When Trina Solar Limited (NYSE: TSL) disappointed investors by lowering its shipment guidance by 100MW a couple of weeks ago, things had looked pretty bad from all the angles. The $45M accounts receivable provision from customers who could not pay, a loss of $24.1M in foreign exchange due to the Yuan appreciating against the Euro, and inventory market adjustments and equipment value write-offs totalling $38M, punctuated the heavy impact of the stagnant environment, with no chance for improvement in the short-term.

Today’s release has confirmed all the warnings, but solar investors should not walk away from those results with feeling of complete failure.  Believe it or not, there are a few very positive aspects, which continue to count Trina among the industry leaders.

We noted when analyzing Canadian Solar Inc. (NASDAQ: CSIQ)results how the EPC projects will have positive impacts. We also observed how clearly Canadian Solar’s pipeline separates this company from others.  It is the current nature of Trina’s business that makes the company lose money.  The expectation of 10% revenue derived from the EPC segment in 2012, and the possibility to see 25% in 2013 are some of the indications that choices are made towards this direction. The target of 50% revenue coming from projects in 2015 is a vision, confirming that in order for global companies like Trina to survive, they must take on profit-making ventures– not in the matter of if, but when.  To support this vision, Trina had added seasoned executives: Mr. Mark Mendenhall, for newly created Americas region and Mr. Qi Lin, for China. Mr. Mendenhallhas theexperience leadingSunEdison’sNorth American division, whileMr. Qi Lin, who worked for Siemens in the similar capacity,now will be responsible for projects in China. The company reported on number of agreements with municipalities in China, starting projects late 2012 and in 2013, but warned about existence of factors we read from analysis from Solarzoom and Pierce Lee about this market region.  In addition, Mr. Jim Wang has joined Trina Solar as Vice President, Special Projects. Mr. Wang worked for GCL-Poly and JA Solar. Mr. Mark Kingsley, the company's Chief Commercial Officer, has left the company for personal and business reasons.

Another global perspective was something we had expected for a long time. In order to build a presence in the market, the company must create local manufacturing. When asked about duties being considered by the European Union, the company has presented a number of solutions, including joint venture, investment or buildup of its own capacity in the region. The domestic content comment may even suggest that Trina will consider expansion into India.  In light of complaints about thin-film and market domination in India by the US companies, the window of opportunity may be opening for the Chinese in the region, and when executed with local content and joint-venture settings in mind, they could get quick results.  Trina has been looking to many emerging markets, which constitutes not only a strong desire to survive, but quite meaningful capability on the financial side to do so. When reviewing the numbers, Trina has the same level of debt as SolarWorld;they also have three times the supply chain capacity, absolutely healthy manufacturing costs and 2.5 times SolarWorld’s levels of cash. We have also heard that in addition to raw material procurement costs, reductions are coming from high conversion lines and further reductions in processing costs.  The company sees further in the future $0.45 per watt as a non-poly costs possibility for 2013. If the poly pricing remains at $20 levels, the all-in cost of $0.55 per watt will be here. 

Moving to an analysis of Trina’sresults, the company had delivered $346M in revenue in Q2, on shipments of 418.8MW. This is the second-largest shipment in its history, only 7MW shy of their 425MW in Q4 2011. The average ASP appears to be at the $0.83 mark, which is a cent below that of Canadian Solar. The reported gross margin was at 8.34%. The company added to COGS the inventory write-down of $26.1M and the impairment on PPE (property, plant and equipment) of $12.8M. The COGS per watt was at $0.76, yet excluding the above provisions the resulted outcome was $0.66 per watt. This would be a GM around 19%.  The company announced a reduction of non polysilicon costs to $0.52 per watt, which would leave $0.14 for poly costs and the procurement of $26 per kg (5.5g per watt), which appears to finally getting closer to spot market pricing. 

Operating expenses increased by $44.1M due to provision on the doubtful accounts. The accounts receivables dropped by roughly $25M, suggesting that the company sold $19M worth of products on credit – an improvement over past quarters.  There was also a $2M increase in general and admin expenses over Q1.  The other aspect that was out of ordinary was the $24M loss in foreign exchange due to strong Yuan performance versus the Euro.  There were no incremental provisions for CVD or AD duties this period, suggesting that procurement channel has been established to supply the US market and some of sales have been already covered by the $26M set aside in Q1. 

Mr. Jifan Gao, chairman and CEO of Trina Solar said,"To address the increased competitiveness of our environment, we have recently restructured our global sales, marketing and project development structure. We anticipate that these changes will streamline the flow of information required in our day-to-day commercial decision-making to better serve the needs of our four global revenue regions and to expand our global customer base.” At the end we expect an improvement in operating expenses, which isa particularly important agenda if the scale of shipments is not growing to contribute to it. 

The inventory increased by $112M from Q1; this includes the impact seen from 100MW of modules that did not sell in the quarter. The higher numbers absorbed the $28M adjustment as well. Another increase is the production glut, caused by cells, which would normally go into modules, but no longer can be sold in the US; thus, the company had to procure them from other geographic locations.  To eliminate the impact from this condition Trina announced a reduction of utilization to 66% of the overall supply chain, which we suspect is unevenly allocated with the majority of impacts in the cell area, possibly utilizing 500MW of the Honey cell lines the most, with wafer being much higher due to a 50% ratio to cells capacity, and lastly with modules production being the most utilized.  The inventory turnover days are at 169, meaning that entire inventory in order to turn would need almost two quarters.   Assuming around $250M in module inventory valued at $0.82 per watt, this would give about 304MW of modules at the end of June. The company guided 450 to 480MW sales in Q3.  Using 75% utilization for modules, or 450MW, the company could exitinventory for Q3 with the same amount of modules on hand as in Q2. However, the value of that inventory will be at $0.75 per watt, or $225M, while the remaining $211M in raw materialsfrom Q2 should be reduced to around $140M or so, so that the inventory expectations are around $365M in Q3.

Trina has borrowed more money in a short-term debt, but paid out some long-term debt and convertible bonds, while interest-bearing liabilities increased by $164M, or 14.4%, and cash accounts moved up by 12.4%, or $92M.The overall debt level for Trinaat the end of the Q2 was $1.3B. Trina has doubled the level of accounts payables to $620M since last year. Chinese companies continue to extend the payable cycle to hold onto cash for longer. As reported per Solarzoom, many vendors are becoming increasingly apprehensive with this technique. It is understandable for a high level of accounts receivables company like Trina to try to offset this with accounts payables. The tier-1 status is still holding clout within the vendors’ pool.  Ultimately, vendors are very careful not to lose clients of this level by giving inflexible terms, or demand cash or equivalents. The story is a lot different for others,nor are the banks in a support mode to every company.  

The move to add on Honey module and cell capacity seems to be an essential factor for the company’s module lines and current success. We have been receiving information that high-end modules are coming into demand and as Solarzoom reported last week, low tiers are selling their inventories quickly for low pricing to avoid warranty concerns on degradation of aging stock in already low level of outputs. The company being able to reach the highest output in the multicrystalline category in its third generation “Ultra Honey” was recently discussed by SPVI in the interview with Mr. Grunow, VP of Marketing. 

Yet the tough conditions continue to affect forecasts for the second half of the year and Trina has lowered is full-year guidance by dropping 300MW from the top end quote of 2.1GW.  The Q4 expectations would see the level of shipments at 551MW. We suspect that the 66% level of utilization may extend to Q4 and company may re-allocate some of their personnel from the manufacturing segment to sales, as hiring of sales personnel in China has intensified, but labor requirements could be reduced as much as 30% for the next six months.