Ladies and gentlemen, thank you for standing by, and welcome to Canadian Solar’s Third Quarter 2019 Earnings Conference Call. My name is Tara, and I will be your operator today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

As a reminder, this conference is being recorded for replay purposes. And I’d now like to turn the call over to Ed Job, Managing Director of Canadian Solar’s IR Department. Thank you. Please go ahead..

Thank you, Tara, and welcome, everyone, to Canadian Solar’s third quarter 2019 earnings conference call. Joining us today are Dr. Shawn Qu, Chairman and Chief Executive Officer; Yan Zhuang, Acting Chief Executive Officer and Chief Operating Officer – Commercial Officer ; and Dr. Huifeng Chang, Senior Vice President and Chief Financial Officer.

On this call, Shawn will provide a brief introduction, followed by Yan who will review the execution of our business strategy and outlook, and Huifeng, who will go over our financial results. We will then open the call to your questions.

Before we begin, may I remind listeners that management’s prepared remarks today as well as their answer to your questions will contain forward-looking statements which are subject to risks and uncertainties.

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 management’s current expectations. Any projection of the company’s future performance represents management’s estimates as of today’s call.

Canadian Solar assumes no obligation to update these projections in the future unless otherwise required by applicable law. A more detailed discussion of risks and uncertainties can be found in the company’s annual report on Form 20-F filed with the Securities and Exchange Commission.

Management’s prepared remarks will be presented within the requirement of SEC Regulation G regarding generally accepted accounting principles, or GAAP. Some financial information presented during the call will be provided on both GAAP and non-GAAP basis.

By disclosing certain non-GAAP information, the management intends to provide investors with additional information to permit further analysis of the company’s performance and the underlying trends. Management uses non-GAAP measures to better assess operating performance and to establish operational goals.

Non-GAAP information should not be viewed by investors as a substitute for data prepared in accordance with GAAP. At this time, I would like to turn the call over to Canadian Solar’s Chairman and CEO, Dr. Shawn Qu. Shawn, please go ahead..

Thanks, Ed, and welcome, everyone. This was another strong quarter for Canadian Solar. Total module shipment was ahead of the expectations, and our gross margin was up significantly. Overall, global demand levels remain robust, and our strong brand and capability and reliability continues to come off a premium for our products.

We expect these positive trends to continue into 2020, given the compelling economic benefits for solar and the broader push for renewable energy. We are seeing stable pricing trends across our key markets, especially in markets where we have a leading position, including the U.S., Japan and Brazil. Yan will update you on our business and pipeline.

I would just like to emphasize that our integrated business model remains at the center of our success. Synergies from our model – from our module and project businesses continue to give Canadian Solar an important competitive advantage. Our global late-stage project pipeline stands at 3.4 gigawatt exiting Q3.

We are on track and committed to monetizing the portfolio as we move forward. The diversity of our pipeline in sales aftermarket will enable us to secure an attractive ROI for the company and shareholders. This in turn gives us increased visibility and added competence in our outlook.

As we have said in the past, we will use the process of the project asset sales to invest into other development opportunities that meet our criteria. This includes higher ASP markets such as Japan and fast-developing markets like Brazil. Our goal is to deliver profitable growth, time project returns and greater stability in our monetization process.

In 18 years, since founding Canadian Solar in 2001, innovation has been at the center of everything we do. Our – one of our competitive advantages is our ability to commercialize higher efficiency solar modules, which helps us to lower the total cost of solar systems and create value for our customers.

For example, our team recently set another world record of 22.8% conversion efficiency for P-type multi-crystalline silicon solar. R&D, an innovation leadership will always be one of our key priorities. Finally, we continue to strategically and cautiously invest in capacity expansion. Canadian Solar is the world-leading cell and module manufacturer.

And our capacity is designed to flexibly support customers’ changing demand. Our business strategy has allowed us to remain nimble, while benefiting from significant efficiency improvements across the manufacturing line channel. Overall, I’m pleased as our teams continue the progress and our financial results in Q3.

We are positive in our outlook based on demand levels and the strength of Canadian Solar business. Our priority remains unchanged to increase value for the company and our shareholders. With that, I would like to pass the line to Yan. Yan, please go ahead..

Thank you, Shawn. We’re pleased with our three – Q3 results and continued progress. The key takeaways from this quarter are; one, our Q3 shipments and gross margin both came in above our previous guidance. We’re firmly on track to monetize our 3.4-gigawatt late-stage project pipeline.

While this is always subject to unpredictable and short-term delays in sales closing, we have a proven track record in realizing the value of high-quality, high IRR projects across the world. We continue to strengthen the synergies between our upstream and downstream businesses.

On one hand, we’re leveraging our global purchasing power to capture greater value, while on the other hand, we are repositioning our business model to become a system integrator and a solution provider, taking greater advantage of our existing and growing attractive markets.

With this end, we continue to evaluate strategic R&D investments and partnerships to build up our leadership position in technological innovation. We’re confident that our differentiated strategy and business model will allow us to continue to deliver strong results in the coming quarters and years.

Importantly, we’re resolutely focused on delivering profitable growth and creating value for our shareholders and customers. Now let me go through this quarter’s results. In Q3, revenue from our MSS business was $675 million. Gross margin was again above expectations and improved to 26.9% from 22.8% in Q2.

The improvement was driven by stable ASPs, as we benefited from our strong brand, bankability and reliability and also our optimized channel structure and disciplined sales operation management. Canadian Solar continues to differentiate and drive value through R&D leadership and innovation.

As Shawn just mentioned, our team broke another world record in cell conversion efficiency in Q3 for P-type, multi-crystalline silicon. This was a significant milestone and proved that our proprietary multi-crystalline silicon technology can achieve efficiencies that are close to mono, while enjoying the cost advantage of multi supply chain.

We’re rapidly ramping up mass production of our P5 casted mono modules and expect P5 capacity increase significantly throughout next year. We continue to expand our technology pipeline and remain committed to providing customers with competitive products that produce the lowest levelized cost of electricity.

In our energy business, our team continued to execute and made significant progress in Q3. We announced the NTP sale of the 266-megawatts Rambler project in the U.S. and completed the sale of 80% interest in the 171.5-megawatts project in Brazil.

Our portfolio of late stage utility-scale solar power projects, including those under construction was 3.4 gigawatts as of September 30, 2019 compared to 3.6 gigawatts during our last call. Projects in operation totaled 796 megawatts as of September 30, with an estimated resale value of approximately $900 million.

We remain committed to monetizing the remainder of our late stage pipeline and operating projects through 2020 and beyond. This is consistent with the timeline we provided previously. For example, in Brazil, we completed the sale of an 80% interest in three projects with a total capacity of 353 megawatts in late October.

Global demand for our project assets is high, given our proven track record and bankability. In Q3 we won attractive PPAs with total capacity of 424 megawatts and reached COD on the largest solar power plant in Argentina of 100 megawatts. We continue to drive growth and develop new project opportunities across various geographic markets.

We remain focused on pursuing only those opportunities that meet our stringent development and ROI criteria. Our strong track record of excellent performance has helped make Canadian Solar one of the sector’s most bankable brands.

The latest example was in Q3, while we secured $120 million in non-recourse project financing for two projects – two solar projects in Brazil. Our ability to secure financing on favorable terms gives us a significant advantage and continues to make Canadian Solar a development partner of choice. Now, let me comment on guidance for Q4 2019.

We currently expect total Q4 shipment – module shipment to be in the range of 2.3 gigawatts to 2.4 gigawatts, including 190 megawatts of shipments to the company’s own utility scale solar project. Revenue expected to be in the range of $815 million to $880 million. Gross margin is expected to be between 19% and 21%.

The lower margin reflects the expected lower margin contribution from project sales in Q4. For the full year 2019, we now expect total shipments to be in the range of approximately 8.4 gigawatts to 8.5 gigawatts. Total revenue for the full year of 2019 expected to be in the range of $3.13 billion to $3.16 billion.

Overall, we’re optimistic in our long-term outlook and expect acceleration in growth in 2020 led by cells in our late stage project pipeline. Our company’s fundamentals have never been stronger. We remain focused in executing on our strategy for the MSS and any Energy businesses and on building value for the company and its shareholders.

Let me now turn the call over to Huifeng for a more detailed review of results for the third quarter. Huifeng, please go ahead..

Thank you, Yan. As Yan noted, for Q3 both with our module shipments and gross margin were above expectations. The improved volume and the profitability reflected the benefits of our strong pricing power and then cost reductions.

The Energy business also contributed significantly to the gross margin, a trend we expect to continue as we monetize the remainder of 3.4 gigawatts late stage pipeline. In the process, our focus is to maintain the balance between driving profitable growth and strengthening the balance sheet. Now let me go over the financial results in detail.

In Q3, total solar market shipments were 2,387 megawatts compared to 2,143 megawatt in Q2. Net revenue for Q3 was $759.9 million, down 26.7% sequentially and down 1.1% year-over-year. Net revenue for Q3 was comprised of $674.9 million from MSS business and a $97.6 million from the Energy business.

Gross profit in Q3 was $198.9 million compared to $182.6 million in Q2 and $200.4 million in Q3 of last year. Gross margin in Q3 was 26.2% compared to 17.6% in the second quarter of 2019 and a 26.1% in the third quarter of 2018.

These figures include antidumping and countervailing duty true-up benefits of $24.3 million in Q3 2019 and $21.6 million in Q2 of 2019 and $8.3 million in Q3 2018. Excluding these benefits, non-GAAP gross margin would have been 23% in Q3 2019, 15.5% in Q2 2019 and 25% in Q3 2018.

Total operating expenses were $118.8 million in Q3 compared to $121.9 million in Q2 and $104.5 million in Q3 2018. Income from operations was $80.1 million in Q3 compared to $60.7 million in Q2 and $95.9 million in Q3 of last year. Operating margin was 10.5% in Q3, compared to 5.9% in Q2 and 12.5% in Q3 of the prior year.

Foreign exchange gain in Q3 was $2.8 million, compared to a gain of $16.4 million in Q2 and $10.1 million in Q3 of the prior year. We recorded a loss on the change in fair value of derivatives of $2.2 million in Q3 compared to a loss of $12.5 million in Q2 and $8.9 million in Q3 2018.

Income tax expense was $10.4 million, compared to the expenses $14 million in Q2 and $13.4 million in Q3 2018. Net income attributable to Canadian Solar shareholders for Q3 was $58.3 million or $0.96 per diluted share.

This compares to a net income of $62.7 million or $1.04 per diluted share in Q2 2019 and a net income of $66.5 million or $1.09 per diluted share in Q3 2018. Net income attributable to Canadian Solar on a non-GAAP basis for Q3 2019 was $40.1 million or $0.66 per diluted share. This excludes the AD/CVD true-up noted earlier.

Now moving onto the balance sheet. At the end of Q3, Canadian Solar increased its balance of cash, and cash equivalents was $526.2 million, compared to $438.5 million at the end of Q2. The restricted cash balance was $522.7 million at the end of Q3 compared to $542.5 million at the end of Q2.

Inventories at the end of Q3 were $413 million, compared to $337.8 million at the end of Q2. Inventory turnover was 63 days in Q3 compared to 40 days in Q2. Short term borrowings and current portion of long term borrowings on product sales – sorry, project assets at the end of Q3 totaled $1.3 billion unchanged from the end of Q2.

Long term borrowings at the end of Q3 were $525.9 million, compared to $462.9 million at the end of Q2. Total debt at the end of Q3 was $1.97 billion, of which $433.1 million was non-recourse.

Short term borrowings and long term borrowings directly related to utility-scale projects, which included $406.9 million of non-recourse borrowing, totaled $670.8 million at the end of Q3 compared to $640.5 million at the end of Q2. With that, I would now like to open the call to your questions.

Operator?.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question is come from Colin Rusch from Oppenheimer. Please go ahead..

Thanks so much, guys.

Can you breakout how big the direct model sales channel was in the quarter and what the growth rate is on that during the year and year-over-year?.

So you’re talking about the split of volume in different channels, right?.

Yes..

Okay. So the buildup channel has actually been evolving but rather stable, it’s not a dramatic change, except we continue to adjust our allocation to different markets according to the price movements.

So we, in general, first of all in mature markets like U.S., Europe, Japan, and Brazil and Australia, we continue to expand our direct sale channel into the premium rooftop market. And so that has been around like 25% of our total volume.

So we’ll continue to grow in that segment with the premium pricing, and also differentiated product offerings, and of course marketing and other channel strategies – channel support and a dedicated team, of course.

And on the other hand, next year something strong about to Canadian Solar is, we have highly bankable capacity in Southeast Asia that we’re going to shift to the U.S., it’s about 3gigawatts of the U.S. in the next few years and each year. So and there’s a shortage on bankable capacity in the Southeast Asia. So our price in U.S.

market is rather is very healthy. And thirdly is a, we continue to allocate more volume in high priced markets like Japan. And Japan, naturally, the net profit level for any business in Japan is like the twice or three times compared to other markets, depends on the business segment.

And our leadership, our market share in residential market in Japan is very – is pretty high as more than 10% ranking number two after Panasonic, but ahead of other local Japanese players. It gives us a lot of profit. And in market like Brazil and Australia, we also sell a slightly higher pricing with the bigger volume.

And we will continue control our exposure in low price markets like China and India. On top of those, we also have a captive markets. We’ve got own projects. Our own Energy group of projects will use – mostly use our module at a market price. So we don’t have to really go with the super low price competition.

And also our turnkey EPC project is also using our module at a market price. So this is the channel structure and the split off the volume. Hope, I answered your question..

Yes. That’s incredibly helpful. And then, I know you want to be a little bit cautious about sharing too much about the cadence of cost reductions.

But what can you tell us in terms of how we should think about how that moves forward? It seems to me that you’ve got some pretty fertile soil in front of you in terms of migrating costs down and being able to maximize some margin here over the next four or five quarters?.

So Colin, you’re talking about the cost and price trends, right?.

Yes. Just the costs or cadence..

Okay. So we believe into next year this that we will cut down our cost and together, of course, the margin price will also go down.

And we actually observing the cost reduction mainly coming from the model line, mono supply chain and in particular waiver and however, we believe that the price – the module price going down together with the costs going down. And at certain point of the time, when price goes to a certain level, that might be a turning point of the market.

So we actually are cautious. And also, next year, the Tier 1 suppliers will have more volume overseas. And therefore, we have a better control over the pricing and the Tier 1 capacity comparing the total demand, the oversupply is actually less.

So Company’s be the better branding and bankability and better products will have a better chance to sustain the pricing. So this was my deal.

Shawn, do you want to add more?.

In terms of the cost of goods sold, we have continued costs curve for every year. I will call yet, why is the – like a – I will use the term like organic cost down.

That’s the cost down effort from our sales through better production control, better equipment, more automation and it was higher efficiency type for that typical to every year, we can get somewhere around 10% – 10% to 15% of cost down in a past few years..

.:.

Thanks so much, guys..

[Operator Instructions] Our next question comes from Brian Lee from Goldman Sachs. Please go ahead..

Hey, guys. Thanks for taking the questions and welcome back Shawn.

I guess maybe just, first off, I jumped on the call late, so I might have missed this, but is it just the Japanese projects that are falling out from Q4 into Q1 of 2020?.

Yes. This is one of the Japanese projects, we originally thought, we can close everything in Q3 and somehow because of the – a lot of paperwork, legal work and then slip it to a later time. Now, actually, I talked to the Japan team last night, and then they told me that they are moving forward. Everything is smooth. There’s no dispute with the buyer.

So, in terms of closing and the pricing variation, we’re confident that everything will come out in the right place. That may be, because we have several projects in the closing, some of the projects originally, we scheduled for Q4, for the same reason may slip into Q1, but earlier part Q1. So that is situation.

It’s just an issue of administrative process..

Okay. Fair enough. But the Japanese project in question that was originally potentially for Q3 that that’s having the biggest impact here on the Q4 guidance.

And then are you – Huifeng, do you want us to assume that it’s in Q1 or is this an administrative process that could extend even beyond Q1 for the Japanese project in question?.

Yes. Actually, we are working on multiple projects. So, a – I think one shifted from Q2 – Q3 to Q4 and more from Q4 to Q1. I know that’s also the reason main driver of what we load a guidance for Q4..

Yes, understood. And then I guess on gross margin, I had a question there.

Just can you give us a sense of – in the 19% to 21% range, what’s being reflected for the two different segments?.

Well, I think it’s mainly, primarily driven by the slippery of the project sale closing. And a smaller part is on the module side, because of the price dropping. So that’s the situation..

Okay, fair enough. Is there any, I think there’s….

There’s also a project that’s low margin that’s going to close in next quarter, it’s called McBride project. That’s a $130 million with a low margin sale..

Okay. Low margin sale in the projects business for Q4. Okay, fair enough. And then for the AD/CVD reversal, I know you don’t pick typically put that into guidance. Just want to confirm that’s not embedded in the guidance for Q4 as well..

It is right or just….

No..

Okay. No, no, it’s not..

It is not in the 19% to 21%?.

Correct. Not in the guidance..

Okay, great. And then maybe, last one, I’ll pass it on. I think there’s been some scuttle, but for potentially, a near-term policy update on the China solar market for 2020, maybe, even by year-end, just wondering, I know this year, the late policy development kind of stunt in the market out there in China.

Maybe, they’re trying to get around that this year, but maybe, give us your latest thoughts on how you expect policy to settle out next year if you think the subsidy budget, I guess particularly for utility scale changes much from this year.

And if you would expect, some clarity around policy toward the year-end or are you still expecting it next year? Thank you..

Okay. So, first of all, to say that our exposure in China is lower. So, the short-term fluctuation in China market has a minimum impact on our business. Secondly, regarding China demand, I think we all heard the news about the total installation in the first three quarter of 16 gigawatts.

So, we also see that we do not experience a super strong rush in Q4. Although there’s a slight demand up in October and November, but although our speaking is quite rationalized demand. So, Q4 is down, basically, most capacity has been fulfilled and into next year, we continue to see the rationalization of the market.

So that however, we also anticipate the delayed projects from push forward by the delayed project from this year to next year.

Actually, the reason for China low number of installation this year is partially also because aside from being rationalized is the late announcement of the PPA – of the project permits that did not give you enough time to secure the land and other financings. So that’s part of the reason why it gets pushed following to next year.

So therefore, next year, I was given like as low as 30 gigawatts, 35 gigawatts next year, but with the push forward delayed project into next year. We anticipate China can be on a higher side comparing to the 35 gigawatts, the 10 gigawatts to 40 gigawatts next year.

Because over time, people will – people needs more time and we’ll need the time to readjust their position to get into the new policy.

And in terms of the policy clarification, it’s a moving target, but I don’t think it will have a fundamental impact on the existing programs of the grid parity and also the subsidy of –subsidized market, because of subsidies going down already, has went down this year already, will continue to move down next year at low level.

But how the entire industry is actually over the year, they should get used to – better adjusted to the new environment and it will – the demand will be stabilized..

Thanks, Shawn. If I may get back to queue..

Next question please..

Next question comes from Mark Strouse from JPMorgan. Please go ahead..

Yes. Thank you very much for taking our questions. Huifeng, I just wanted to go back to the guidance if I can. I apologize if I missed this. I just want to be clear. So, for the year, you’ve left your shipment and guidance the same, but you took down revenue.

Are you reducing your internal assumptions for ASPs in the MSS business or is it completely a function of the project delays?.

Literally, it’s a function of the closing time of the project in Japan..

Right, okay. Got it. And then on the power plants and operation, it’s like the megawatts were stable quarter-over-quarter. You took down the estimated resale value a tad though.

Just curious what’s driving that? Is that just a rounding error or is there anything that you’d call out in the regions, where you have operating assets?.

Well, it’s mainly because of China. So, as you – as we’ll know that things, end of June last year, China market, project market actually was crashed in a way.

And so there’s a lot of project inventory that some sell in the market in China and because of the desperation of selling those projects for cash flow purpose, the pricing moving around in the market is pretty low.

So, it’s now right now, a buyer’s market and our projects are actually better – much better in terms of project completeness and then quality compared to the inventories in the market.

And we receive rather healthy pricing on the – and also, however we have some, because of the market change and the perception, so we have some difficulties on collecting the residue payment, balance payment on the project already sold. And so according to the U.S.

GAAP and our finance department work together with the Deloitte and the NEDA evaluation of the situation now in certain projects and one of the projects that we have a write-off on the balance payment. So, this is one of the reasons and also, we have a project that also, the valuation come down a little bit.

So, this is the reason for the devaluation of project pipeline..

Got it, okay. Very helpful. Thank you..

[Operator Instructions] Our next question comes from John Segrich from Luminus. Please go ahead..

Hey guys, just maybe, two quick ones. One, can you give us a sense of where the module ASP was in 3Q and where do you see it in 4Q? And then secondly, it looks like you’ve increased your module capacity for 2020, but left the cell capacity pretty much unchanged.

Can you give us a sense, maybe preliminarily, what you think you’d be able to grow shipments in 2020 given the uptick in module capacity?.

What’s your first question? ASP, okay….

For 3Q and we are expecting for 4Q?.

Yes, yes, yes. I would say, from Q3 to Q4, it’s a downturn, but for us, it’s also downturn, but more mild, it’s rather stable down.

So, this is a Q4 situation and because we secured our high price orders much earlier for most of the Q4 pipeline and it’s only a portion of the Q4 fills that come late with the impact of pricing down, but however, cost is also went down a little bit.

And moving to next year, I think, the margin percentage next year may go down compared to this year to a certain level, but it depends on DVD companies. I believe Canadian Solar with our brand name and bankability in our channel structure and our brand name around the world.

And the discipline on optimizing – sorry, our prioritizing market, we should be able to maintain a better price in the market. And so also next year, the supply chain cost structure changed.

This year, one of the benefit we enjoyed is we actually made our decision now selling more quality products based on the economics of the supply chain; next year, that will change. We will see that this could be some significant costs down on non-wafer side, so that will transfer to sale.

And so therefore we can benefit from a model more than this year. So, next year, we have – we’re going to have a 9.6 gigawatts of sale and also 13 – sorry, 13 gigawatts of module capacity. So, our shipment volume will go up. I cannot give you guidance today.

But our shipment volume will go up, which will compensate for the slight percentage down on the margin side, and also our next year, we believe that our project team will do better than this year..

Hi, John. It’s Shawn Qu. I will comment the supplement what Yan just said, yes indeed. We are going to expand our module capacity a little bit. Well, cell capacity the same. That’s the current plan. The molecule capacity, the expansion of the molecule capacity old for new product, we have a very success product. We call it HiKu.

As a matter of fact, that’s the first time the so-called 166 mm wafer got commercialized in the industry. So, not requiring some new collection and say, but we are making good money in there. You also ask about a gap to internal cell and modules. In the past two years, there’s not development of a cell only companies in China.

They don’t do wafer and they don’t do module, but they do just cells. Those are few companies like that. So, somehow fill the gap, so that we don’t have to buy, develop our own cell capacity the whole time. We can – so our internal cell capacity that can be better supplemented by external cell only companies.

We focus on channels and the branding of the module, that’s kind of trait being in development in the past four years. So, John, I hope, Yan and I answered your question..

Yes. Thank you, guys..

[Operator Instructions] There are no further questions. I will pass back to Dr. Shawn Qu, Canadian Solar’s chairman and CEO for closing comments..

Thank you, and thank you everyone for joining today’s call and for your continued support. If you have any further follow-up questions, please contact our Investor Relations team and you have a great day..

Thank you. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect..