Ladies and gentlemen, thank you for standing by. Welcome to Canadian Solar's Third Quarter 2023 Earnings Conference Call. My name is Shamali and will be your operator for 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. I would now like to turn the call over to Isabel Zhang, Investor Relations Director at Canadian Solar. Please go ahead..

Thank you, operator, and welcome everyone to Canadian Solar's Third Quarter 2023 Conference Call. Please note that today's conference call is accompanied with slides that are available on Canadian Solar's Investor Relations website within the Events and Presentations section. Joining us today are Dr.

Shawn Qu, Chairman and CEO; Yan Zhuang, President of Canadian Solar's majority-owned subsidiary, CSI Solar; Dr. Huifeng Chang, Senior VP and CFO; and Ismael Guerrero, Corporate VP and CEO of Canadian Solar's wholly-owned subsidiary, Recurrent Energy also formerly Global Energy.

All company executives will participate in the Q&A session after management's formal remarks. On this call, Shawn will go over some key messages for the quarter. Yan and Ismael will review business highlights for CSI Solar and Recurrent Energy, respectively, and Huifeng will go through the financial results.

Shawn will conclude the prepared remarks with the business outlook, after which we will have time for questions. Before we begin, I would like to remind listeners that management's prepared remarks today, as well as their answers to questions will contain forward-looking statements that are subject to risks and uncertainties.

The company claims 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 projections of the company's future performance represent management's estimates as of today.

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 requirements of SEC Regulation G regarding generally accepted accounting principles, or GAAP. Some financial information presented during the call will be provided on both a GAAP and non-GAAP basis.

By disclosing certain non-GAAP information, management intends to provide investors with additional information to enable further analysis of the company's performance and 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. And now, I would like to turn the call over to Canadian Solar's Chairman and CEO, Dr. Shawn Qu. Shawn, please go ahead..

Thanks, Isabel, and thank you to everyone for joining our Q3 call today. Please turn to slide three. We achieved solid Q3 results despite the continued challenging environment. During the quarter, we delivered 8.3 gigawatt in solar module shipments.

We generated $1.85 billion in net revenue, a 16.7% gross margin, and total net income attributable to Canadian Solar shareholders of $22 million, or $0.32 per diluted share. Let me share a few key takeaways. Please turn to slide four. First, even with the challenging operating environment, the industry is healthy.

To give you some color, I have worked in the solar industry for well over 20 years, but only just witnessed total cumulative solar installed capacity finally reach 1 terawatt worldwide in 2022. As we look ahead, strong global demand is on track to drive that number up to 1 terawatt in annual installations.

I strongly believe this can happen before the end of the decade or 2030. That is an incredible amount of growth ahead of us. Adding to this, the battery energy storage system market, our best market, is also growing rapidly.

I believe that best market is also on pace to reach the terawatt generation over the coming decade as it hits its first terawatt hours of cumulative deployments. Of course, short-term market cyclical fluctuations are inevitable with demand and supply constantly rebalancing.

However, even with the current high cost of capital, solar and energy storage project returns are more economically attractive today than ever before. This is due to the lower equipment costs and higher electricity prices.

The push towards de-carbonization and net zero emissions is stronger than ever before and the challenges of energy security remain. I strongly believe that the solutions we provide the market are truly the most competitive, impactful, and scalable in a fight against climate change. So, long-term, we believe the market fundamentals remain very strong.

Turning to slide five, technology remains a key driver of growth and progress in the industry. Over the past 20 years, conversion efficiencies improved from less than 15% to well over 25% now. N-type is the next big technology driver and we have already ramped capacity.

N-type TOPCon cell capacity now accounts for half of our total cell capacity and is expected to reach 60% by the end of this year. This gives us a major competitive advantage over other companies that have far greater exposure to older legacy technologies. Please turn to slide six.

The third point I would like to make is on the continued strategic long-term investments we are making in key premium markets, including the US, where we are making major inroads. We recently announced a new 5 gigawatt solar cell investment in Jeffersonville, Indiana.

Jeffersonville is on the northern side of the Ohio river, on the border between Indiana and Kentucky. We chose this location after extensive analysis and evaluation of 85 different sites across the US.

It is going to be one of our largest single investment, which will enable us to not only better serve US customers with the most advanced technology, but also fulfill the local-content rules of the Inflation Reduction Act, or IRA.

We are excited, because our new 5 gigawatt cell facility will complement the new 5 gigawatt solar module facility in Mesquite, Texas, which we announced earlier this year. The Mesquite facility is on track to start producing modules in a few weeks before the end of the year.

In fact, I was there last week and was pleased to see the team fine-tuning and working on the final preparations for mass production. I'm very proud of everyone involved in executing these two important manufacturing plants.

We also thank the officials in Indiana and Texas and the local officials in Jeffersonville and Mesquite for their unwavering, critical support. We look forward to continuing work with them as we grow in these communities, create important new jobs, and expand our global platform.

In addition, we also recently announced a 5 gigawatt solar wafer facility in Thailand, which will complement our investments in the US and allow us to responsibly meet the new requirements related to latest and adjusted AD/CVD ruling by the US Department of Commerce.

Concurrently, we are adjusting the procurement of our module bill of materials in accordance with the newest regulations. Overall, we are strongly positioning ourselves to deliver long-term profitable growth for our shareholders. Please turn to slide seven. Lastly, we continue to lead in our ESG efforts.

Recently, our ESG working group held global internal ESG town halls to socialize our initial tests and seek greater participation from our employees across all our regions. In this process, we continue to gather ideas and feedback from our great talent tool.

Over the next year, we plan to focus on setting our SBTi, our science-based initiative climate targets. We will also be expanding Recurrent Energy's ESG practices across OS development and construction activities.

This includes standardizing ESG procedures to the strictest levels of biodiversity, archaeological surveying, community engagement and environmental justice policies, enhanced health and safety, and so on. Historically, we have mostly focused on the manufacturing side of the business, which naturally has the greatest environmental impact.

But we are making sure that our efforts cover every inch of our company. We are committed to continual improvement. Reflecting on our leadership efforts in ESG, we recently received the Global Sustainability Reporting of the Year Award by Environmental Finance. Congratulations to the global teams for their hard work.

Canadian Solar will continue to work on our ESG disclosures, enhance strategy and execution and seek improvement every year. With that, let me turn the call over to Yan, who will provide more details on our CSI Solar business. Yan, please go ahead..

Thanks, Shawn. Please turn to slide eight. In Q3, as Shawn noted earlier, the CSI Solar division delivered 8.3 gigawatts in solar module shipments and $1.8 billion in net revenues. Gross margin was 16.6%, 230 basis points higher than last quarter, driven by lower manufacturing costs and a higher level of vertical integration.

This was partially offset by lower solar modules price. It also included a $35 million inventory write-down, which was specifically for modules in warehouses intended for certain distributed generation markets. Without the write-down, CSI Solar's gross margin would have been 18.5%.

Let me now give you an update on the key drivers and market dynamics we're seeing. Please turn to slide nine. First, in Q3, we added 13 gigawatts of TOPCon cell capacity. We expect to add another 11 gigawatts by the end of 2023.

As we explained previously, this expansion will meaningfully help us improve our vertical integration and enhance our structural margins. As Shawn mentioned earlier, we are big believers in N-type technology and its ability to drive change in our industry. We also believe that TOPCon is the most competitive N-type technology for the next few years.

In fact, TOPCon technology has pleasantly surprised us since we have been adding more lines over the past few months. For example, the conversion efficiency of our mass-produced TOPCon cells has now reached an average of 25.65%, which is nearly 3.5 percentage points higher than that of PERC. We're confident we'll exceed the 26% threshold next year.

However, that is still well below the theoretical limit for TOPCon, which is currently 28.7%, and this number will likely increase over time as well. Second, let's look at our capacity by region. I want to highlight the implications of our capacity investments.

We believe we will meaningfully increase our US market share with our capacity expansion in the US and Thailand, where we're investing across the supply chain from modules to cells to wafer.

Over the past few years, we have been shipping on average around 3.5 gigawatts to the US, as we did not make any major investments due to the uncertain policy environment.

The circumstances have obviously changed over the past 12 months and next year, we intend to deliver significant growth in the US market, supported by a combination of our new local capacity in the US, as well as in Thailand.

We have also set up our own internal capacity for certain view of materials in Vietnam and by March of next year, we expect to meet the new requirements on the four out of six rule in the newest Department of Commerce ruling on AD/CVD circumvention for 100% of our solar module production in Thailand.

Let me also make a few comments about our shipments to the US as certain false information about Canadian Solar was recently brought to our attention. In the first three quarters of 2023, we imported approximately 3 gigawatts of solar modules manufactured in Thailand into the US.

Over the past few weeks, a sampling of containers has been detained for inspection under the UFLPA. This is a small fraction of the total, only amounting to approximately 150 megawatts as of last Friday.

More importantly, we believe the detained merchandise is outside the scope of the UFLPA and we are fully cooperating with CBP to provide detailed information to that effect, as we have strictly traceability procedures in place.

Moreover, Canadian Solar follows comprehensive ESG protocols and do not tolerate forced labor or any other form of modern slavery. In 2022, we conducted 122 supplier ESG audits. We believe this is one of the most rigorous ESG auditing programs in our industry. Lastly, turn to slide 10.

I would like to highlight our continued progress in e-STORAGE, our utility scale storage business. Since June 30 of this year, our team has signed approximately $520 million in new contracts, and our total contracted backlog has increased to $2.6 billion.

Of these, around half are expected to be delivered next year, which is equivalent to approximately 6 gigawatt hours to 6.5 gigawatt hours of projects. As we speak, our teams are busy with customers closing more transactions, which we expect to announce over the next few weeks.

I'm proud that we have built a very strong global team that is able to execute and deliver on some of the most differentiated storage technical solutions in the market. Their ability to solve complex problems for our customers has allowed us to sign contracts with multiple repeat customers.

The profitability of e-STORAGE has also been improving as most of our contracts have fixed prices, whereas our costs have been declining alongside the decline in lithium carbonate prices. Hence, we expect e-STORAGE to be a much bigger contributor to CSI Solar revenues and, notably, profits in 2024.

Now, let me hand over to Ismael to provide an overview of Recurrent Energy, Canadian Solar's global project development business. Ismael, please go ahead..

Thank you, Yan. Please turn to slide 11. In Q3, we delivered $64 million in revenue with a 27.7% gross margin. Q3 was expected to be a sequentially lower but still profitable quarter for Recurrent Energy from a gross margin standpoint, as we only monetized an 18 megawatt project in Japan and a few smaller projects in Taiwan.

However, as I have started emphasizing recently, we are now shifting more of our resources towards executing projects as we intend to grow our base of operating assets that generate recurrent earnings. In Q3, nearly 300 megawatts of projects in the US closed financing, including both tax equity and project finance, and are now under construction.

We expect to hold these projects longer term. We also expect to close financing on a third one soon, with construction then starting. Hence, we plan to have close to 500 megawatts under construction in the US by the end of 2023. In Europe, we have approximately 150 megawatts under construction with financing and lucrative PPAs in place.

Over the course of the next year, we expect to COD around 500 megawatts projects and a start construction of approximately 1.7 gigawatts of solar and 800 megawatt hours of storage projects, which we intend to hold long-term. All of this means we are executing on our strategy.

We are transitioning from mostly being a pure developer to a developer plus asset owner and operator. Over time, this will allow us to deliver more stable, forecastable growth, as over 70% of the revenues of the assets we intend to retain control of are fully contracted and diversified in low-risk addresses only.

We've also significantly expanded our operations and maintenance, or O&M capabilities. In Q3, we acquired a market-leading O&M team in the UK, significantly expanding our O&M contracted capacity from 6 gigawatts at the end of last quarter to 8 gigawatts at the end of Q3. This brought us to top three in the world by global O&M market share.

Being one of the largest and most geographically diversified O&M operators and power services providers for both solar and storage assets enables us to better understand and optimize the performance of these assets in different locations around the world. Please turn to slide 12.

As of September 30th, our total development pipeline grew to 26 gigawatts of solar and 55 gigawatt hours for battery storage projects. While we are focusing our resources on executing late-stage projects, we are also proactively developing new origination opportunities.

The persistently high interest rate environment has made generating high returns more challenging. However, the decrease in system cost has also helped offset these effects, including the significant decline in solar module and lithium prices, as well as the lower cost of steel that has reduced the cost of trackers and other pieces of equipment.

Technology improvements such as TOPCon have also improved our project economics through higher efficiency and lower degradation and the interest from offtakers for renewable assets remain as strong as ever, helping us sign lucrative PPAs.

Securing interconnections and interconnection delays continue to be the main constraints for our business today, but having approximately 13 gigawatts of solar and 12 gigawatt hours of storage interconnections secured give us very good long-term growth visibility.

One of the key advantages of being a global project developer is our ability to apply lessons learned and best practices from one region to others. For example, we are one of the market leaders in energy storage development in the US, where we developed and completed 3 gigawatt hours of projects.

We are now applying that valuable experience as we pursue significant storage opportunities across Europe, Japan, and areas in Latin America. In these markets, we are the only player with a significant track record in storage development.

This lends us significant credibility and competitive BEPS to take advantage of the earliest and most profitable opportunities that will create long-term value.

Similarly, being one of the few developers that can provide PPAs in different parts of the world give us a significant advantage with global offtakers who are seeking a streamlined process when signing renewable projects in different countries.

We have been very successful in signing contracts in different jurisdictions with the same global customers, thanks to this advantage. Now, let me hand over to Huifeng, who will go through our financial results in more detail. Huifeng, please go ahead..

Thank you, Ismael. Please turn to slide 13. In Q3, we delivered $1.85 billion in net revenues, down 22% sequentially and 4% year-over-year. The sequential decrease was driven by lower project sales in Q3 relative to Q2, and a decline in module average selling price. Gross margin was 16.7%, a sequential decrease from 18.6% in the prior quarter.

This was mainly driven by a lower contribution from the Recurrent Energy segment, which monetized a large high-margin project in the second quarter of 2023. On the CSI Solar side, margins improved due to a faster decline in costs relative to ASPs.

In addition, CSI Solar incurred a $35 million inventory write-down specifically for modules in warehouses intended for certain distributed generation markets. Without the write-down, the Q3 total gross margin would have been 18.6%. Selling and distribution expenses were up 14% sequentially, driven by higher unit logistics costs.

General and administrative expenses declined 18% sequentially, as share-based compensation expense related to the CSI Solar IPO from Q2 did not reoccur in Q3. This was partially offset by other factors, including a TOPCon ramp-up cost. Research and development costs increased 25% sequentially due to higher spending in TOPCon and the storage R&D.

Overall operating expenses increased by 4%. Net interest expense in the quarter was $11 million, down from $21 million in the prior quarter. This was mainly driven by the higher interest income from higher cash balance during the quarter from the proceeds of the CSI Solar IPO, which have not been spent yet.

The net foreign exchange and the derivative loss in Q3 was $17 million, compared to a net gain of $34 million in the second quarter of 2023, mainly driven by a weaker euro relative to the US dollar and hedging losses on RMB.

Total income was $62 million, with net income attributable to Canadian Solar shareholders at $22 million, or diluted EPS of $0.32. Now getting to the cash flow and the balance sheet, please turn to slide 14. In Q3, we generated approximately $158 million in operating cash and invested $305 million in CapEx.

Our full year 2023 CapEx budget is reduced slightly to approximately $1.3 billion. This means that Q4 will have a significant increase in CapEx. While we firm up next year's CapEx plans, we expect the next year's number to be slightly higher, but not too off from this year's CapEx level.

So, we ended the third quarter with a healthy total cash balance of $3 billion. Our leverage, as measured in net debt to EBITDA, excluding restricted cash, was at 1.6 times, slightly higher than last quarter. Our financing programs now include two green bonds, one issued in Europe and other in Japan, the latter which we closed around a month ago.

So, now, let me turn the call back to Shawn, who will conclude with our guidance and the business outlook. Shawn, please go ahead..

Thanks, Huifeng. Let's turn to slide 15. For the fourth quarter of 2023, we expect solar module shipment by CSI Solar to be in a range of 7.6 gigawatts to 8.1 gigawatts, including approximately 85 megawatts to Recurrent Energy project.

Total e-STORAGE utility scale battery storage shipment by CSI Solar are expected to be in a range of 1.4 gigawatt hours to 1.5 gigawatt hours, of which approximately 720 megawatt hours are expected to be recognized as revenue in early 2024.

From a financial point of view, we expect total revenue to be in a range of $1.6 billion to $1.8 billion, and gross margin is expected to be between 14% to 16% in the fourth quarter. For the full year 2024, we expect total solar module shipments to grow to the range of 42 gigawatts to 47 gigawatts.

We expect total battery energy storage shipment to grow to the range of 6 gigawatt hours to 6.5 gigawatt hours. These numbers include approximately 2 gigawatts of solar and 2.5 gigawatt hours of storage internal shipment to Recurrent Energy projects, respectively.

While competition is always tough in this industry and probably more so today than in the time past, overall, Canadian Solar is well positioned to execute through the near-term challenges and drive long-term growth. The strong position we hold across our key markets, segments and business units gives us a major competitive advantage.

This includes the e-STORAGE, which is one of our fastest growing businesses with improving profitability. We expect to further strengthen our leadership position as we expect to more than triple shipment of our utility-scale energy storage solution in 2024, gaining additional market share in the global energy storage market.

With that, I would now like to open the floor for questions.

Operator?.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Colin Rusch with Oppenheimer. Please proceed with your question..

Thanks so much. You know, Shawn, you've been through a number of these cycles with the industry as it's grown and gone through some down cycles. And I know that folks are really, you know, trying to get some visibility into what's going on in the distribution channel with inventory.

Can you talk a little bit about what you're seeing, both from an overall inventory level, but also a sell-through and expectation around cycle times, both in your own distributor business, as well as your customers, particularly in Europe?.

Thanks Colin. As you said, I have gone through quite many cycles like this in the past 27 years in the solar industry. And actually, sitting here, I feel better -- much better this time than other industry uncertainty -- uncertain time or tough time.

That's because number one, we are -- Canadian Solar is much bigger and also with sufficient cash, actually a lot of -- sitting on a lot of cash. So, I don't have to worry about liquidity at all. Now, talking about inventory sell-through, as you know, the distribution market accounts for about 30%, 35% of the total solar market.

And in this market, it seems that there are some inventories in the channel in certain market, but not all the market. For example, in China market, actually, I don't see much inventory in the distribution channel. But in European market, maybe.

Now, actually, to answer your question, I received a customer who is our number one distributor in Europe just last week, and I asked him the question. I asked him, look, you know, how do you think those inventories will affect you? How long do you think it will take to sell-through in Europe? And he said, maybe one quarter, maybe less.

Then I said, well, I read on some Internet news that, you know, some people were talking about 80 gigawatt, 90 gigawatt inventory. Did you -- do you see that? And he said, no, no, Shawn. I don't know -- actually, I don't know where those information or the rumors started. I certainly don't see this much inventory. The scale of inventory is much smaller.

So that's the information my customer gave to me -- or the distribution customer gave to me just last week. So, Yan and I feel to be more conservative. We feel let's be prepared for more than one quarter, maybe this quarter and a little bit of -- and also Q1, because Q1 is winter, right? It's a low season.

So, maybe it takes two quarter to sell-through. So that's my feeling, Colin..

Thank you so much, Shawn. Super helpful. And I guess, the second one is really for Ismael. You know there's a lot of discussion around interconnection and grid capacity for taking on new projects.

Can you talk a little bit about the cadence at which you're seeing projects move through interconnection queues and the potential for, you know, some of these energy storage projects to move a little bit faster, you know, into construction and potentially prioritizing the energy storage elements of projects before the solar -- as you get into 2024, and how you see that evolving?.

Thank you, Colin. Thanks so much for the question. Look, it remains being the main issue, not only the saturation of the grid, but also the delays on executing the expansions by the grid operators. The good thing in our case is that we have very good visibility for the next three yours, four years of what are we going to be deploying.

But it's an issue to keep on alerting the pipeline on the relatively short term for whoever needs that. Look, transformers, you need to order way in advance, and you are taking a significant risk, because sometimes you need to order them before fully finalizing your permitting process. Otherwise, you are going to be late.

In the storage side, we start to see more acceleration than before. We are starting to have the first projects coming in Europe. We are starting to receive the first interconnections for storage in Japan. So, we believe it's going to accelerate; probably not as fast as we wish, but it's starting to happen. I hope I answered the question..

Yep. Thanks so much, guys..

Our next question comes from the line of Philip Shen with ROTH MKM. Please proceed with your question..

Hey, guys, thanks for taking my questions. As a follow-up to the question earlier around inventory and the outlook for Europe, Shawn, I was wondering if you could kind of speak a little bit bigger picture in terms of your guidance. Your Q4 guidance is declining 5% quarter-over-quarter in a seasonally strong quarter.

But then you're looking at 2024, and it seems like you could grow shipments maybe 50% year-over-year. So if the slowdown for Europe is maybe Q4 and Q1, is the expectation that there is a tremendous recovery as we get through Q2 and Q4 of next year? Thanks..

Hi, Philip. This is in Yan's territory, so I will ask Yan to answer the question..

Hey, Philip. As you already know that the destocking actually started in Europe for, like, end of Q2, it's already started. So it's been two quarters already, and we believe, by Q1, it should be somehow finished. And once that channel is coming back with such a dramatic price reduction over the past year, we should see strong demand coming back.

And so and as you know that we have a pretty strong presence in that channel. So we anticipate a strong coming back in Europe and other markets as well. So and this is -- we're in a price-elastic market. So with such a price reduction, the demand is going to be stimulated to a much higher level.

It just may not happen right away, but it's going to be -- maybe some delay in a few quarters, a couple of quarters will come back on the utility side as well.

So we had some demand reduction on the utility side as well over the year due to different bottlenecks on EPC, on interconnection, on some equipment, but also some speculation, because people expect module price coming down, so they decide to delay. But over the course of next year, we should see the utility demand also should come back strong.

So we actually see -- we actually anticipate a strong demand pickup in latest second half -- second half of next year..

Great. Thanks for all the color, Yan. Shifting to the US market, you mentioned in your remarks that a 150 megawatts product was detained.

Looking ahead, do you expect risk for new shipments to be detained? And how many gigawatts do you think you could ship into the US from Southeast Asia in 2024? And as it relates to the detention, what type of bomb is in the module that has been detained? How long do you expect the detention to last, and do you expect it to spread? Thank you..

Well, so we're actively cooperating with CBP on the submitting the documentation. And we're actually very confident with our traceability procedures and from our knowledge that both non-China and China silicon, you know, has passed through the customer. So we're working with them and we're confident that we can resolve this soon..

Okay. Yeah, thank you..

And for next year -- for next year, we should have a strong growth, as Shawn has mentioned, in the US..

Can you share how many gigawatts you think could be in the US next year?.

Well, Philip, as you know, we used to have about 4 gigawatt solar cell capacity in US, and we are now building a 8 gigawatt TOPCon capacity. Not in US, I'm sorry. 4 gigawatt of solar cell capacity in Thailand, and we are now ramping up another 8 gigawatt of TOPCon solar cell. Now, most of those capacities are built in order to serve the US customer.

I guess, that's the information I can provide to you at this moment..

Okay. Thank you, Shawn. Another question here. What is your base assumption of the size of the US market overall in 2024? I've heard other Chinese companies suggest that the US market could be 80 gigawatts of module shipments with maybe 50 gigawatt of installation, which seems pretty high.

I was -- so I was wondering what you think the 2024 baseline could be in your base case. Thanks..

Now, I want to check if our Senior Vice President, Thomas Koerner is online. Thomas, are you online? Thomas? Okay, forget it. Next time.

So, Yan?.

Yeah. So actually --.

Thomas' line is now -- is now live..

Okay. So, actually, we're seeing -- also seeing -- anticipating a strong growth of US market demand next year. I'm not sure about 80 gigawatts, but they should be much higher than this year. That's our estimate..

I think Thomas might be available now. On what -- what's the basis of that strength? You know, utility scale might grow 10% to 15%. Residential, I see down 10% -- 12% actually. And then commercial might be flat to up, but it's not a big market. So just curious, where do you anticipate that strong growth? Thanks..

Thomas, your line is now live..

Well?.

Hi. This is Thomas.

Can you hear me?.

Yes, thanks..

Yes..

Yeah, Thomas..

We are seeing a significant revival and ramp-up of utility projects mid to the end of 2024. And as also Shawn and Yan has already outlined, the deployment through distribution channel should be finished by Q1, latest by Q2 next year. You're already seeing distribution companies to reorder and restart ordering for the beginning and Q2 next year.

So once the inventory has been deployed in the residential channel and some rooftop markets, we are seeing customers coming back and reordering products in anticipation of a pretty strong 2024 US market..

Okay. Great. Thank you for the color, guys, and taking all the questions. I'll pass it on..

[Operator Instructions] Our next question comes from the line of Brian Lee with Goldman Sachs. Please proceed with your question..

Hey, guys, how's it going? Thanks for taking the questions. Maybe a few follow-ups to Phil's questions around guidance. Just trying to triangulate here some of the moving pieces for Q4.

So maybe if you could help us out? Just the 14% to 16% gross margin guidance, what does that embed for CSI Solar? You know, is it up, flat, down? And is your base of reference reported 16.6% or is it the adjusted 18.5%? Like, are there other inventory write-downs you're anticipating for Q4 in CSI Solar? So, on maybe just, you know, what's the gross margin direction or, you know, range you'd expect for that segment in Q4?.

Hi, Brian. Good to hear you again. Now, actually, I would like to introduce a new person. Well, actually, he's not new. He has been with us for many years. Kah Locke, our financial controller.

Now, Kah Locke, do you want to shed light?.

Yeah. So, the outlook will be driven primarily by CSI Solar. So, that is the basis for our, you know, present outlook.

You know, in terms of, you know, the range of guidance, you know, that, you know, just, you know, reflect the, you know, sensitivity we have towards the, you know, market right now in terms of the -- you know, the price and, you know, our inventory level, et cetera..

Okay, fair enough. Maybe asking it a different way, it sounds like you're inferring that, you know, Q4 is going to be largely driven by CSI Solar. And so, Recurrent, you know, was pretty light revenues in Q3.

If we presume Recurrent doesn't grow significantly in Q4, I guess, the math would just imply that ASPs, which were like low $0.20 per watt this quarter reported, would be like $0.17 or $0.18 per watt in Q4, or do we -- are we wrong in assuming that Recurrent is not growing much in Q4? Just trying to triangulate the pricing, I guess, because I have a follow-up question around the implications for 2024 guidance..

Your estimation, you know, is in a ballpark. You know, Recurrent is not growing much, you know, for this next quarter..

Now, I want to explain in a different way. Recurrent is shifting from develop and flip to develop and hold project. So, Recurrent is growing, but they are not selling project. We think we have been leaving too much money on the table by selling the project just after or before COD.

We think our projects are very valuable, and connection points are also very valuable and you're not going to see this kind of PPA or this kind of connection point anymore. So, we think that by holding those projects, though, the value will grow. So I just want to correct that Recurrent is growing, because the pipeline is growing..

Okay. Thank you, Shawn. No, that makes a lot of sense, and I have a follow-up question on that.

But maybe just quickly to round out this line of questioning, if you're kind of, let's call it, high-teens, ASP per watt, exiting 2023, what's sort of your big picture view around, you know, '24, given we're still going through some destocking and it doesn't sound like you're going to have meaningful shipment growth maybe until the back half of the year? That's what you seem to infer to an earlier question.

So, ASPs flat, you know, down modestly, like, what kind of -- what's your big picture view off of these levels for maybe the balance of '24?.

Hi, Brian. As you know, we don't provide 2024 margin or ASP guidance yet.

So, why don't we wait till March or May conference call, and let's see whether we can share some the numbers at that time?.

Okay, understood. Last one for me, Shawn, and I'll pass it on. I did want to ask you kind of big picture strategy question, you know, as Recurrent is going to go into more of a -- you know, it almost sounds like quasi-IPP model.

Wondering, can you give us a sense of, you know, what your average holding period, target holding period would sort of be like? And the reason I ask is, you know, you're not generating free cash flow this year, and if CapEx is up, you know, more next year, you know, presumably, you may be in a tight free cash flow position next year as well.

And you're not selling these assets for upfront margin. So, does it start to strain your cash flow or balance sheet picture in terms of holding these projects longer? Just kind of get a sense of the puts and takes and how you balance that? Thank you..

Hi, Huifeng, do you -- can you answer this question?.

Yeah, sure. Hi, Brian. Our leverage on the Recurrent Energy side has increased over the year, because we are transitioning into a build-and-hold model. But meanwhile, when we indicate our strategy of holding assets, we have been approached by many financial partners.

So, we have options going forward, equity, partnership, all kinds of form to grow our assets and also be a manager for those assets. So, the future cash flow will be predictable, stable. So we are really in the transitional period. And that explains why the revenue number over the past few quarters was lower for Recurrent Energy.

But going forward, you will see the cadence will change, we'll accelerate the growth, owning more assets and owning more cash flows. Thank you..

Hey, Ismael, do you want to add some color?.

Sure. So, look, you've been asking a couple of things. The first one was for how long we intend to hold the assets. I think that's heavily dependent on when is the optimum point of selling.

So, our intention is to retain for as long as we can and wait for opportunities, if there are opportunities in the market, to sell a portion of high -- bigger portfolios whenever market conditions are good for sale. But initially, we don't have a period to be holding. We are signing PPAs for 15 years to 20 years.

So, the intention is to prepare the assets to be holding for the long run. And on how to get equity I think you can reply perfectly. I mean, there are many ways to get the equity we need and we are perfectly aware of what it means cash wise, the shift. So everything is very well planned, I think..

And it looks like we have time for one more question. Our last question comes from the line of Praneeth Satish with Wells Fargo. Please proceed with your question..

Thanks. Good morning. So, I guess, when you look at your end markets, you know, we know DG demand, residential demand is weak.

But I guess, focusing more on the utility side, have you seen signs of slowdown on utility-scale solar demand, given higher rates? And then on the Recurrent side, how are you seeing returns trending in the current market and what's the ability to pass on, you know, the higher rates with higher PPAs? How much room is there for that?.

So, I would invite Yan to provide colors from the module vendor side, and then Ismael can add more colors as a developer.

Yan?.

Hey. Well, so the answer is on the demand side. We -- we're seeing a strong potential demand next year, because from our discussion with our many of the big utility-scale customers, you know, a lot of the -- those customers, they have a huge pipeline that are coming up and some of them are just delayed into next year.

So, for various reasons and as -- pricing downtrend is one reason and other reasons like delayed interconnection and some other permitting delays. But we know the pipeline's coming up next year. So, that's a good sign..

Ismael?.

Sure. Look, on the interest rates and the ability to pass over the hit on the model, there are a couple of things that we need to understand. The interest rates are high right now, but we don't know for how long are they going to stay high. Everybody's assuming in their modeling that sooner or later they will refinance at a better rate.

So, you are having a hit right now, but it's not a hit for the life of the asset, while we are having reductions on the CapEx of the projects that stay there for the life of the asset, because it's a one-time investment. On the PPAs, we still see a very strong demand and the dynamic of that market is different from the interest rates.

It's basically dominated by supply and demand. And because of the delays of interconnection, we still see that there is a significant shortage of good quality projects, and offtakers are generally struggling to secure all the PPAs they want to secure.

So, we've been canceling a couple of PPAs ourselves to sign better ones, and right now, the market is strong. That's all I can tell you right now..

And we have reached the end of our question-and-answer session. I'll now turn the call back over to Chairman and CEO, Dr. Shawn Qu, for closing remarks..

Thank you for joining us today and for your continuous support. If you have any questions or would like to set up a call, please contact our investor relations team. Hope you have a wonderful Thanksgiving holiday with your families and take good care..

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation..