brothers

And how about Q2, do you expect similar trends or do you see a change?

Terry Wang

Will be similar to Q1 and for the second half is when we see change in the distribution because of our long-term contracts are mainly for Germany and Italy. So for the second half of the year, Germany will be around 20%, Italy 25%, Spain 17%, Belgium 14%, USA 6%, France 3%, and Portugal 3%.

Vishal Shah – Lehman Brothers

That’s very helpful. Thank you very much. And then just as a followup on this, when you look at the Spanish market, and I apologize if this was already asked, but if you look at the Spanish market ASPs and if you look at the German or Italian market ASPs, what do you think is the delta between the two markets? Our ASP is around 10%-15% higher than German or Italian markets or maybe even higher?

Terry Wang

For which period of the year?

Vishal Shah – Lehman Brothers

For the first half, for the Q1/Q2 timeframe.

Terry Wang

For Q1/Q2, it depends on the long-term contracts and the negotiations made in the previous year, in 2007. So, there is not so much of a difference now as we are in an environment of high demand and very easily German suppliers are shipping motors to Spain or to Italy. So the difference between these markets is not so big, is not so important.

Vishal Shah – Lehman Brothers

And what about second half ASPs?

Terry Wang

For the second half ASP, we expect because we have contracted 90% of our second half of the year, a quite stable ASP. Maybe in Q4, there is a slow decline due to the [contest] in the USA where the ASP is lower than Europe.

Vishal Shah – Lehman Brothers

So you said Q4 you expect what percentage decline?

Terry Wang

We can give you a guideline range of prices; so we expect for Q4 between the $3.75 to $3.85 per watt.

Vishal Shah – Lehman Brothers

And how about the Q3 number?

Terry Wang

I think it is better to give you the range for the second half. The average for the second half will be between $3.85 and $3.95.

Operator

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

Brian Yerger – Jesup & Lamont Securities Corporation

I just wanted to see if you could comment on the percentage ASP decline you are forecasting for 2009.

Terry Wang

We are expecting in Spain a decline in tariff of around 10% to 15% in Spain, but for the roof installations for the systems, ASP decline would not be so strong. So, we are going to expect more than 3%-5% of decline in the ASP.

Brian Yerger – Jesup & Lamont Securities Corporation

That’s for the entire year for 2009?

Terry Wang

It would be mainly for the first half of the year 2009.

Brian Yerger – Jesup & Lamont Securities Corporation

So you don’t have any contracts right now in terms of your visibility on pricing for the second half of 2009 at this time?

Terry Wang

We have a range not only for Spain, but globally. We can give you a range between $3.75 and $3.85 for 2009 prices, but these are, again this is diversification in several countries, more than 12 countries, not for Spain.

Operator

Your next question comes from Paul Lemming with Soleil Securities.

Paul Lemming – Soleil Securities

I was wondering if you could go over depreciation for the first quarter, your expectations for the full year, capital spending for the first quarter and for this year, and some guidance to what capital spending is likely to be for 2009 within some range.

Terry Wang

Depreciation for first quarter, there is little increase from the last quarter, from 2% to 3% of net revenue.

Paul Lemming – Soleil Securities

Could you give us a dollar amount as depreciation for the quarter?

Terry Wang

It’s about $2.6 million for first quarter. And for the year, to answer the second question about capital expenditures; because as capacity expansion grows we have increased from last year our capital expenditure with purchase of equipment and due to infrastructure for the product line so that it can support our capacity expansion. We expected to target by the end of the year capacity expansion for 350 megawatts from 150 megawatts from last year; so an incremental 200 megawatts needs a capital expenditure. For that and other automation we are expecting to spend about $250 million to $300 million as CapEx for this year.

Paul Lemming – Soleil Securities

And then any thinking as to what capital spending level is likely to be even within a broad range for 2009?

Terry Wang

Capacity expansion by the end of 2009 we will reach 600 megawatt; so given that target we are expecting that capital expenditure will still remain between $250 and $300 million for next year.

Operator

Your next question comes from [Dan Reese – Colin Stuart].

[Dan Reese – Colin Stuart]

You signed a few silicon agreements in April or at least one large one in April with GCL. I am curious if we should expect an increase in the prepayment as a result of that. And if so, the $38 million in cash is obviously available for prepayment. Is any of the $126 million restricted cash available for prepayment at this point?

Xiyuan Tzou

No. The $126 million in restricted cash is just used for the bank to borrow money and to finance the level of credit, particularly the working capital for purchase of silicon material, but for prepayment, it is long term. We actually send money to them.

Andrew Klump

And Dan, I just want to follow up on that. I will definitely say when we said that we had actually canceled the polysilicon project due to changing market conditions, we’ve been keeping in touch with a number of potential suppliers and it was over the course of a number of months that we found that trying to certainly change some of the prepayment percentage has decreased quite dramatically. In some cases, it is the low single digits. So, it’s not nearly as cumbersome of our expenses as we had once thought.

[Dan Reese – Colin Stuart]

But am I correct that since the GCL agreement looked like it was signed in April, but it is not reflected in that March 31st balance sheet right? Any prepayment would have been made to GCL.

Xiyuan Tzou

No. We started to pay the prepaid long-term in April.

[Dan Reese – Colin Stuart]

Do you have availability of short-term bank loans or something like that, I am just curious; the $38 million is the concern, that the cash is relatively low if there is still prepayment required.

Xiyuan Tzou

Yes. We do have the schedule with a line of credit with banks over the course of the quarter so that we will have sufficient money to pay the long-term prepayment and also support our business and also to support the growth of our rapid expansion. The change that is frequently required by suppliers has been much less than it was before, so that helped us.

[Dan Reese – Colin Stuart]

I think you said that you have 60% of 2009 booked; 60% of what target level of shipment?

Andrew Klump

The target level of shipments is 360-400 megawatts.

[Dan Reese – Colin Stuart]

The $245 million in short-term debt; can you clarify how much headroom you have on that than with banks, I mean do you have running room to $400 million or something?

Terry Wang

 

Can you repeat the question for us?

[Dan Reese – Colin Stuart]

I think that the short-term debt level was $245 million at the end of the quarter. Do you have headroom on that to $350 million or $400 million that you have pre-arranged with banks?

Xiyuan Tzou

Yes. We do have bank credit line so that is covering up for this year, and again, $247 million in a short-term is not a typical image of short-term loans.

[Dan Reese – Colin Stuart]

Did you mention how many grams per watt you are now using in your wafer and cell lines?

Xiyuan Tzou

In Q1 we are doing about 7.5 gram per watt, and in Q2 we have improved in our process to about 7 gram per watt.

Operator

Your next question comes from [Bing Shen] with Goldman Sachs.

[Bing Shen] – Goldman Sachs

The first question is what is the unit cost for first quarter ’08?

Terry Wang

First quarter unit cost for the non-silicon is $1.17.

[Bing Shen] – Goldman Sachs

And what about for silicon cost?

Terry Wang

The silicon is $1.76.

[Bing Shen] – Goldman Sachs

How is the operating cash flow in 1Q; is it positive?

Terry Wang

Yes. Operating cash flow is positive, about $13 million. I’m saying that the net income is $12.9 million and that comes to that because we have the inventory increase because of the increased silicon cost and that comes to the resulting negative cash flow for operating cash.

[Bing Shen] – Goldman Sachs

 

Do you mind telling us what that amount would be?

Terry Wang

That’s about $104 million.

[Bing Shen] – Goldman Sachs

 

Any color on your new supplier DDK, what is your capacity, and has the construction already started, and what will be the initial output and the first delivery date for you guys?

Andrew Klump

 

We spent a lot of time with Changzhou DDK. As you know, this is the contract in Changzhou, China, fairly close to our facilities, is also a project that was really backed by Sun Power. We don’t have details of the contract, but we will be receiving some product in the second half of 2009. With respect to the size of their project, I will actually meet them and follow up with more information, but what you can see is a very sizable supplier with strong international technology and a great platform to allow us to work with them as a partner on a long-term basis.

Operator

 

Your next question comes from Peter Parker of Capital.

[Peter Parker – Capital]

 

Just a followup on some of [Dan Reese’s] questions if I could. Can you guys tell me what the interest rate you’re paying on the bank loans is roughly on the debt side?

Terry Wang

 

Over time, the interest increased from last year and we have come to the point on the average as of 7.3%, mainly from the loans on the RMB denomination.

Peter Parker – Capital

 

So, 7.3%, did I hear that right?

Terry Wang

 

Yes.

Peter Parker – Capital

 

My second question, if I could, did you guys say earlier in the call that your Q1 capital spending was $65 million and that the amount for the full year would be $250 million to $300 million, did I hear that correctly?

Terry Wang

 

Yes, that’s true; specifically $51.5 million and for the year targeting, we would think that because of the capacity expansion, that will be in the range of $250 and $300 million.

Peter Parker – Capital

 

My last question then, if I could is, if we think about in the first quarter you obviously burned cash from advances and on the working capital side, if we also think about the further CapEx you have to spend this year and further advances to suppliers as you’re building out your capacity for 2009, how much debt you expect to sort of put on this business by the end of the year, and I guess why not find may be a cheaper way of bringing in capital through some kind of convert or an equity offer? Just to try and understand the thinking.

Terry Wang

 

In terms of financing, 2009 we plan because of the expansion we’re going to be spending $250 and $300 million. We are now open to not just the debt financing also the other type of financing equity-equity linked financing when the time is right so that as long as we are aggressively seeking to optimize our CapEx cost of capital in conjunction with the needs or requirement of the cash.

Operator

 

Your next question comes from Ricky Lu with Deutsche Bank Securities.

[Ricky Lu] – Deutsche Bank Securities

 

I would like to ask though, what is the tax rate going forward, especially for Q2 and Q3. Second question, what is the FOREX loss that we should except for Q2 and the following quarters?

Terry Wang

 

As I mentioned before, we’re still enjoying the Chinese tax holiday this year and the tax rate of this year annualized is going to be 4.92% and that is going [to go forward] across the end of the year. And to answer the question about the exchange of loss or gain, as we released due to the change of functional currency, we matched the obligations in the non-US dollars nominated loans and other liabilities and assets so that as long as the US dollar is depreciating, we will have against RMB and Euro and we will have continuous extensive loss, but going forward, when we look at the market in Euro and US dollars and RMB, we are pretty confident that US dollars will come back in the near future so that this currency exchange loss we will be in control and at a manageable level.

Ricky Lu with Deutsche Bank Securities

 

Can you give color regarding what kind of number we should expect?

Terry Wang

RMB appreciating against US dollar for Q1 is a little bit dramatic compared to the Q2 and end of Q2 so that RMB is getting slow in the pace and depreciating, so that this quarter starting we’ll have less of exchange loss than the first quarter.

Ricky Lu with Deutsche Bank Securities

 

Can we use $1 to $2 million US dollar loss for Q2, or do you think it’s too high or too low?

Terry Wang

 

You’re talking about Q2, in first quarter we had $4 million and this quarter we’re expecting around $3 million and in that range.

Ricky Lu with Deutsche Bank Securities

 

I’m sorry, you mean $3 million for Q2 right?

Terry Wang

 

Yes.

Ricky Lu with Deutsche Bank Securities

 

The following question is back to the first one, actually could you indicate what kind of tax rate for 2009 and in 2010?

Terry Wang

 

In 2009 and 2010 we will possibly be enjoying the tax holiday as well. So then the rate for these 2 years is going to be 13.26% for tax.

Operator

 

Your next question comes from Lu Yeung from Merrill Lynch.

Lu Yeung – Merrill Lynch

 

Just want to get your thought on what you’ve been carrying on the subsidy news from Germany and Spain and can you share with us what are your customers thinking when they place orders for delivery in ’09?

Xiyuan Tzou

 

From all the exhibitions and the different meetings with customers, current foreigners, and future foreigners, there is uncertainty, so people want to figure out what is going on, but the thought is that the demand is very strong. In our case, we are quite comfortable because you have secured our sales from 2008, the current year, and also we are around 60% secure for 2009. So Germany even it has been announced the decrease on the PV tariff to 8% is not a huge impact to us. What we expect is that other markets are taking advantage. So, markets like, we told you before, Italy will be very strong for us where Trina Solar has around 20%-23% market share, or markets like Belgium and the Netherlands; so Europe will be a strong demand and also USA, we expect increasing the demand that we probably are experimenting this year, and also markets like Korea in Asia. So, there are a lot of countries coming in on the table and we are quite diversified in this regards.

Lu Yeung – Merrill Lynch

 

What are you seeing in your silicon costs in 2009?

Andrew Klump

We see silicon pricing declining at a much faster rate than our ASP decline. So, we’ve seen an increase this year but next year we’re projecting that even with the additional amount of material that we’ve not secured, we anticipate to have a 12% to 15% decline at the minimum.

Operator

 

Our last question comes from Robert Stone with Cowen & Co.

Robert Stone – Cowen & Co.

 

I’m sorry if you’ve already mentioned this, but did you say whether you expect to take any type of charge in the second quarter to account for shutting down the polysilicon project?

Terry Wang

 

Second quarter we have the charge from the non-operating expense side, and you know that we have the discontinuation of the polysilicon project and we’re going to write off from the spending that we spent in early stage of the project. That’s the major cost, and also I mentioned that 10 year anniversary, that is not very material, the range is not similar, it’s not big, but that’s a one time, just two items that’s going to be a one-time charge expense in Q2.

Robert Stone – Cowen & Co.

 

So, just to be clear, is the one-time charge for discontinuing the poly project included in your operating margin guidance for the second quarter or is that an additional item?

Terry Wang

For poly project write-off is not going to be included in the operating expense, but that’s going to be not in the non-operating expense items.

Robert Stone – Cowen & Co.

 

So, it will be treated as a discontinued operation?

Terry Wang

 

Yes, that’s true.

Operator

 

[Operator instructions].

Andrew Klump

On behalf of the entire Trina Solar management team we wish to thank you as always for your interest and participation on this call. If you have any interest in visiting us, please let us know. Thank you again for joining us. This concludes Trina Solar’s First Quarter 2008 Earnings Conference Call.

Operator

 

This concludes today’s conference call, you may now disconnect.

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Source: Trina Solar Ltd. Q1 2008 (Qtr End 03/31/08) Earnings Call Transcript
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