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Edited Transcript of CSIQ earnings conference call or presentation 21-Mar-19 12:00pm GMT

Q4 2018 Canadian Solar Inc Earnings Call

KITCHENER Mar 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Canadian Solar Inc earnings conference call or presentation Thursday, March 21, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Huifeng Chang

Canadian Solar Inc. - Senior VP & CFO

* Mary Ma

Canadian Solar Inc. - Senior Supervisor, IR

* Xiaohua Qu

Canadian Solar Inc. - Chairman, President & CEO

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Conference Call Participants

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* Alex Liu

UBS Investment Bank, Research Division - Associate Director and Research Analyst

* 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

* Paul Coster

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

* Philip Shen

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to Canadian Solar's Fourth Quarter 2018 Earnings Conference Call. My name is Annie, and I'll be your operator today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would like to turn the call over to Ms. Mary Ma with Canadian Solar's IR department. Please go ahead.

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Mary Ma, Canadian Solar Inc. - Senior Supervisor, IR [2]

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Thank you, operator, and welcome everyone to Canadian Solar's Fourth Quarter 2018 Earnings Conference Call. Joining us today on the call are Dr. Shawn Qu, our Chairman and Chief Executive Officer; and Dr. Huifeng Chang, our Senior Vice President and Chief Financial Officer.

Before we begin, may I remind our listeners that management's prepared remarks today will contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. 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, and therefore, we refer you to a more detailed discussion of the risks and uncertainties in the company's annual report on Form 20-F filed with the Securities and Exchange Commission. In addition, any projections as to 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.

Our prepared remarks will be presented within the requirements of SEC Regulation G regarding generally accepted accounting principles or GAAP. Some financial information presented by us during the call will be provided on both a GAAP and a 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 for results and underlying trends. Management use non-GAAP measures to better assess operating performance and to establish our 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 our 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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Thank you, Mary. We appreciate everyone taking the time to join us today. 2018 was an exceptional year for Canadian Solar. We achieved a record net income of $3.88 per diluted share and our net profit increased by 140% compared to 2017. In 2018, we shipped around 6.6 gigawatt of solar modules and monetized 1 point -- monetized around 1.7 megawatt of utility-scale solar project globally with total annual revenue of USD 3.74 billion. Both of our MSS and Energy business group contributed positively to our top line and bottom line.

In 2018, our module group, our MSS business contributed 58% of the total revenue. We successfully maintained a healthy gross margin despite module ASP pressure that started in May with the policy change in China. We achieved this result through disciplined order management and control of operational cost and inventory combined with the benefit of the raw material price declines. During the year, we also expanded our EPC business and O&M business.

In 2018, our Energy business contributed 42% of the total revenue. This reflect the strengths of our pipeline of sought-after energy assets and the acceleration of sales of certain projects with high profit into 2018 from 2019.

In Q4 specifically, our MSS business contributed 63% of the total revenue for the quarter. We shipped 1,951 megawatts of solar modules during the quarter, which exceeded our guidance. Gross revenue -- gross margin for our MSS business was 31.7%, or 28.8% if we exclude the CVD reversal benefit. Gross margin benefited from our cost and operational controls, lower material costs and our premium brand that adds to our competitive strength and the ability to control the price erosion. As of Q4 2018, we had accumulatively delivered around 2.6 gigawatt of high efficiency anti-LeTID PERC solar modules worldwide. The majority of these modules are polycrystalline-based PERC products, which makes us the undisputable worldwide leader in high-power polycrystalline products. In 2019, we plan to convert all of our solar cell capacity, both poly and mono, into PERC technology. Our high-efficiency solar module products such as HiKu, HiDM and BiHiKu are well accepted by our customers.

In Q4, our Energy business contributed around 37% of the total revenue with 27.5% gross margin. During the fourth quarter, we sold 857 megawatt of solar project assets globally. We achieved revenue of $326.5 million and investment income of $40.4 million from the sales of those solar project assets. Through this process, we also reduced our project debt by approximately $400 million.

Our projects in operation as of February 2019 totaled 986 megawatt, with an estimated resale value of approximately USD 1.2 billion. Our portfolio of late-stage, utility-scale solar power project as of February 28, 2019, including those under construction, was approximately 2.9 gigawatt. Our strategy is to build and sell these projects at COD or to sell them before COD either at NTP or before NTP based on the market conditions. Due to the typical development cycle, we expect to realize sales for the majority of our current 2.9 gigawatt late-stage project pipeline in 2020 or later.

In Japan, we energized a 10.8-megawatt solar power project in November. Our current late-stage project pipeline in Japan of 295 megawatt reflects the anticipated impact of the final rule of the proposed change to the feed-in tariff program from METI or Japanese Ministry of Economy Trade and Industry. Canadian Solar maintains an approximately 15% ownership of the Canadian Solar Infrastructure Fund, which has a capacity of 106.8 megawatts and a total assets under management, or AUM, of approximately JPY 43.4 billion equivalent to USD 389 million. Canadian Solar will continue to provide a right of first offer to CSIF to acquire our solar power plant in operation and project in our late-stage pipelines after they reach COD at competitive market price.

In U.S., we completed the sale of Garland and Tranquillity solar power plants totaling 260 megawatt in October. In December, we sold the 210-megawatt Mustang 2 at pre-NTP stage. In addition, we further expanded of -- our late-stage project pipeline to 1.2 gigawatt in U.S. Following our Q3 call, we successfully signed 2 power purchase agreement for additional 398-megawatt projects, namely a 25-year PPA for the 88-megawatt Stanford Solar Station #2 project with Stanford University and a PPA of a 310-megawatt project in Texas with a leading commercial and industry customer.

In addition to the 1.2-gigawatt late-stage pipeline, we signed a build-to-transfer agreement for the 100-megawatt AC Sunflower project located in Mississippi. The build-to-transfer agreement is pending regulatory approval.

Finally, in February 2019, we provided a preliminary assessment of the potential impact of the PG&E bankruptcy filing on our project pipeline. We noted at that time, the company does not have material exposure with respect to previously sold project. We do have potential exposure with respect to 60-megawatt AC of power purchase agreement signed with PG&E. In addition, the company has potential exposure with respect to interconnection agreement with PG&E including our an early- to mid-stage development project and the late-stage Slate project, which together total approximately 700-megawatt AC. We continue to monitor the situation, but have no further update as of today's call.

Now let me comment on our guidance for Q1 2019 and full year 2019. We currently expect total Q1 module shipment to be in the range of approximately 1.3 to 1.4 gigawatt including 50-megawatt of shipment to our home utility-scale solar project. We expect the revenue for the first quarter of 2019 to be in the range of USD 450 million to $480 million. We expect the gross margin for the Q1 to be between 16% to 18% with net profit low or negative.

Our outlook reflects lower module production and sales during the Chinese New Year holiday season. Our IT upgrade during the quarter, continuous module ASP pressure, decreased sales of solar power project compared to the previous quarter and an expected foreign exchange loss due to the appreciation of Chinese RMB against the U.S. dollar.

For the full year 2019, we expect our total module shipment to be in the range of approximately 7.4 to 7.8 gigawatt, and total revenue in the range of USD 3.5 billion to USD 3.8 billion. We expect profit in subsequent quarters after Q1 likely to recover as module production and sales increase and project sales pick up. However, we currently expect our net profit for 2019 will be lower than that of 2018 due to the lower project sales, ASP pressure and appreciation of RMB against U.S. dollar, which results in higher module costs. The current headwinds would normally be offset -- the currency headwinds would normally be offset by an adjustment of module price or cost reduction enabled by technology improvement, but that process takes time.

Overall, the pullback in our 2019 outlook compared to 2018 is not a reflection of the long-term health, growth or profitability of our core business. Our core business and long-term growth trends remain sound and strong. We expect a rebound in project sales in 2020 and beyond, given our robust 2.9-gigawatt late-stage project pipeline, and we will continue to develop and monetize solar projects. Our focus on new solar module technologies, innovative product and premium channels will help us maintain our competitive edge in our module and solar system business.

Finally, we announced today the appointment of Mr. Arthur Wong to our board as an Independent Director. His board -- his broad experience in finance, accounting and as an auditor will add valuable perspective and insight to our Board of Directors as we continue to maximize the value of our shareholders and focus on delivering improved results.

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

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Huifeng Chang, Canadian Solar Inc. - Senior VP & CFO [4]

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Thank you, Shawn. We are pleased with the Q4 results, particularly net income and gross margin. We achieved the higher-than-expected profitability through a combination of supply chain improvement, cost cutting in the MSS business and the acceleration in selling solar power plants. As a result, our balance sheet has become stronger. We reduced debt by about 14% quarter-over-quarter. And in February, we repaid the entire outstanding balance of our senior convertible notes. We continue to redeploy capital into new attractive project opportunities, establishing our groundwork for future success.

Now please allow me to go over the details in the financial numbers. Net revenue for Q4 was $901 million, up 17.3% sequentially from Q3, but down 18.7% compared to a year ago period. The sequential increase is due to the successful monetization of solar power project assets and increased solar module shipments. The year-over-year decrease is a result of reduced solar module average selling prices and a reduction in revenue from project sales. Net revenue for Q4 was comprised of $564.8 million from our MSS business and $336.3 million from our Energy business.

Gross profit in Q4 was $271.3 million compared to $200.4 million in Q3 and $218.6 million in Q4 last year. Gross margin in Q4 was 30.1% compared to 26.1% in Q3 and 19.7% in Q4 last year. Gross profit in Q4 includes the benefit of a CVD reversal of $16.1 million, which was based on the final rate of Solar 1 CVD AR5. Excluding that CVD reversal benefit, gross margin was 28.3% compared to 25% in Q3. The sequential increase in gross margin was primarily due to the realization of deferred module profits after project sales and lower blended module manufacturing cost, which is, however, partially offset by a lower average module selling price.

Total operating expenses were $134.7 million in Q4 compared to $104.5 million in Q3 and $88.4 million in Q4 of the prior year. Income from operations was $136.6 million in Q4 compared to $95.9 million in Q3 and $130.2 million in Q4 of last year. Operating margin was 15.2% in Q4 compared to 12.5% in Q3 and 11.7% in Q4 of the prior year.

Foreign exchange gain in Q4 was $7.3 million compared to a gain of $10.1 million in Q3 and a loss of $9.5 million in Q4 of the prior year. We recorded a loss on change in fair value of derivatives of $7.3 million in Q4 compared to a loss of $8.9 million in Q3 and a gain of $7.6 million in the fourth quarter of 2017.

Income tax expense in Q4 was $36.7 million compared to $13.4 million in Q3 and $28.9 million in Q4 over the prior year.

Net income attributable to Canadian Solar shareholders for Q4 was $111.6 million or $1.81 per diluted share compared to net income of $66.5 million or $1.09 per diluted share in Q3 2018 and a net income of $61.4 million or $1.01 per diluted share in the fourth quarter of 2017.

Move on to the balance sheet. At the end of Q4, our balance sheet of cash and cash equivalents was $444.3 million compared to $519.6 million at the end of Q3. Our restricted cash balance was $496.7 million at the end of Q4 compared to $475.4 million at the end of Q3. Inventories at the end of Q4 were $262 million compared to $322 million at the end of Q3. Inventory turnover was 44 days in Q4 compared to 55 days in Q3.

Short-term borrowings and long-term borrowings on project assets at the end of Q4 totaled $1.3 billion compared to $1.9 billion at the end of Q3. Long-term borrowings at the end of Q4 were $393.6 million compared to $120.2 million at the end of Q3. Total debt at the end of Q4 was approximately $1.96 billion, of which $527.8 million was nonrecourse. Short-term borrowings and long-term borrowings directly related to utility-scale projects, which included $480 million of nonrecourse borrowing, totaled $735.1 million at the end of Q4 compared to $1.07 billion at the end of Q3. As I noted earlier, we repaid the entire $127.5 million outstanding balance of our senior convertible notes in February 2019.

Overall, we exited Q4 in a strong business and financial position. We will continue to carefully manage our project pipeline in order to secure the highest return for our assets. While we expect 2019 to be lower than 2018 in profits, our core business and pipeline remains strong. We expect to see a rebound in 2020 based on project development cycles.

As always, Canadian Solar is not chasing lower-margin volumes. We remain focused on driving profitability and building value for our shareholders.

With that, I would like now 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) Your first question comes from Brian Lee of Goldman Sachs.

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Brian K. Lee, Goldman Sachs Group Inc., Research Division - VP & Senior Clean Energy Analyst [2]

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I had a couple that I wanted to run through with you, maybe just on the guidance for 2019. It's a much softer start to the year than maybe we would have expected and definitely compared to 2018. Can you give us some sense of the cadence of projects? I know you are saying of the 2.9 gigawatts, a lot of it is happening in 2020. Maybe can you give us some sense of what percent of sales were from the projects business from the Energy segment in 2018? And what percent of sales that segment is expected to be in 2019?

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

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We provide the 2018 percentage. I believe for 2018, the module segment accounts for 52% revenue and the project account for 48%, as I said previously. Now this year will be slightly different. We will see more revenue from the project business and less from the -- more from the module business and less from the project business. However, you will still -- the revenue itself doesn't always reflect the profitability because we are selling some of our project pre-NTP. As you know, if we sell a project at NTP or pre-NTP, then the margin can be high, but revenue can be low. The current guidance -- the current annual guidance of $3.5 billion to $3.8 billion reflect our current focus of how many of the pipeline project will be sold in 2018 at NTP or below -- before NTP and some will be left to 2020. As you noted, we have 2.9 gigawatt of pipelines, some of those projects will reach COD this year anyway, some won't reach, but most of them will reach COD in 2020 and 2021. So we can assume that the majority of them will be sold in 2020 or 2021. But there will be some project which we are already -- we have already brought on the market to sell as a NTP or pre-NTP package. We will update you when that process move along. But we do expect to sell some of those projects at NTP or pre-NTP, so those projects will contribute to the profit in 2019.

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Brian K. Lee, Goldman Sachs Group Inc., Research Division - VP & Senior Clean Energy Analyst [4]

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Okay, that's helpful. Maybe staying on that topic then on the margins, 2018 obviously, you had a strong gross margin year even with the pricing challenges that the industry saw for half the year. Just wondering, how should we be looking at gross margin targets for both the module and the Energy segments in '19, just in the context to some of the commentary you made here about NTP and mix? Are margins expected to be flat to up in both segments in '19? Or just any kind of color you can give on what to expect for the profit targets here.

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Xiaohua Qu, Canadian Solar Inc. - Chairman, President & CEO [5]

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Thanks. For the module business, our current guidance reflected a lower gross margin than 2018. This forecast is based on a few factors. First of all, we forecasted the material price slightly going down, but not going down a lot. But meanwhile, the module ASP reduction will catch up because in the last year, especially second half of last year, the raw material cost dropped a lot, but Canadian Solar had successfully hold on and slowed the reduction of our module ASP due to our branding and channel capability. But eventually, we think the module ASP will decline -- continue to decline in the period and achieve some kind of balance. So we did forecast the gross margin to be lower in 2019. But we also included this particular headwind, which is the currency. Late last year, the Chinese RMB is at CNY 6.9, and at some point even close to RMB 7 to USD 1. And because a lot of our products are still made in China, especially -- and lot of our material, raw material purchase in China help us to reduce the cost. But in past 3 months, the Chinese currency appreciated a lot against U.S. dollar. I guess, expecting a resolution on the China-U. S. trade dispute, but that has a negative impact on us because that drives up our module cost. So we included these factors into our module profit guidance. However, as you know, the market can swing one way or another. So I hope by -- so a better management of the cost and also the price, I hope we can achieve a better result on the MSS. Now for the Energy business, the gross margin will -- yes, the gross margin will probably be high because we are selling more project NTP, therefore, you will see a high gross margin, but the revenue will be low. So the net -- if you look at the net profit, I think, it's more or less the same.

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Brian K. Lee, Goldman Sachs Group Inc., Research Division - VP & Senior Clean Energy Analyst [6]

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Okay. No, that's super helpful. Maybe last one, and I'll pass it on, just more of a housekeeping question. Can you -- or maybe a bigger picture question just on China demand. What percentage did China represent of shipments in 2018? And then how much do you expect it to be as a percentage of shipments in '19? And then, just maybe broadly speaking, what are your expectations for installations in the China market in 2019 overall for the market? And just lastly, any expectations on solar policy updates in China? What's maybe the latest you've been hearing there on when we might hear something official?

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Xiaohua Qu, Canadian Solar Inc. - Chairman, President & CEO [7]

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All right. For Canadian Solar, our -- the percentage of module sales in China was around 20% in 2017 and reduced to -- close to 10% in 2018, especially in the second half of 2018. For 2019, we budgeted around 10% or slightly higher than 10% in terms of solar module sales of Canadian Solar. Now your next question is the China market itself, so far, all the third-party independent firms believe China will install somewhere around 48-gigawatt in 2019. So we are using that as our -- as the base of our annual upgrading plan as well. However, China hasn't announced its 2019 policy yet. It has been in consultation for 3, 4 months now and still in consultation. Before the Chinese New Year, some people expect it to be announced before the Chinese New Year, which means in January. At that point, Canadian Solar said, "Hey, be cautious," and again after the New Year, people saw it will be announced before the end of March. But now it looks like it's still in consultation. So personally, I don't see it to be announced in March, but I think, eventually it will come out. I just hope it will come out early than later.

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Operator [8]

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Our next question is from the line of Colin Rusch of Oppenheimer.

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Colin William Rusch, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [9]

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Shawn, can you talk about the cadence of nonsilicon cost reduction with the manufacturing process? Are you continuing to see ongoing benefits there? Or are you really shifting into a higher-value, higher-price products with a little bit more expensive process?

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

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I think for nonsilicon cost, most of cost reduction now come from the increase of the solar module wattage now. I don't -- haven't seen that much reduction of the cost itself. I do see the reduction of silver usage presumably on the solar cell stage, but we also see the increase of the solar glass price, so more or less offset, I guess. But since the module wattage has been going up, so the average per watt, now sort of comprised, has been going down, that seems to be the main driver now.

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Colin William Rusch, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [11]

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Okay. And then in terms of targeted markets and emerging markets, are there areas in the world that you see as growing in some of the emerging markets that may surprise us in 2019 where you feel like you're in a strong position to benefit from that sort of growth? There is always typically some sort of surprise market, but I'm wondering if you're seeing that coming at this point for 2019?

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Xiaohua Qu, Canadian Solar Inc. - Chairman, President & CEO [12]

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Well, we have turned most of the surprise market into our strong market. For example, Latin America used to be a surprise market, and now we already become the strongest player in that market. So it's not a surprise at all for us to continue to maintain the strength. And Australia used to be a surprise market, but now we have so much market share there, and it's not a surprise to me anymore. Now U.S. market, as some of analysts noted, it may have a safe harbor rush by the end of this year. It might be a short-term rush, and I'm not sure how much capacity is available to supply that rush demand anyway. There are some market demand like additional demand from Middle East. Let's see how much of those demand will materialize. Now Europe, we do see some potential demand upside from -- for example, Netherlands, Spain and Italy.

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Operator [13]

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The next question is from Philip Shen of Roth Capital Partners.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [14]

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We've been hearing a lot about strong global demand outside of China. So frankly, I was a bit surprised by your Q1 guidance, which looks light for both revenue and margins. I know you've talked about margins a bit already. But first, can you comment on a little bit more on that global demand? I know you just addressed some of that with Colin, but if there is some additional color, that would be great. And then also, can you provide some more color on the Q1 revenue guide, specifically how much of the revenue in the Q1 guidance is being impacted by your IT or ERP implementation. What was the potential revenue impact from the ERP system perhaps being implemented resulting in lower utilization? So if you can comment on perhaps that capacity utilization that would be great.

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Xiaohua Qu, Canadian Solar Inc. - Chairman, President & CEO [15]

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Yes, Philip. The -- we shut down the operation for about 5 days in Q1 in order to complete the ERP upgrade. And also the factory -- most of the factories had been down for about 3 or 5 days during the Chinese New Year. So that -- those are the major loss in production. And we are also upgrading some of our production line. For example, we are upgrading -- we have been upgrading our cell lines in Thailand in order to allow for more product and more high-efficiency product, that also result in some reduced shipment. So, see, Q1 is a typical low season. But these factors also somehow contribute negatively to the production in Q1. But I expect those issues go away in Q2. Now I -- in particular, another factor in Q1 is the foreign currency. The Chinese yuan appreciation happened so sudden that we expect to have a sizable foreign exchange loss in Q1. I hope that it will be absorbed more or less in Q2, it will still impact the production cost, but at least we will now see a sizable foreign exchange loss.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [16]

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Okay. And then, as it relates to...

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Xiaohua Qu, Canadian Solar Inc. - Chairman, President & CEO [17]

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What's your next question? Go ahead.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [18]

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Shawn, as it relates to ERP implementation, can you talk about the cost benefit? You -- obviously, there is a cost in terms of shutting down the facility for 5 days -- all your facilities for 5 days. What benefits do you expect to reap from the implementation of this new system?

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Xiaohua Qu, Canadian Solar Inc. - Chairman, President & CEO [19]

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Well, shut it down for 5 days, and you will get a benefit for next 5 years. So overall, it's still beneficial. And our previous SAP-based ERP system were implemented around 6, 7 years ago. And at that time, our production is probably around 1 gigawatt, 1 to 2 gigawatt. We only have less than 10 major product. So the production -- like the product codes were all -- and also material code were all developed at that time, and it doesn't support our current production level, the complexity of our product mix and also materials. And also, we are now operating 15 factories around the world, so they are totally different scales. We think that to make this upgrade will be -- it's necessary for us to continue to be competitive and also to handle the increased complexity of the production. Also, in the long term, we have to reduce the labor cost, the headcount in a factory and to have the system ready will help us to do that. So there will be the future benefit. But as you know, that it would take time to see the benefit of any IT upgrade. And I hope to discuss this question with you after 12 months. And I hope I can details -- give you some clear details of what benefit we achieved.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [20]

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Great. Shawn, in terms of the housekeeping question on the Q4 ASP, we calculate $0.26, but that seems much too low. Can help us understand what the Q4 module ASP was for external shipments, please?

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Xiaohua Qu, Canadian Solar Inc. - Chairman, President & CEO [21]

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I don't think it's that high. The ASP should be around $0.30, right.

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Mary Ma, Canadian Solar Inc. - Senior Supervisor, IR [22]

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Yes.

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Xiaohua Qu, Canadian Solar Inc. - Chairman, President & CEO [23]

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Yes, you're right. It's about -- around $0.30. But the manufacturing cost is in low $0.20. So that give us the close to 30% gross margin.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [24]

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Okay, great. And one last one here. In terms of CapEx, what do you expect for 2019? I know you laid out some expansion for cell. Can you kind of talk to us about why you're expanding cell? And what the CapEx number might be for '19?

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Huifeng Chang, Canadian Solar Inc. - Senior VP & CFO [25]

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We have a very wide estimate, somewhere around maybe USD 400 million and maybe some of that is new, around $300 million and maybe $100 million carry from 2018.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [26]

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Great. And then, in terms of the rationale for cell expansion, I mean, to what degree do you see the -- is there a global demand surge at this point? Or is that a little bit too robust of a perspective?

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Huifeng Chang, Canadian Solar Inc. - Senior VP & CFO [27]

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Yes. First of all, we disclosed the matrix for the capacity expansion in terms of mostly on the module side and slightly expand the cell. And I think wafer pretty much remain constant -- wafer and ingot remain constant. And of course, we have a strategy in mind why we set up this way and then also because of all of these tariff issue, et cetera, by location wise, we also have a plan.

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Operator [28]

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Our next question is from Paul Coster from JPMorgan.

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy & Applied and Emerging Technologies [29]

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Quite a lot to unpack here. The accounts receivables going into the new year are pretty elevated, I think, nearly $500 million, which seems up a lot year-on-year and yet the first quarter is pretty low. Perhaps, you could just sort of help us square that one away.

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

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This is Huifeng. The increase of accounts receivable, the reason are 2, very straightforward. One is that we are selling some projects in China, but some of the income is to be received. And the other one is that we have very sizable module order in Europe, and also it's payment to be received. But nothing unusual happened.

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy & Applied and Emerging Technologies [31]

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Okay. All right, fine. Then the next question I've got is the -- so Shawn, it sounds to me like you're seeing the impacts of the second half weakness in module pricing and is kind of flowing through to this year, and now we're sort of paying the price for that. But do you think that module prices will be fairly stable over the course of 2019? Or do you expect 2019 to also be a year in which module prices decline significantly?

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Xiaohua Qu, Canadian Solar Inc. - Chairman, President & CEO [32]

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No. Paul, we believe our module price will be more or less stable. We modeled some -- our quote ordered -- our disciplined module price reduction quarter-over-quarter, but no dramatic price reduction. And we believe that our channel and channel feedback allow us to do that. Now I can't really comment on other companies. At this moment, it seems like the price -- module price stable. Now moving forward, let's see how it happen to other manufacturers. But for us, we're saying we'll be able to maintain the -- let's say, for the module price to orderly going down.

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy & Applied and Emerging Technologies [33]

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All right, got it. So I think most investors will be now looking through 2019 at least as far as it relates to Canadian Solar into 2020. And obviously, you've got a lot of projects that will be coming to COD and NTP next year. How much of a line of sight do you have into the margins for 2020?

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Xiaohua Qu, Canadian Solar Inc. - Chairman, President & CEO [34]

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Yes. Paul, I think it is a right way to look into 2020 rather than dwell on 2019. Margin-wise to realize those projects in 2020 allow us to increase margin we believe. Now in the project business, actually, the later you wait, usually the lower the components price you can receive. So to have the projects COD in 2020, it's not necessarily a bad thing, especially we can secure the safe harbor ITC -- 30% ITC safe harbor this year, and we'll realize those project in 2020 and 2021.

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy & Applied and Emerging Technologies [35]

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Okay. One last question. It looks like the business in North America is shifting a little bit towards C&I customers and away from utilities and IPPs. Does that have any bearing on margin or ASPs? Or is it the business the same in those 2 different end markets?

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Xiaohua Qu, Canadian Solar Inc. - Chairman, President & CEO [36]

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Our business -- our project business still focus on the utility scale, large utility-scale projects. But a PPA provider can be a private PPA from a -- like leading corporate rather than regulated utilities. Now we are focused on large-scale utility-scale project in the U.S.

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Operator [37]

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Our next question is from Alex Liu of UBS.

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Alex Liu, UBS Investment Bank, Research Division - Associate Director and Research Analyst [38]

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I have 2 questions. Number one is, considering the wafer (inaudible) rally year-to-date and potentially it heightened the wafer supply demand, so what's your thoughts and strategy for wafer? Will you consider maybe expanding your wafer capacity or you will stick to buying from the others? And do you think that any wafer price increase further you can maybe pass through some of the increase to your customers? And my second question is, what's your breakdown of your cell module capacity in terms of mono-silicon and multi-silicon? And what's your view of the mono and multi commutation for this year and maybe the year afterward?

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

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Yes. Thanks, Alex. I believe this is the first time I answer the question during our earnings call, so welcome Alex. And now -- thanks. Now on the wafer price side, we will stick to our current internal capacity for ingot and wafer, which means we are going to purchase more and more wafers from external suppliers at least for this year and probably also for next year. The reasoning is straightforward. We believe that ingot wafer is the most oversupplied segment along the module value chain. If you look at poly ingot wafer and then cell and module, we believe that wafer capacity is highest. Now the solar cell side, the total solar cell capacity so, so high, but high efficiency solar cell, namely the PERC solar cell capacity -- PERC, but with strong anti-LeTID ability, those capacities are still limited. And that's why we -- our strategy is to source more wafers from the external suppliers. Now among all the external suppliers, we will continue to source more poly wafer than mono wafer. The answer -- the reasoning is also straightforward, simply because a lot of our competitors move to mono, we believe that the mono wafer supply will have some uncertainty. And we have much better control on the multi-wafer supply, also the control on the cost of multi-wafers. And Canadian Solar develop the high efficiency multi-PERC technology, and we became a undisputable leader in this particular segment, the multi-PERC. We can also produce very high efficiency, we can produce 400-megawatt modules and even higher. And this gave us a different advantage, a differentiator. And so this will be our wafer, ingot wafer strategies. And what's your next question, Alex?

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Alex Liu, UBS Investment Bank, Research Division - Associate Director and Research Analyst [40]

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My next one is, what's your view about the multi and mono commutation this year? And maybe what's you estimate about demand breakdown in terms of mono and multi? And what's your current capacity breakdown of mono and multi? And do you further expect the expansion will be more mono or multi?

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Xiaohua Qu, Canadian Solar Inc. - Chairman, President & CEO [41]

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Well, now this is a interesting question. I have seen the multi-mono swing a few times, the cycle a few times in my 23-year career path in solar. So it always swing back and forth. At this moment, the mono is taking more market share than multi, which is the trend in the past few years. However, we believe that multi is actually competitive in many market segment. For example, in the utility-scale project segment, many of our customer realizes that. Many of our customers actually understand that, multi has much longer field track record than mono. So we see a strong enough demand for our high power, high efficiency multi product. Now in the future, Canadian Solar will continue to produce both mono and multi. Now multi will be more than 50% of our project portfolio. But for some of our residential premium product, we do use mono. And for the -- our new solar cell capacity, we announced -- actually, we disclosed some of our continued expansion on solar cell. For all those new solar cell capacities, we also make sure that those cell capacity are exchangeable between mono and multi. So we are flexible on the 2 technologies.

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Operator [42]

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Thank you. This is the end of our question-and-answer session. I'll now turn the call back to our presenters. Please go ahead.

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Xiaohua Qu, Canadian Solar Inc. - Chairman, President & CEO [43]

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Thank you, everyone, for your continued support. And if you have any further follow-up questions, please contact our Investor Relations. Thanks, and have a nice day.

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Operator [44]

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Thank you. Ladies and gentlemen, that does conclude our conference for today, and thank you for participating. You may all disconnect.