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Edited Transcript of CSIQ earnings conference call or presentation 12-Nov-19 10:00pm GMT

Q3 2019 Canadian Solar Inc Earnings Call

KITCHENER Nov 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Canadian Solar Inc earnings conference call or presentation Tuesday, November 12, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ed Job

Canadian Solar Inc. - MD of IR

* Huifeng Chang

Canadian Solar Inc. - Senior VP & CFO

* Xiaohua Qu

Canadian Solar Inc. - Chairman, President & CEO

* Yan Zhuang

Canadian Solar Inc. - Acting CEO, Senior VP, Chief Commercial Officer and President of Modules & Systems Solutions

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Conference Call Participants

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* Brian K. Lee

Goldman Sachs Group Inc., Research Division - VP & Senior Clean Energy Analyst

* Colin William Rusch

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* John Segrich;Luminus Management LLC

* Mark Wesley Strouse

JP Morgan Chase & Co, Research Division - Alternative Energy and Applied & Emerging Technologies Analyst

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Presentation

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Operator [1]

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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. (Operator Instructions) 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.

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Ed Job, Canadian Solar Inc. - MD of IR [2]

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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'll 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 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 of 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 law. A more detailed discussion of 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 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, management intends to provide investors with additional information to permit 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.

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.

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Xiaohua Qu, Canadian Solar Inc. - Chairman, President & CEO [3]

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Thanks, Ed, and welcome, everyone. This was another strong quarter for Canadian Solar. Total volume -- shipments was ahead of the expectations, and our gross margin was up significantly. Overall, global demand levels remain robust, and our strong brand capability and reliability continues to come out 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 committed to monetizing the portfolio as we move forward. The diversity of our pipeline in sought-after markets will enable us to secure an attractive ROI for the company and shareholders. This, in turn, gives us increased visibility and added confidence in our outlook.

As we have said in the past, we will use the proceeds 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, high 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 cells.

R&D and 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 demands. Our business strategy has allowed us to remain nimble, while benefiting from significant efficiency improvements across the manufacturing supply chain.

Overall, I'm pleased with our team's continued progress and our financial results in Q3. We are positive in our outlook based on demand levels and the strength of Canadian Solar's 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.

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Yan Zhuang, Canadian Solar Inc. - Acting CEO, Senior VP, Chief Commercial Officer and President of Modules & Systems Solutions [4]

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Thank you, Shawn. We're pleased with our 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 cell 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 to 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 3 projects with 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 geographical 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 nonrecourse project financing for 2 projects -- 2 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 projects. Revenue expected 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 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 are optimistic in our long-term outlook and expect an acceleration in growth in 2020, led by sales 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 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.

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Huifeng Chang, Canadian Solar Inc. - Senior VP & CFO [5]

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Thank you, Yan. As Yan noted, for Q3, both results of module shipments and gross margin were above expectations. The improved volume and profitability reflected the benefits of our strong pricing power, and continued cost reductions. The energy business also contributed significantly to the gross margin, a trend we expect to continue as we monetize the remainder of the 3.4-gigawatt late-stage pipeline. In the process, our focus is to maintain a balance between driving profitable growth and strengthening the balance sheet.

Now let me go over the financial results in detail. In Q3, total solar module shipments were 2,387 megawatts compared to 2,143 megawatts in Q2. Net revenue for Q3 were $759.9 million, down 26.7% sequentially and down 1.1% year-over-year. Net revenue for Q3 were comprised of $674.9 million from MSS business and $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 last year.

Gross margin in Q3 was 26.2% compared to 17.6% in the second quarter of 2019 and 26.1% in the third quarter of 2018. These figures include antidumping and countervailing duty to benefits of $24.3 million in Q3 2019 and $21.6 million in Q2 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, 12.5% in Q3 of the prior year.

Foreign exchange gain in Q3 was $2.8 million compared to gains of $16.4 million in Q2 and $10.1 million in Q3 of the prior year. We recorded a loss of a change to fair value of derivatives of $2.2 million in Q3 compared to losses of $4.5 million in Q2 and $8.9 million in Q3 2018.

Income tax expenses was $10.4 million compared to the expenses $14 million in Q2 and a $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, the 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 [AD and CVD] true-up noted earlier.

Now moving on to the balance sheet. At the end of Q3, Canadian Solar increased its balance of cash and cash equivalents to $526.2 million and $438.5 million 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 end of Q2.

Inventory turnover was 63 days in Q3 compared to 40 days in Q2. Short-term borrowing and current portion of long-term borrowings on product sales -- 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 nonrecourse. Short-term borrowings and long-term borrowings directly related to the utility scale projects, which included $406.9 million of nonrecourse borrowings totaled $607.8 million at the end of Q3 compared to $140.5 million end of Q2.

With that, I would now like to open the call to your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Colin Rusch from Oppenheimer.

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Colin William Rusch, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [2]

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Can you break out how big the direct module sales channel was in the quarter? And what the growth rate is on that during year and year-over-year?

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Yan Zhuang, Canadian Solar Inc. - Acting CEO, Senior VP, Chief Commercial Officer and President of Modules & Systems Solutions [3]

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

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Colin William Rusch, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [4]

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Yes.

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Yan Zhuang, Canadian Solar Inc. - Acting CEO, Senior VP, Chief Commercial Officer and President of Modules & Systems Solutions [5]

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Okay. So the split of channels has actually been evolving, but rather stable. It's not a dramatic change, except that 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 extend our direct sales channel into the premium rooftop market so that has been around like 20% -- 25% of our total volume. So we will continue to grow in that segment with premium pricing and also a differentiated product offering. 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 Canadian Solar is we have a highly bankable capacity in Southeast Asia that we're going to ship to the U.S., it's about 3 gigawatts to the U.S. in the next few years and each year. So -- and there's a shortage on bankable capacity in Southeast Asia. So our pricing in the U.S. market is rather -- it's very healthy.

And thirdly is we continue to allocate more volume in high-priced markets like Japan. And Japan, naturally, the net cost level for any business in Japan is like twice or 3x compared to other markets, it depends on the business segment. And our leadership -- our market share in residential market in Japan is pretty high as more than 10% ranked #2 after Panasonic, but ahead of other local Japanese players. It gives us a lot of profit.

And in markets like Brazil and Australia, we also sell at a slightly higher pricing with a bigger volume. And we will continue control our exposure in low-priced markets like China and India.

On top of those, we also have for captive markets with our own projects. Our -- our own Energy group of projects we'll 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 of the volume. I hope I answered your questions.

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Colin William Rusch, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [6]

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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 the margin here over the next 4 or 5 quarters.

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Yan Zhuang, Canadian Solar Inc. - Acting CEO, Senior VP, Chief Commercial Officer and President of Modules & Systems Solutions [7]

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So Colin, we're talking about the cost and price trend, right?

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Colin William Rusch, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [8]

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Yes, just the cost [out] cadence.

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Yan Zhuang, Canadian Solar Inc. - Acting CEO, Senior VP, Chief Commercial Officer and President of Modules & Systems Solutions [9]

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Okay. So we believe, into next year, that we will cut down our costs. And together, of course, the module price will also go down. And we actually observing the cost reduction, mainly coming from the mono model line -- mono supply chain, and in particular wafer. And however, we believe that the price -- module price going down together with the cost going down and at certain point of the time when price goes to a certain level, there might be a turning point of the market. So we are actually are cautious. And also, next year, the Tier 1 suppliers will have more volume overseas, and therefore, have a better control of the pricing. And the Tier 1 capacity comparing to total demand, the oversupply is actually less. So companies with the better branding and bankability and better products will have a better chance to sustain the pricing. So this is my view. Shawn, do you want to add more?

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Xiaohua Qu, Canadian Solar Inc. - Chairman, President & CEO [10]

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In terms of the cost of goods sold, we have continued a cost down curve every year. I will call it why is the like -- I will use the term like organic costs down. That's the cost effort from our sales through better production control, better increment, more automation and also higher efficiency. For that typically, every year, we can get somewhere around 10% -- 10% to 15% of the cost down in the past few years. Another factor, which is inorganic or involuntary cost down, and that's the cost [coming] the supply chain, for example, polysilicon wafer, that cost down. It's a little bit difficult to estimate that (inaudible) and it's triggered by different events, for example, last May 31, the change of China policy triggered a big cost down on the mature cost along the line.

So combine the 2 together, I think next year, we will see, let's say, 10% to 20% or maybe 10% to 25% of the cost down on the solar modules. And whether it's 10% or 25%, let's see. I know I gave you a very broad range. But this is solar. You have to work with broad range. But as Yan said, the price of solar modules, according to the cost curve and continue to maintain a premium that we can be a winner in both good or bad market.

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Operator [11]

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(Operator Instructions) Our next question comes from Brian Lee from Goldman Sachs.

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Brian K. Lee, Goldman Sachs Group Inc., Research Division - VP & Senior Clean Energy Analyst [12]

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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?

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Huifeng Chang, Canadian Solar Inc. - Senior VP & CFO [13]

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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 flipping to a later time. Now actually, I talked to the Japanese 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. But maybe 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 of Q1. So that is the situation, it's just an issue of administrative process.

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Brian K. Lee, Goldman Sachs Group Inc., Research Division - VP & Senior Clean Energy Analyst [14]

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Okay. Fair enough. But the Japanese project in question that was originally potentially for Q3. 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?

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Huifeng Chang, Canadian Solar Inc. - Senior VP & CFO [15]

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Yes, actually we're working on multiple projects. So a couple -- I think one shifted from Q3 to Q4 and moved from Q4 to Q1. And that's also the reason main driver, we lowered the guidance for Q4.

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Brian K. Lee, Goldman Sachs Group Inc., Research Division - VP & Senior Clean Energy Analyst [16]

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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 2 different segments?

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Huifeng Chang, Canadian Solar Inc. - Senior VP & CFO [17]

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

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Brian K. Lee, Goldman Sachs Group Inc., Research Division - VP & Senior Clean Energy Analyst [18]

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Okay. Fair enough. Is there any…

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Yan Zhuang, Canadian Solar Inc. - Acting CEO, Senior VP, Chief Commercial Officer and President of Modules & Systems Solutions [19]

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And there is also a project that's low margin, that's going to close in the next quarter it's called [McBride] project. That's a $130 million low-margin sale.

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Brian K. Lee, Goldman Sachs Group Inc., Research Division - VP & Senior Clean Energy Analyst [20]

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

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Huifeng Chang, Canadian Solar Inc. - Senior VP & CFO [21]

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Okay. No, no, it's not.

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Brian K. Lee, Goldman Sachs Group Inc., Research Division - VP & Senior Clean Energy Analyst [22]

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It is not in the 19% to 21%?

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Unidentified Company Representative, [23]

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Correct. Not in the guidance.

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Brian K. Lee, Goldman Sachs Group Inc., Research Division - VP & Senior Clean Energy Analyst [24]

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Okay. Great. And then maybe last one, I'll pass it on. I think there's been some scuttlebutt for potentially a near-term policy update on the China solar market for 2020 or maybe even by year-end. Just wondering, I know this year, 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 towards the year-end? Or are you still expecting it next year?

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Yan Zhuang, Canadian Solar Inc. - Acting CEO, Senior VP, Chief Commercial Officer and President of Modules & Systems Solutions [25]

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Okay. So first of all, I want to say that our exposure in China is still 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 (inaudible) first 3 quarters 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 [speaking its] 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 -- but however, we also anticipate the delay of the projects from -- pushed forward by the delayed project from this year to next year. Actually, the reason for China low number of installations this year is partially also because aside from being rationalized is the late announcement of the project permits, that did not give you enough time to secure the land and the other financing. So that's part of the reason why it gets pushed forward into next year. So therefore, next year, I was given like as low as 30, 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, but can go up to 40 gigawatts next year because over time, people will -- people needs more time, and that will 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 -- subsidized market because the subsidy is going down already. It's one down this year already. We'll continue to move down next year at low level, but the entire industry is actually, over the year, they should get used to -- better adjusted to the new environment. And will -- the demand will be stabilized.

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Operator [26]

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Next question comes from Mark Strouse from JPMorgan.

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Mark Wesley Strouse, JP Morgan Chase & Co, Research Division - Alternative Energy and Applied & Emerging Technologies Analyst [27]

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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 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?

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Huifeng Chang, Canadian Solar Inc. - Senior VP & CFO [28]

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A complete function of the closing time of the projects in Japan.

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Mark Wesley Strouse, JP Morgan Chase & Co, Research Division - Alternative Energy and Applied & Emerging Technologies Analyst [29]

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Right. Okay. Got it. And then on the power plants in operation, in fact, 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 any of these regions where you have operating assets?

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Huifeng Chang, Canadian Solar Inc. - Senior VP & CFO [30]

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Well, it's mainly because of China. So as you -- as we all know, that since end of June last year, China market, project market actually was crushed in a way, and so there's a lot of -- product inventory that's on sale 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 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 perceptions, we have some difficulties on collecting the residual payment -- balance payment on the project already sold.

And so according to the U.S. GAAP and our finance department worked together with Deloitte and the needed evaluation of the situation on certain projects, and one of the project we have a write-off on the balance of payment. So this is one of the reasons. And also, we have a project that unsold, the valuation come down a little bit. So this is the reason for the devaluation of the project pipeline.

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Operator [31]

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(Operator Instructions) Our next question comes from John Segrich from Luminus.

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John Segrich;Luminus Management LLC, [32]

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Just maybe 2 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 sell 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?

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Huifeng Chang, Canadian Solar Inc. - Senior VP & CFO [33]

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What's your first question?

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Unidentified Company Representative, [34]

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ASP for...

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John Segrich;Luminus Management LLC, [35]

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For 3Q and what you're expecting for 4Q.

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Yan Zhuang, Canadian Solar Inc. - Acting CEO, Senior VP, Chief Commercial Officer and President of Modules & Systems Solutions [36]

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I would say, from Q3 to Q4 it's -- there's a downturn. But for us, it's also downturn but more mild, it's rather stable, down. So this is true for a situation because we secured our high-priced orders much earlier for most of the Q4 pipeline. And it's only a portion of the Q4 POs that come late with the impact of pricing down. But however, cost has also gone 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 the individual companies. I believe Canadian Solar with our brand name and bankability and our channel structure and our brand name around the world and the discipline on optimizing -- sorry, prioritizing markets, 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 benefits we enjoyed is we actually made our decision on selling more poly product based on economics of the supply chain.

Next year, that will change. We will see that this could be some significant cost down on nonwafer side so that will transfer to sale. And so therefore, we can benefit from model more than this year. So next year, we have -- we're going to have 9.6 gigawatts of sales 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.

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Xiaohua Qu, Canadian Solar Inc. - Chairman, President & CEO [37]

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John, (inaudible) I have one more comment to supplement what Yan just said. Yes indeed, we are going to expand our module capacity a little bit while sale capacity the same. That's the current plan. The module capacity, the expansion of module capacity are for new products. For example, we have a very success product, we call it [Tychoo] as a matter of fact, that's the first time the so-called 166-millimeter wafer got commercialized in the industry so that requires some new capacity, but we are making good money there.

You also asked about the gap, internal cell and modules. In the past 2 years, there is a development of cell-only companies in China. They don't do wafer, they don't do module, but they do just cells. Those are a few companies like that. So somehow fill the gap so that we don't have to buy the -- develop our own cell capacity whole time. So our internal cell capacity can be better supplemented by external cell-only companies. We focus on channel and branding of the module. That's [another] trend. It being in development in the past half of the year. So John, I hope Yan and I answered your question.

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Operator [38]

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(Operator Instructions) There are no further questions. I will pass back to Dr. Shawn Qu, Canadian Solar's Chairman and CEO, for closing comments.

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Xiaohua Qu, Canadian Solar Inc. - Chairman, President & CEO [39]

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

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Operator [40]

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