Trina Solar Limited (NYSE: TSL) has posted results of its second-quarter performance, showing a healthy increase in both module shipments and year-on-year net revenue..
Second Quarter 2011 Financial and Operating Highlights
- Solar module shipments were approximately 396 MW for the second quarter of 2011, representing an increase of 23.7% sequentially and an increase of 77.9% year-over-year
- Net revenues were $579.5 million, an increase of 5.2% sequentially and 56.3% year-over-year
- Gross profit was $98.3 million, a decrease of 35.0% sequentially and 17.3% year-over-year
- Gross margin was 17.0%, compared to 27.5% in the first quarter of 2011 and 32.1% in the second quarter of 2010
- Gross margin relating to the Company's in-house wafer production to module production was 20.4%
- Operating income was $32.8 million, compared to $84.5 million in the first quarter of 2011 and $83.3 million in the second quarter of 2010
- Operating margin was 5.7%, compared to 15.3% in the first quarter of 2011 and 22.5% in the second quarter of 2010
- Net income was $11.8 million, compared to net income of $47.7 million in the first quarter of 2011 and $38.7 million in the second quarter of 2010
- Earnings per fully diluted American Depositary Share ("ADS") were $0.17, compared to $0.63 in the first quarterof 2011 and $0.52 in the second quarter of 2010
"Amidst continuing demand environment challenges, we achieved record shipment volumes in the second quarter," said Mr. Jifan Gao, Chairman and CEO of Trina Solar. "Despite this increase, our sales were affected by end-market financing and high industry inventory due in part to recently-issued regulatory revisions and reduction of solar subsidies in Italy.
"In the third quarter, we expect a significant reduction in our manufacturing costs due in large part to recently completed renegotiation of the majority of our long term polysilicon feedstock and wafer agreements. We have seen substantial improvement in order pipeline from our distributors and large commercial and utility segment customers across Europe and North America. In addition to recently concluded agreements, we are also advancing discussions with new and existing customers to secure a growing number of sales agreements that extend through the second half of the year and early 2012.
"We are very encouraged by China's solar feed-in-tariff updates announced on August 1, which we believe reflect the improved economics and efficiency of solar energy. Since our recently announced agreements to supply two large-scale solar projects in Qinghai, we have seen increased opportunities to expand our domestic shipment allocations as the market expands.
"We remain focused on quality performance, product innovation and improved manufacturing efficiency, with the ultimate goal of improving total PV system performance, reliability and cost factors to further differentiate our product offerings. To support these goals, we recently announced our collaboration with Australia National University to develop high efficiency n-type monocrystalline solar cells with conversion efficiencies of 20%, and the launch of our innovative Trinamount mounting solutions to reduce overall system costs through systems-level innovation and product design.
"Lastly, we are excited to announce an improved warranty program that extends our product workmanship warranty from five to ten years and offers a 25-year linear performance warranty that positions Trina Solar's modules as one of the safest investments in the renewable energy marketplace."
Recent Business Highlights
During the second quarter of 2011, the Company:
- Announced that it was ranked No. 2 globally for environmental and social performance in the 2011 Solar Company Scorecard, an award system established by the Silicon Valley Toxics Coalition;
- Announced that its subsidiary, Trina Solar (U.S.) Inc., signed a sales agreement with US-based FRV AE Solar, LLC, a subsidiary of Fotowatio Renewable Ventures, Inc., to supply approximately 35 MW of the Company's powerful utility-scale solar modules for one of the largest PV projects in the United States;
- Announced through its subsidiary, Changzhou Trina Solar Energy Co. Ltd., the extension of its national distribution agreement with Australia's leading renewable energy distributor, RF Industries Pty Ltd. ("RFI") through December 31, 2012. Under the terms of the agreement, Trina Solar is expected to supply RFI with up to 40 MW of PV modules during 2011;
- Announced through its subsidiary, Changzhou Trina Solar Energy Co. Ltd., the signing of a three year research agreement with the Australian National University ("ANU"). Under the terms of the agreement, Trina Solar will collaborate with ANU to develop high efficiency n-type silicon solar cells with conversion efficiencies of 20% for mass production by leveraging existing and proven processing tools currently used for p-type cells;
- Announced the opening of its new sales and business development office in Sydney, Australia, to support its growing base of customers and to seek out business development opportunities in the region;
- Announced through its subsidiary, Trina Solar (Germany) GmbH, the signing of a sales agreement to supply 130 MW of module products to Mohring Energie GmbH, a well-established German-based project developer and engineering, procurement and construction services company, with deliveries commencing in the second quarter of 2011;
- The appointment of Mr. Mark Kingsley to the new position of Chief Commercial Officer. His joining is expected to enhance the Company's first class customer service and product management in an increasing number of end-markets and distribution channels worldwide as well as help the Company to realize its anticipated market share increases in 2011 and beyond:
- Announced the introduction of an improved warranty program, which extends its product workmanship warranty to ten years, improving on the industry standard of five years. Additionally, the Company has replaced its two-step performance warranty with a linear performance warranty that guarantees module power output will not decrease by more than approximately 0.7% per year after the initial year of service. The Company does not expect that there will be a significant increase in its warranty cost as a result of this improved warranty program;
- Announced that Trinamount mounting solutions are ready for shipment to the North American market. These innovative mounting solutions are expected to considerably reduce overall system costs and increase the pricing competitiveness of solar energy compared to traditional energy sources. Trinamount hardware will be compatible with a wide variety of roof types, from tile to commercial flat roofs; and
- Announced that through its subsidiary, Trina Solar (Spain) S.L.U., it has signed a sales agreement with Gestamp Asetym Solar, S.L. ("Gestamp Solar"), a well-established Spanish-based developer of large-scale solar energy projects, to power Renault's manufacturing plants in France. Under the terms of the agreement, Trina Solar is expected to supply Gestamp Solar with 55 MW of the Company's solar modules which are expected to be installed on Renault's manufacturing sites in France, including Douai, Maubeuge, Flins, Batilly and Sandouville.
Subsequent Events
Subsequent to the second quarter of 2011, the Company:
- Announced changes to its board and board committees, including its audit and corporate governance and nominating committees. In light of Peter Mak's departure from the Company's board of directors, Mr. Jerome Corcoran, an independent director of the Company, has been appointed as chairman of the audit committee of the board to replace Mr. Mak. Dr. Yeung Kwok On, an independent director of the Company, has been appointed as chairman of the corporate governance and nominating committee of the board. Mr. Qian Zhao, an independent director of the Company, has been appointed to the corporate governance and nominating committee of the board.
- Announced that its subsidiary, Changzhou Trina Solar Energy Co. Ltd, has signed supply agreements with Huanghe Hydropower Development Co., Ltd, a subsidiary of China Power Investment Corporation, for two ground-mounted solar projects in China for a total of 30 MW of PV modules;
- Announced that the right of the holders of the Company's 4.00% Convertible Senior Notes due 2013 to surrender their Securities for purchase (the "Option") by the Company expired at 5:00 p.m., New York City time, on August 9, 2011. Securities with an aggregate principal amount of $320,000 were validly surrendered prior to the expiration of the Option. After this purchase, $137,680,000 principal amount of the Securities remains outstanding;
- Announced that its Mono and Multi Module Series have successfully received the ammonia gas resistance certificate from TUV Rheinland ("TUV") and its Multi Module Series has already received salt mist certificate from Intertek Testing Services ("Intertek"); and
- Announced that through its subsidiary, Trina Solar Australia Pty Ltd, it has signed a strategic partnership with Origin Energy Australia ("Origin"), the leading Australian integrated energy company. Under the terms of the agreement, Trina Solar is expected to supply Origin with approximately 22 MW of PV modules over the next twelve months starting from the third quarter of 2011.
Second Quarter 2011 Results
Net Revenues
Net revenues in the second quarter of 2011 were $579.5 million, an increase of 5.2% sequentially and 56.3% year-over-year. Total shipments were 396.4 MW, compared to 320.4 MW in the first quarter of 2011 and 222.8 MW in the second quarter of 2010. The sequential increase in total shipments was primarily due to the Company's increased sales in Germany and the United States, which were supported by recent increases in manufacturing capacity.
Gross Profit and Margin
Gross profit in the second quarter of 2011 was $98.3 million, compared to $151.3 million in the first quarter of 2011 and $118.9 million in the second quarter of 2010.
Gross margin was 17.0% in the second quarter of 2011, compared to 27.5% in the first quarter of 2011 and 32.1% in the second quarter of 2010.
Gross margin relating to the Company's in-house wafer production to module production was 20.4% in the second quarter of 2011, compared to 32.1% in the first quarter of 2011. The sequential decline was primarily due to lower average module selling price.
Operating Expense, Income and Margin
Operating expenses in the second quarter of 2011 were $65.5 million, a decrease of 2.0% sequentially and an increase of 83.6% year-over-year. The Company's operating expenses represented 11.3% of its second quarter net revenues, a decrease from 12.1% in the first quarter of 2011 and an increase from 9.6% in the second quarter of 2010. The sequential percentage decrease was primarily due to a decrease in general and administrative expenses. The year-to-year percentage increase was primarily due to the continued expansion of the Company's global management structure to meet its strategic growth objectives and increased investment in research and development initiatives, partially offset by expense control measures implemented starting from 2010. Operating expenses in the second quarter of 2011 also included $2.3 million in share-based compensation expenses, compared to $1.6 million in the first quarter of 2011 and $1.7 million in the second quarter of 2010.
As a result of the foregoing, operating income in the second quarter of 2011 was $32.8 million, compared to $84.5 million in the first quarter of 2011 and $83.3 million in the second quarter of 2010. Operating margin was 5.7% in the second quarter of 2011, compared to 15.3% in the first quarter of 2011 and 22.5% in the second quarter of 2010.
Net Interest Expense
Net interest expense in the second quarter of 2011 was $7.2 million, compared to $6.7 million in the first quarter of 2011 and $8.2 million in the second quarter of 2010. The sequential increase in net interest expense was primarily due to a reduction in interest income in the second quarter of 2011.
Foreign Currency Exchange
The Company had a foreign currency exchange loss of $10.8 million in the second quarter of 2011, which was net of changes in fair value of derivative instruments, compared to a net loss of $24.1 million in the first quarter of 2011 and a net loss of $29.2 million in the second quarter of 2010. This net loss was primarily due to the loss from foreign currency forward contracts used by the Company to hedge its foreign currency risk exposure, which was partially offset by gains from the appreciation of the Euro against the U.S. dollar.
The Company continued to hedge for foreign exchange rate volatility during the second quarter of 2011 using forward contracts involving the Euro, Renminbi, and U.S. dollar currencies.
Income Tax
The Company's effective tax rate during the second quarter of 2011 period was 20.54%, compared to 20.54% in the first quarter of 2011 and 15.00% in the second quarter of 2010. The year-on-year increase is due to the fact that its major subsidiary, Changzhou Trina Solar Energy Co., Ltd., ("Changzhou Trina") in China is currently in the process of renewing its preferential tax rate from the local tax authority. In 2010, Changzhou Trina benefited from the preferential tax rate for High and New Technology Enterprises.
Net Income and EPS
Net income was $11.8 million in the second quarter of 2011, a decrease from $47.7 million in the first quarter of 2011 and $38.7 million in the second quarter of 2010. Net foreign currency exchange loss included in net income was $10.8 million in the second quarter of 2011, compared to $24.1 million in the first quarter of 2011 and $29.2 million in the second quarter of 2010.
Net margin was 2.0% in the second quarter of 2011, compared to 8.7% in the first quarter of 2011 and 10.4% in the second quarter of 2010.
Earnings per fully diluted ADS were $0.17 in the second quarter of 2011. The effects of the net second quarter foreign currency exchange net loss was approximately $0.15 per fully diluted ADS.
Financial Condition
As of June 30, 2011, the Company had $684.2 million in cash and cash equivalents and restricted cash and a working capital balance of $758.1 million. Total bank borrowings were $725.6 million, of which $382.6 million were long-term borrowings. The Company increased its short-term borrowings by $189.7 million to approximately $343.0 million as of June 30, 2011.
Shareholders' equity was $1.24 billion as of June 30, 2011, an increase from $1.22 billion at the end of the first quarter of 2011.
Third Quarter and Fiscal Year 2011 Guidance
For the third quarter of 2011, the Company expects to ship between 480 MW to 520 MW of PV modules.
The Company expects its gross margin relating to its in-house wafer production to module production to be in the high teens in percentage terms during the third quarter of 2011. The Company believes its overall gross margin, taking into account wafer and cell requirements outsourced to third party suppliers to meet demand in excess of its internal capacity, for the third quarter will be in the mid to high teens in percentage terms. Such guidance is based on an exchange rate between the Euro and U.S. dollar of approximately $1.40. For the full year 2011, the Company expects total PV module shipments to be between 1.75 GW to 1.8 GW, representing an increase of 65.6% to 70.3% from 2010.
Operations and Business Outlook
Non-Silicon Cost
In the second quarter of 2011, the Company's non-silicon manufacturing cost for its core raw materials to module production was approximately $0.73 per watt, unchanged from the previous quarter. By the end of 2011, the Company expects its non-silicon manufacturing cost to decline to below $0.70 through the continuation of technology and manufacturing process improvements involving proprietary processes for ingot, wafer, cell and module manufacturing, higher cell conversion efficiencies, and supply chain and logistics management initiatives currently under testing or development.
Silicon Procurement
Through its diversified range of short, medium, and long-term supply agreements, the Company will continue to maintain competitive silicon costs relative to the current market price.
As a result of renegotiation of a significant portion of its long-term silicon supply agreements, the Company expects a sequential reduction in its manufacturing costs in the third quarter of 2011.
2011 Capacity Expansion
As of July 31, 2011, the Company's annualized in-house ingot and wafer production capacity was approximately 1.0 GW and its PV cell and module production capacity was approximately 1.9 GW.
To meet expected demand for its PV solar modules, the Company expects to raise its annualized in-house ingot and wafer production capacity to approximately 1.2 GW in the second half of 2011, based on actual manufacturing yield.
