Q2 2023 Canadian Solar Inc Earnings Call

Speaker 1: Ladies and gentlemen, thank you for standing by. Welcome to Canadian Solar's second quarter of 2023 earnings conference call. My name is Melissa and I will be your operator for today's call.

Speaker 1: 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 Isabelle Zhang, IR Director at Canadian Solar. Please go ahead.

Speaker 2: Thank you, operator, and welcome everyone to Canadian Solar's second quarter 2023 conference call.

Speaker 2: Please note that we have provided slides to accompany today's conference call, which are available on Canadian Solar Investor Relations website, within the events and presentations section.

Speaker 2: Joining us today are Dr. Sean Chu, Chairman and CEO . Yen Zhong, President of Canadian Solar's majority owned subsidiary, CSI Solar.

Speaker 2: Dr. Hui-Feng Chan, Senior VP and CFO , and Ismael Guerrero, Corporate VP and CEO of Canadian Solar's wholly owned subsidiary of Recurin Energy, also formerly Global Energy.

Speaker 2: All company executives will participate in the Q&A session after management's formal remarks.

Speaker 2: On this call, Sean will go over some key messages for the quarter. Yan and Ismail will respectively review the highlights of the CSI solar and recurrent energy businesses.

Speaker 2: followed by Hui Song who will go through the financial results.

Speaker 2: Sean will conclude the prepared remarks with the business outlook, after which we will have time for questions.

Speaker 2: Before we begin, may I remind listeners that management 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 the protection of the safe harbor for forward-looking statements that have contained in the Private Securities Litigation Reform Act of 1995.

Speaker 2: Actual results may differ from management's current expectations. Any projections of the company's future performance would present 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 the risks and uncertainties can be found in the company's final report on Form 20F.

Speaker 2: basis. By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the company's performance and underlying trends.

Speaker 2: 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.

Speaker 2: And now I would like to turn the call over to Canadian Solar's Chairman and CEO , Dr. Sean Chee. Sean, please go ahead.

Speaker 3: Thank you, Isabel. Hi, everyone. Welcome and thank you for joining us today. Please turn to slide 3.

Speaker 3: We achieved strong financial and operating results in the second quarter of 2020.

Speaker 3: 2023, we delivered record module shipments of 8.2 gigawatt with

Speaker 3: Importantly, we delivered record total net income for Canadian solar shareholders of $170 million or $2.33 per diluted share. Let me share a few QQ2 messages before Yan, Isabelle and Huifeng reveal our performance in more detail. Please turn to slide 4.

Speaker 3: First, we successfully completed the IPO of our PSI solar subsidiary on the Shanghai Stock Exchange. We have completed the IPO of our PSI solar subsidiary on the Shanghai Stock Exchange.

Speaker 3: Starboard.

Speaker 3: The investor demand was strong and we reached approximately $975 million in gross proceeds, 70 percent more than our original target. These funds will be used to support our gross plans across both our solar and energy storage businesses, including our strategic investment.

Speaker 3: in vertical integration to further drive technology and cost improvements.

Speaker 3: This is the latest example of how we are building long-term value for the company and shareholders.

Speaker 3: Please turn to slide five.

Speaker 3: Second, under the backdrop of the Inflation Reduction Act, we continue to strengthen our competitive position in the US, one of our core markets.

Speaker 3: 5 gigawatt and represents an investment of over $250 million. Production is expected to begin near the end of this year with approximately 1,500 new jobs created once fully ramped up. We are proud to be embarking on these growth initiatives with long-term partners such as EDF Renewable.

Speaker 3: With whom we signed a multi-year module supply agreement of 7 GW of high-efficiency anti-topcom solar modules.

Speaker 3: At the same time, our e-storage team will be supplying the equipment integration services and the long-term services for Type-A Gold. This is another great example of how we focus on capturing more value of each project over its lifetime. Of our 6.6 gigawatt of solar PV development pipelines in the US,

Speaker 3: Likewise, 45 percent of our advanced storage pipelines in the U.S. are also cited in energy communities. We see significant potential in the U.S. market, particularly after the passing of the IRA, and we will continue to build on our competitive... Hello? Am I still online?

Speaker 3: 45% of our advanced storage pipelines in the U.S. are also cited in energy communities. We see significant potential in the U.S. market, particularly after the passing of the IRA will continue to build on our competitive... Hello? Hello? Am I still online? Hello?

Speaker 3: and track record in this market. Lastly, turning to slide six, I would like to highlight Canadian Folders latest annual ESG sustainability report, which we published a few weeks ago. This year, we made significant improvement in our systems and disclosures.

Speaker 3: We hope the report will serve as a transparent account of our efforts to integrate sustainability and ethics into every aspect of our business.

Speaker 3: For example, we significantly expanded our participation in international ESG initiatives and certifications. We are now supporters of United Nations' international ESG initiatives.

Speaker 3: Sustainable Development Goals and recently joined the United Nations Sustainable Development and recently joined the UN Global Compact Committee to support the Sustainable Development Goals.

Speaker 3: I adhere to the 10 principles of the UNGC on human rights, labor, and human rights.

Speaker 3: environment and anti-corruption.

Speaker 3: We also submitted our commitment letter to SBTI.

Speaker 3: our times based targets

Speaker 3: And that's all for now.

Speaker 3: This indicates our intention to set the near term net zero science-based climate target. We also continue to ensure that our own operation as well as those of our suppliers follow ethical labor practices. I am grateful that these efforts have not gone unnoticed. Having received a prime ESG rating from Institutional Fairholder Services or ISS, we are now in the middle of an interview with our partners at Filoooo Gentle hue Changing this place course development much of it at the level of AI and probably if you allow able to break out

Speaker 3: and an excellent ESG rating from Archills from Arch With that, let me turn it over to Yan who will provide more details on our ESI solar business.

Speaker 3: Yes, please go ahead. Thanks, Zhang. Please turn to slide seven. In Q2, the CSI solar division delivered 8.2 gigawatt of solar module shipments.

Speaker 3: and $2 billion in revenue. This is a record quarter as it's the first time we're crossing the $2 billion mark.

Speaker 4: Gross margin was 14.3%.

Speaker 4: down around 4.2 percentage points, quarter over quarter.

Speaker 4: This is included.

Speaker 4: A $31 million inventory write-down driven by the sharp decline in raw material costs.

Speaker 4: Without the write down, gross margin would have been 15.8%.

Speaker 4: Let me go over the key drivers behind these numbers.

Speaker 4: Please turn to slide 8.

Speaker 4: First, while you can see that polysilicon prices declined significantly during the quarter, fever and sale prices have not fallen nearly as much as polysilicon.

Speaker 4: Note that we ended last year with 20 gigawatt of cell capacity despite expecting 30 to 35 gigawatt of module shipments.

Speaker 4: This means that our non-vertically integrated capacity was not the most optimal from a cost end point.

Speaker 4: We are working to improve this meaningfully as we ramp up cell and wafer capacity in the second half of 2023.

Speaker 4: In the meantime, we're restricting our procurement of third-party cells in order to protect margins before our cell capacity is fully ramped up.

Speaker 4: Second, which is perhaps the larger factor, is the decline in module prices.

Speaker 4: This was mainly driven by the distributed generation segment across most regions.

Speaker 4: mainly driven by the distributed generation segment across most regions, and just specifically the residential sector.

Speaker 4: Overall, market inventory levels are higher than usual.

Speaker 4: and that has led to de-stocking.

Speaker 4: We expect to see improvements in the DG segment as we move through the second half of 2023, once the de-stocking is complete.

Speaker 4: We also saw some utility spill customers post or even delay orders given the sharp pricing declines.

Speaker 4: Despite the near-term pricing volatility and de-stocking, we remain very confident, given the strong demand across nearly every market.

And we are already starting to see polysilicon prices rebounding over the past few weeks.

Projects can only be delayed for so long before they start to incur liquidated damages.

and the development pipeline we see in the market has eclipsed previous levels.

Near term.

Based on the factors I just mentioned, we expect the market to improve as we move through the second half of 2013.

Third, our logistics costs continued to decline in Q2.

mostly driven by lower logistic cost in China.

We have also been locking in shipping contracts when they are lower.

to protect ourselves from any increase as the market rebounds.

combined with our higher operating leverage.

Our operating profit nearly doubled year over year to $119 million. Actually, moving to Q3, we already see that the gross margin is improving.

So, moving to Q4, we expect further improvement.

Turning into slide nine.

Turning into slide nine, we made

The strategic decision to rebrand our utility scale turnkey energy storage business under our new eStorage brand.

which we believe more clearly articulates our business.

In the second quarter of 2023, we signed approximately $630 million in new bookings.

As of the end of Q2, we had a contracted backlog of $2.1 billion.

including contracts under long-term service agreements. We expect shipments will ramp up significantly in the second half of 2023, as we complete our planned transition from a white label product.

into our own manufactured products. Importantly, even our bookings and the 26 gigawatt hour of total pipeline, we believe e-storage is firmly on track to become a billion dollar business in 2024.

I'm very proud of our e-storage team for achieving such impressive growth in just three years.

I know you called out some place quiet tied also some of the crucial part for example, the CT tubes law. One is of course, a crucible bump caused tubes.

There's also a tie so oh people are moving are switching from PERC to top car. There are some nissan volatile, let's say.

But our target is still the same.

Well we are.

But we are ramping up about a 30 to 40 gigawatt of pulp call US we speak we have close to 208 gigawatt of PERC capacity right now and as I said, when I run PR around Florida deployed gig one adult gosney speak.

Yes, so after it but we will.

To summarize we finished on a ramp up to sort of Oh, where capacity will be a will be a tough comp and we're also we also plan another.

The project pulp gone project 10 gigawatt project.

So altogether by that's why by the end of next year in Seattle, six seven day Guangdong.

Pulp costs.

It's not the run probably small linear linear because once you complete them faster.

<unk> two <unk> installs of machines and so once the machines oh tune off than yours.

A bulk of the Oh.

On leap off the Oh, Yeah, Oh cell capacity.

Yeah and in Q4, our top count capacity, that's going to be significantly higher than Q3, and therefore, the top kind of shipment in Q4, it's also a much higher so.

As Sean mentioned is not a linear it's jumped in Q4.

Okay. Thanks for all the color guys I'll pass it on.

Thank you as a reminder, if you'd like to join the question queue. Please press star one on your telephone keypad.

Our next question comes from the line of Philip Shen with Roth M. Can please proceed with your question.

Hi, guys. This is Matt on for Phil. Thank you for taking the questions first I just wanted to ask when shipping to the U S market. This year have any of your modules been detained by C. B P. A in 'twenty three.

And then secondly on a different topic for the U S module facility.

You guys have announced where do you expect to source the cells and wafers for that facility and then are there eventually plans to have U S solar wafer and what would it take to make that decision.

Yeah, Matt This is Joe.

Also this grad students.

Turning to terminal three we.

I haven't noticed any alcohol modules to 10 P T.

The second Oh, we will use our Thailand.

The solar salt concerning pool to supply to the hockey hockey Muskie.

T Oh, they're counting on us.

And we are looking into the store.

Oh solar cell factory.

United States.

Okay.

Okay. Thank you for the color there I'll pass it along.

Yeah.

Thank you. Our next question comes from the line of Colin Rusch with Oppenheimer. Please proceed with your question.

Thanks, So much guys could you kind of a center.

The shipping expenses are going to trend through the balance of the year and the full impact on the.

SG&A.

Think about the operating leverage.

We go forward.

Yeah.

Yeah do you want to comment on this question, they're shipping expansion and its full impact on SG&A.

Yes, so the shipping costs came down in Q2 and in Q3 is a kind of a stabilizing and some lines may go up somewhat in the most most are stabilizing and we're actually.

As we mentioned as I mentioned before we sign we're signing a new long term contract to secure the ship sleeping space at low cost. So our we believe that our shipping costs will remain at lower level. So oh, how can continue to you know to help.

On our SG&A.

SG&A.

Okay I'll take the rest offline and then on the battery side you know, there's there's an awful lot happening from a battery chemistry perspective, as well as pack design perspective can you talk about the cadence of evolution of your products and how much R&D or our incremental design changes are being.

Implemented are right now and kind of the evolution of that as you did you look at your your pie.

Or are you really locked in with chemistry and design on that pipeline at this point and the R&D and product development, that's going to be ongoing.

Sure.

Our future focused effort.

Our CMO.

Use the a L. P. A bathroom, mainly U S T E.

The bandwidth to construct or battery energy storage system.

Men pronto.

D R killer portal right now Steve.

So we have one of our so bad.

We are.

Developing new pronto.

Oh, no we are not releasing new stack yeah no.

Product.

I'll have mark sorry.

Power density, but also a much firewall safely.

And so oh in terms of e-commerce to Oh, we believe in the lithium.

Our lithium battery chemistry chemistry.

I'm not.

Looking for and the major change.

On the tax to yet, but we are developing a designer developed new products.

Thanks, so much guys.

Thank you Colin.

Thank you once again as a final reminder, if you'd like to ask a question. Please press star one on your telephone keypad, a pause a moment to allow for any other questions.

Yeah.

Yeah.

Yeah.

At this time I'm not showing any other questions I will turn the floor back to Canadian solar CEO , Dr. Shawn Xu. Please go ahead.

Yeah.

Yeah.

Okay.

Okay.

Hum.

Thank you.

Right. Thank you and thank everyone for <unk>.

John you have today and also for your continued support.

If you have any other question on OXXO started off the call. Please contact our Investor relations team.

And have.

Have a great rest of the summer and take care. Thank you.

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