Q3 2019 Earnings Call
Good standing by and welcome to Canadian Solars third quarter 2019 earnings Conference call.
My name is Tara and I will be your operator today.
At this time.
Having to listen on the mine.
They will conduct a question on <unk> session.
As a reminder, this conference is being recorded for replay purposes.
I'd now like to 10 Nikolaivich.
Job managing director of Canadian Solar <unk> Department.
Thank you. Please go ahead.
Thank you.
And welcome everyone to Canadian Solars third quarter 2019 earnings conference call joining us today are Dr., Sean shoot Chairman and Chief Executive Officer Yen John .
<unk> Chief Executive Officer.
In Chief operating officer.
Commercial officer.
And dr. quite fun.
Senior Vice President and Chief Financial Officer.
This call Sean will provide a brief introduction followed by yen, who reviewed the execution of our business strategy and outlook and weight.
Who will go over our financial results well then open the call to your questions. Before we begin may I remind listeners that management's prepared remarks today as well as their answers to your questions will contain forward looking statements, which are subject to risks and uncertainties. Therefore the company.
He 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 projections are these the company's future performance represent 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.
A more detailed discussions all the 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. Oh. This is see regulation G regarding generally accepted accounting principles or gap.
Some financial information presented during the call wont be provided them, both GAAP and non-GAAP basis by disclosing certain non-GAAP information management intends to provide investors with additional information to permit further analysis of the company's performance underlying trends.
Management uses non-GAAP measures to better assess operating performance and two stylish operational goals non-GAAP information should not be viewed by investors as a substitute for data prepared.
In the coordinates gap.
At this time I would like to turn call over to Canadian Solars, Chairman and CEO .
Sean cheap Sean Please go ahead.
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Q3 results and continued progress.
He takes at least from this quarter.
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Gross margin came in above previous guidance.
Firmly on track to monetize our 3.4 Gigawatts late stage project pipeline.
Wow. This is always subject to unpredictable and short term.
So in closing we have a proven track record.
Hi.
Hi, our projects across the war.
Continue to strengthen the synergies speech and our upstream and downstream business is a one cents leveraging our global purchasing power consumption.
While the other.
Positioning our business model.
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Solution provider.
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Active markets.
And we continue to evaluate strategic.
Last month and partnerships to do not our leadership position technological innovation.
We're confident that.
Differentiated strategy and business model.
To continue.
And in coming years.
Fortunately.
Resolutely focused on delivering profitable growth.
She holders.
Yes.
Now let me go through this quarter's results.
Q3.
From our MSS business.
$675 billion.
Gross margin was again about expectations.
Just to 26.9% from 22.8% in Q2.
The improvement was driven by Steve Yes piece as we benefited from our strong.
Thanks ability 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 shown just mentioned our team broken now the work record Dean sell conversion efficiency in Q3 for P type multi Chris Chris to launch that sort of huh.
This was a significant milestone proved that our.
Proper retiree, a multi crystalline silicon technology can achieve efficiencies that are close to mono while enjoying the cost advantage of much supply chain.
We're rapidly.
Rapidly ramping up mass production off our P. five constant mono modules and expect P. five 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 blocks.
The city.
In our energy business, our team continued to execute and made significant progress in Q3.
We announced the NTP sell off the 266 megawatts Rambler project in the U.S. and completed the sale of 80, some interesting the 171.5 megawatts project in Brazil.
Our portfolio late stage utility scale solar power projects, including those under construction was 3.4 Gigawatts as of September Thirtyth 2019, compared to 3.6 Gigawatts during our last call.
Project seen operation totaled 796 megawatts as of September thirtyth within that speed resale value of approximately $900 million.
We remain committed to monetizing the remainder of our late stage pipeline and no preaching projects through 2020 and beyond.
This is consistent.
Line, we provided previously for example in Brazil, we completed the sale of an 80% interesting three projects with total capacity of 353 megawatts in late October .
Local demand.
Project assets its height, it's high given our proven track record and Bankability.
In Q3, we want to track two P.P. Acnes total capacity up 424 megawatts and reach C. D on the largest solar power plant in Argentina off 100 megawatts.
We continue to drive growth and do you out of new project.
Project opportunities across there is geographic markets.
We remain focused on pursuing only those opportunities that meet our stringent developing the MRI criteria.
Our strong track record of accident performance has helped make Canadian solar one of the sectors most bankable brands.
The latest example was in Q3, we secured.
You are 120 million dollar in non recourse project financing for two project to solar project in Brazil.
Our ability to sit to secure financing on favorable terms gives us a significant advantage and continues to meet Canadian solar development partner of choice.
Now let me comment on guidance for Q4 2019, we currently expect total Q4 shipment.
Module shipments to be in their wrench up 2.3, Gigawatts of 2.4, Gigawatts, including 190 megawatts of shipments to the company's owned utility scale solar projects.
I'm going to expect it to be in the range of $850 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 itself 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.
Oh for 2019 expected to be in the range of 3.13, beating to $3.16 billion.
Overall, we're optimistic in our long term outlook and expect on the SEC acceleration in growth in 2020 like myself in our late stage project pipeline, our company's fundamentals have never been stronger.
We remain focused in executing our strategy for the MFS and any other businesses and I'm building value for the company and its shareholders. Let me now turn the call over to.
For more detail.
For the third quarter.
Thank you yet.
No that for Q3 or without ammonia shipments and goes money.
Above expectations.
Volume in a profitability refractory the benefits of all the strong pricing power and a continued cost reductions.
The energy business also contributed significantly to the gross margin trends, we expect to continue as we monetize them coming up to 3.4 gigawatt makes it offline.
The process.
Focus is to maintain a balance between driving profitable growth and the strengthening the balance sheet.
Now let me go over the financial results.
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Good morning.
For 2287 megawatt comparing 2001.
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759.9 million.
26.7% sequentially and down 1.1% of year over year.
Net revenue for Q3.
Oh 674.9 billion.
Mmm business at a 97.6 million from the energy business.
Gross profit in Q.
98.9 million.
And to 80 to one 6 million Q2.
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70.6% second quarter, 2019 and 26.1%.
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non-GAAP gross margin would have been.
70 to 90.
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50.5.
Q2, 0.2 19, 25%.
Like 18.
Oh operating expenses.
18.8 million.
Compared to 121.9 million Q2, and a wonderful quantifying billing to sleep like 18.
Income from operations.
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Operating margin was 10.5%.
Compared to 5.9% Q2.
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Foreign exchange gain in Q2.
20 million.
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Net income attributable to Canadian solar shareholders for Q3.
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2.7 million.
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Net income of 6.5 million.
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Net income attributable to Canadian so on the non-GAAP basis, roughly 19 was 40.1 million.
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Moving onto the balance sheet and accusingly, meaning so.
Province of cash cash equivalents 526.2 million.
430 to quantify meeting.
Q2.
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125.9 billion.
462.9 million Q2.
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With that I wouldn't I like to open the call to your questions operator.
Thank you ladies and gentlemen, we will now begin the question answer session.
If you'd like to ask a question. Please press star one on your telephone and Wakefield names via now.
If you need to cats.
Please press the pound <unk>.
I'll say, especially.
From Holland Bush from Oppenheimer.
Please go ahead.
Thanks, So much guidance can you break out 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 a that's made up of already be different channels right.
Yep.
Okay. So the speed of channels the secretary men.
Evolving, but rather stable, it's not as dramatic change except to we continue to adjust our outlook from two different markets. According to the price movements.
So so we are in general.
A couple in mature markets like a U.S., Europe , Japan, and Brazil, and Australia, <unk> continued to extend our direct sales channel into the premium rooftop market.
And.
So that has been around like 20%.
Any type setting up our total volume.
So will continue to grow isn't that a a segment to be the premium pricing and also a differentiated product offering.
And of course marketing and other channel strategies.
No support and a dedicated team of course, and Oh now they haven't next year something a strong about to Canadian solar is well have Ah.
Highly bankable a capacity in south into southeast Asia that we're going to shift to the U.S., it's about three gigawatts the U.S.
In the next few years and each year. So I know, there's a shortage bankable capacity in the southeast Asia. So our pricing you asked market is.
Rather it's very healthy.
And thirdly is we continue to allocate more volume in high growth markets like Japan.
And Japan actually.
And that cost level for any business in Japan is like the twice or three times, a compared to other markets depends on the business segments and Oh, our our leadership our market share in a in a residential market in Japan is there is pretty high as more than 10% number to opt or Panasonic, but.
Ahead of other local Japanese.
Players it gives us a lot of profit ending March like Brazil, and not enough to know we also sell a a slightly higher pricing.
The the Beatles already.
And we will continue.
Control outposts in low priced markets like China and India.
On top of those we also have a captive market. So we've got one projects our E. L Energy group of projects will use most news our module.
I had a market price. So we don't have to really go be the super low price competition and also our term TPC projects also using our.
I I had at market price. So this is a.
Channel structure and this bleed off the bottom hole pounds. Your questions. Yeah. That's incredibly helpful. Then you know I know you want to be a little bit cautious about share in too much about the kids are cost reductions, but what can you tell us in terms of how we should think about how that most florida. It seems to me that you've got some pretty.
Hurdle soil in front of the in terms of migrating costs down and being able to maximize the margin here over the next four or five quarters.
So us coffee talking about the constant price trend right.
Yeah.
Yeah, just the cost the cost our cadence.
Okay. So we believe up into next year, thus the will cut down our cost and a two data of course, the multi product will also go down and Oh, we actually observing the cost reduction mainly come from the mono model line.
No supply chain and in particular wafer and however, we believe that to the price ammonia price going down together with the costs go down and that at certain point of the time, a one price goes to a certain level might be a turning point of the market. So we actually are cautious.
And also next year are the tier one suppliers, we will have more volume overseas and therefore have a have a better controlled in the pricing and the tier one capacity compared to total demand. The oversupply is actually last so.
Companies to be the better branding and Bankability and better products will have a better chance to suspend the pricing.
So this is my view on sound you all that well.
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So that's the cost I mean as a flagship.
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It into the cost curve and continue to maintain a premium that we can be a winner.
Both.
All that market.
Okay.
Thanks, so much guys.
Once again, if he'd like to ask a question. Please press star one on your telephone.
Our next question comes from Brian Lee from Goldman Sachs. Please go ahead.
Hey, guys. Thanks for taking the questions and welcome back on I.
I guess, maybe just a first I I jumped on the call late so I might've missed this but is it just the Japanese projects that are falling out from a Q4 into into Q1 of 2020.
Yes, yes, yes.
One of the Japanese podcast.
We definitely saw we can close everything in Q3.
Somehow a because those are a lot of people walk a.
Ah legal war.
And then.
Slip into two later, Oh actually I talk to the got that team last night and then they told me that they are moving forward everything is more.
No dispute what's the buyer so.
In closing.
Fighting valuation competent to everything will come out the.
Yes, but maybe because we have several projects in the closing.
Some of the part that originally.
For Q4, one of them with it may slip into Q1.
<unk> Q1, so situation.
Just.
Yeah.
Demonstrate the process.
Okay fair enough, but the Japanese project in question that was originally potentially for Q3.
That is having the biggest impact here on the Q4.
Q4 guidance and then are you from 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.
I too.
Well part yet so I.
I think why did it shifted from Q2 Q3, two Q4 and a more prompt coupon until Q1.
The reason Drybulk, we lower the guidance for Q4.
Yep understood and then I guess on gross margin I had a question. There just can you give us a sense of you know in the 19% to 21% range, what what's being reflected for the two different segments.
Well I think as many primarily driven by a slippery off the project sell closely.
And I'm on a smaller part it's on the module side.
Because of or the price dropping so.
So that's the situation.
Okay Fair enough is there any.
Yes.
There's also a project that is low margin that's been a close.
The next quarter is putting a mcbride project.
That's a 130 million dollar.
Well Mark himself.
Low margin so in the projects business for Q4, Okay fair enough.
And then for you know the 80 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 just so I did okay now now it's not.
It is not in the 19% to 21%.
Correct.
Got it.
Okay, Great and then maybe last one I'll pass it on I think there's been some scuttlebutt.
For a potentially a a near term policy update on the China solar.
The market for 2020 or maybe even by year end just a you know wondering later this year.
The the late.
Policy development kind of stunted 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 or you know toward the year end or or are you still expecting it next year. Thank you.
Okay. So first of falling to say that dogs, our exposing turned is lower.
So the short term fluctuation in trying to market. It has a minimum impact on our business.
Secondly, rigging regarding China demand I think two wheel heard the news about the two cities in the first three quarter off while 16 Gigawatts. So we also see that we do not expire so superstrong rushing to four Oh, though there's a a slight a demand hot at the men.
In October and November , but almost speaking is quite rationalized demand. So ah so Q4.
So this is down basically.
Most capacitance into food and into next year, a we continue to see the rationalize decent the market. So.
But however, we also anticipate to the delay opt to projects from a push forward to buy the delayed project from this year to Max you actually the reason for China low a number of a installation. This year's partially also because aside from being rationalized is the.
Late announcement of the TP off the contract permits that do not give you got enough time to secure the land and and other financings. So that's part of the reason why.
That's pushed forward into next year. So therefore next year I was given the unlike a slow at 30 35 Douglas next year, but with the push forward delayed project into next year, we anticipate a China can be.
Higher side comparing to the 35, you got the can go out to 40 gig watts.
Next year, because over time people, who will <unk> people need more time and that will need the time to readjust their position to getting to the new new policy and a in terms of the policy a clarification.
It's a it's a moving target, but I don't think a it will have a fundamental impact on the existing programs off the grid parity and and also the subsidies subsidized market because the subsidies.
Oh already is one don't does he already well continue to move down next year a at low level.
The entire industry is actually over the year, they should get used to a better adjusted to the new environment and it will the demand will be stabilized.
Shocking if any.
[noise] met the question for you.
Next question comes from Mark Strouse from JP Morgan. Please go ahead.
Yeah. Thank you very much for taking my questions a waste long I just wanted to go back to the guidance if I can I apologize if I Miss there. So I just wanted to be clear so for the year you've left your your shipment guidance the same but you took down revenue.
Or you are you reducing your internal.
Assumptions for eight years cheese, and the MSS business or is it completely a function of the project orders.
Let me a function of the closing time of the pockets in Japan.
Right, Okay got it.
And then on the the power plants in operation.
The the megawatts for were stable quarter over quarter, you took down the a the estimated resale value a tad, though just curious what's driving that it's just a rounding error or is there anything to call.
Call out and the neither is a regions where you have operating assets.
Well its many China. So as you actually you know that things are end of June last year, China market.
Mark It actually was.
Crashed.
And so there's lot of humans product inventory that song sound in the market in China.
And because the desperation offsetting those project for cash flow purpose.
The pricing moving around in the market is pretty low so.
It's now right now a buyers market.
And and our projects are actually better must that in terms of a project completeness and quality compare.
To the human tumors in the market and we received a rather healthy pricing.
On the and also however, we have some.
Because the market change and a perception. So we have some difficulties on collecting the that that the receipt who payment Bennett's payment on the project already sold.
And so.
According to so according to the U.S. GAAP and our finance.
Department work together.
And then.
Evaluation of the situation on certain projects and one of the project. So we have Oh, we have a write off.
On the balance payment. So this is.
One of the reason and also we have a project that so.
Valuations come dominant.
So a this is the reason for the devaluation of the project pipeline.
Okay very helpful. Thank you.
[noise] like anything you'd like to ask your question. Please press star one on your telephone line.
Our next question comes from John Cedric from luminous. Please go ahead.
Hey, guys just maybe two quick ones. One can you give us a sense of where.
Finally, as Pete Watson, three Q, and where do you see it and for Q and then secondly, it looks like you've increased your module capacity for 2020, but left to sell capacity pretty much unchanged. It 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.
Yes fee for.
For Threeq, you and so expecting for Fourq.
I would say.
From Q4, it's a it's a downturn but for us.
Also downturn, but more mild so rather stable down.
So this is a true for situation and.
Because we secured our high price autousa much earlier.
Most of the Q4 pipeline.
And it's only a portion of the <unk> Q4 appeals that come late.
The impact of pricing.
However causes also London.
And moving into next year.
I I think.
Margin percentage next year me do down compared to this year.
To a certain level.
It just depends on D.V. two companies I believe needed and soon to be an hour run neiman visibility in our channel structure and our Brendan anymore around the world and the discipline on the optimizing sorry on prioritizing markets we should.
Bob become intend to better pricing the market.
And so also next year.
Supply chain cost structure changed a this year one of the benefit we enjoy is we actually.
Meet our decision on setting more party product a piece on economics of the supply chain next year that will change who see dots as could be a some significant cost down.
So that would transfer himself and so therefore, we can benefit from a.
Model.
More than.
And then this year so.
So next year, we have.
We're going to happen 9.6, Gigawatts himself and also 13.
Sorry.
And it certainly wasn't so module capacity so our shipment volume would go up I cannot give you guidance today.
Our shouldn't Bonnie will go up which will compensate for the slight a percentage down on the margins right.
And also our next year, we believe that our project team will do better than this year.
Hi, John .
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Turning to.
Expand our ammonia capacity out of it well Salka lastly, the same.
That's the corn.
The molecule capacity.
Thanks, I'll give a lot though for the will bottom.
But we have a various access product code.
That's helpful.
The first time, the so called was six thanks.
Millimeter wave or commercialized.
Great.
So a lot require classic, but we're making good money there.
It's also alcohol that gap.
Internal cell and module.
In the past two years.
Development, Oh, well sell only companies in China.
The wafer to them to module, but they do just itself.
Fuel company or like that so let's talk hall that gap, so that we don't have to buy.
You know develop all cell capacity.
Uh huh.
So all internal sell kubasik can be bad or something about it by external sell when a company.
We focus on channel and the branding.
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That's right.
That being you know in development in the possible, yes, So John I Hope, yes, but I also your question.
Yes, Thank you guys.
Just a final call if you would like to ask a question. Please press star one.
There are no says a question I will pass back too tough to Sean Q Canadian Solus, Chairman and CEO for closing comments.
Thank you.
Nevertheless for drilling in today's call will continue to support if you have I knew further follow up question.
Please contact our investor relationship.
I have a great day.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.