Ladies and gentlemen, thank you for standing by, and welcome to Canadian Solar’s First Quarter 2017 Earnings Conference Call. My name is Rochelle and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mary Ma with Canadian Solar’s IR department. Please go ahead.

Thank you, operator, and welcome everyone to Canadian Solar’s first quarter 2017 earnings conference call. Joining us today on the call are Shawn Qu, our Chairman and Chief Executive Officer; and Huifeng Chang, our Senior Vice President and Chief Financial Officer. Before we begin, may I remind our listeners that in today’s call, management’s prepared remarks 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 the GAAP and a GAAP basis. By disclosing further 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 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. If we will use any non-GAAP financial measures during the call, you will find the required presentation and the reconciliation to the most directly comparable GAAP financial measures in the Company’s earnings press release. At this time, I would like to turn the call over to our Chairman and CEO, Shawn Qu. Shawn, please go ahead.

Thank you, Mary. We appreciate everyone taking the time to join us today. Solar module shipments and revenue in the first quarter exceeded our expectations. Our strong performance was led by solid execution on our business strategies with healthy demand for our high performance solar modules out of China, U.S., Brazil, as well as unwavering execution on our total solutions business. We ended the quarter with 1.48 gigawatts of module shipments. Five solar power plants sold and a speedy recovery of our high efficiency solar cell factory in Funing, which was damaged by tornado in last June and the ramp up of our new solar cell and module factory in Southeastern Asia. In Q1, sales to Asia represented 58.2% of revenue, primarily driven by solid demand in China. Sales to Americas represented 29.6% of total revenue; the balance was made up with sales to Europe and other regions. We are pleased with the performance of our module business in the quarter and our ability to manage in a volatile market. Our operation team has done an excellent job in keeping a very tight control of our inventory of materials and finished goods and also the critical job of managing order flow. We continue to prioritize opportunities for profitable module sales leveraging our Tier 1 market leadership technology, quality, strong balance sheet, bankability, and global footprint. Our competitive advantage allow us to pursue opportunities which others do not have the capacity or scale to pursue. This combined ability differentiates Canadian Solar from our peers. On the energy business side, we remain focused on our strategy of developing solar power projects for sales to third-parties which allows us to maintain a healthy balance sheet and redeploy capital to support the profitable growth of our business. In Q1, we focused on construction of…

Thank you, Shawn. We are encouraged by our strong performance in the first quarter and the momentum we are building the sale of our operating solar power plant assets. This is a very busy time for our management team as we execute against a clear set of directives. Our success will allow us to further deleverage our balance sheet and to selectively redeploy capital in support of our growth opportunities. We expect our success will translate into higher shareholder value. For the first quarter net revenue was $677 million, up 1.3% sequentially and down 6.2% compared to a year ago. As Shawn noted, the module shipments and revenue exceeded our early expectations for the first quarter, which is mainly driven by the strong demand in India, Brazil, China, and the U.S. and our unwavering execution on our total solutions business with the sale of five additional operating solar projects. Please note that, the module shipments recognizing revenue in Q1 are 1489 megawatts or slightly higher than the total module shipments of 1480 megawatts. This reflects 9 megawatts that had been previously shipped to projects but not recognized in revenue until Q1. Gross profit for Q1 was $91.4 million, compared to $49 million in Q4 and $112.5 million in Q1 of last year. Gross margin in Q1 was 13.5% compared to 13.9% in the first quarter of 2016. Excluding the AD/CVD true-up provision of $44.1 million or compared to 7.3% including the AD/CVD true-up provision of $44.1 million in the fourth quarter of 2016, and compared to 15.6% in the first quarter of 2016. As an update on the preliminary ruling of AD/CVD AR3, we remain fully engaged in the process and plan to vigorously contest the preliminary results of AD/CVD AR3 during the final phase. Of note, on May 11,…

[Operator Instructions] Your first question comes from the line of Colin Rusch of Oppenheimer. Please ask your question.

Thanks a lot guys. Can you just give us an update on the pool of potential buyers in North America and in the Central America on projects? And how many of those folks are looking at projects at NTP rather than full completion?

Yes, Colin, this is Shawn speaking. The North American project including Central American projects are quite well received, because both Canada, U.S. and Mexico are considered very good investments and we see project buyers from pretty much every corner of the world. We see U.S. investors, we also see European and Asian investors. Now, and also we see the utility investors. We also see the financial investors and typically we sell projects to after COD. However, in certain countries, for example, Canada, we have being selling projects at NTP for long time because the investor believe the execution risk is low and they also trust and like Canadian Solar’s bankability and executing track record. So if we don’t see a big difference in evaluation of COD and NTP, then of course we prefer to sell at NTP.

Okay. And then, just shifting gears to Japan, obviously, you are going forward with the JREIT process. But can you give us an update on where you are at with construction lending for existing projects and where those banks are lending in terms of a loan-to-value on the cash flows as you build out this portfolio and then migrate them into the JREIT?

Okay. Almost all of our projects have construction lending and a few years ago, we used non-Japanese construction lending. However, in the past two years, we have developed good track record in Japan. So we are pretty much converting – while converting most of our project lending to Japanese local banks. Now typically, you can see a loan ratio of 80%, 85% or sometimes even higher, because the cash flow is quite good. Therefore the loan ratio is high. We also use construction financing from a Korean financial institute.

All right. Perfect, thanks guys.

Thank you.

Thank you. Your next question comes from the line of Philip Shen of Roth Capital Partners. Please ask your question.

Hey guys. Thanks for the questions. Wanted to touch base on the Section 201, Shawn to what degree are you seeing a pull-in of demand if any? Have you seen your customers start to increase their buying activity with the Section 201 looming?

Yes, we have seen the market responding, well, the U.S. market is warming up in the past few weeks. I don’t know whether we can directly associated to the Section 201, but indeed, the demand is sufficient. We haven’t seen – we have seen some price movements. I am not going to say it’s significant, but we do see some price improvement in the U.S. market. But you know, the effects in 201 is the process just starting and as the hearing – I guess, I believe the hearing will start sometime in July. And as more information gets released, or people will get – I guess, we’ll get better reading on the situation.

Okay, great. Thanks, Shawn. As it relates to your margins, how do you expect them to trend into Q2? And as you focus more on your internal capacity, do you expect margins to potentially improve in Q3 and Q4?

As we – since we guided a margin of 13% to 15% in Q2, and also I want to remind you that in Q2 we didn’t guide much project revenues. Then obviously, the Q2 – we expect that Q2 margins will improve from Q1. I think that reflects two factors. One is the drop of the material price in February, March and early April, the drop of polysilicon wafer and cell price, and although the price have rebounded somehow, but still, for example polysilicon price is still lower than what it was back in February. So I guess, on the material side, we got some help. And on the sales side, the price is improving. The price has been improving in the past couple weeks in pretty much all the markets, I guess, starting from China market but the European market price we also see some improvement. So, Q2, if everything goes as it, I would expect the manufacturing margin to improve from Q1. And I think for Canadian Solar, this trend will probably continue into Q3. First of all, we will see the full benefit of our – the benefit of 4, 4.5 gigawatt, 4.49 gigawatt of solar – internal solar cell capacity running. This is the first time we have this much internal solar cell capacity running. And we have large percentage in diamond wire-saw and in black silicon. All this will improve our margin structure and as we see today, it looks like the Q3 ASP should also be healthy and that’s how I would see in Q3. But of course, I will – we will provide more and more guidance of Q3 and Q4 during – in August when we do the next earnings call.

Okay, great, Shawn. A couple of quick questions and then I will pass it on. As it relates to the electricity revenue, with 1 gigawatt of capacity online, and in operations, it just seems that might be a little bit low, clearly, Q1 is a seasonally low period, but can you talk to why the electricity revenue was just $5 million? And then also, as it relates to the JREIT, have you guys filed regulatory docs yet and if not, when do you expect to file the regulatory documents?

For the first question, I guess, it’s related to accounting treatment. For the projects ready to sell, no, we don’t record the electricity revenue, right. The electricity revenue will deduct or were used to deduct at the cost. So you’ll don’t see the electricity revenue. Only for the project, listed as projects for hold, you will see the electricity revenue. That’s why the electricity revenue looks low on the paper. Now regarding Japan, I will – rather not answer this question for some confidentiality reasons.

Okay, thanks, Shawn. I’ll pass it on.

Your next question comes from the line of Carter Driscoll of FBR. Please ask your question.

Good morning, Shawn. Shawn, you made some comments about really being constrained certainly not by demand, but by internal cell capacity and then it sounds like even the ability to source third-party. Are you considering changing kind of the mix internally from previous discussions, may be getting into a greater balance between your internal wafer and cell capacity versus your module capacity? And then maybe are you considering changing that level of ratio longer-term, because it sounds like it's actually constraining your business this year or is that really the same parameters you always faced, how much to build versus how much to focus on profitability just trying to get some nuance there. Thank you.

Right. We won’t be able to change the ratio significantly for the remaining of the year, because building the cell capacity takes time, need a new building and you need to putting new equipment. So our current cell factory is pretty much full. All the silicon be bought on again, but it won’t be able to significantly increase our internal cell capacity. So, we – I guess, we rather choose to be conservative of what you control the module volume shipments in order to protect our margins. So that’s why we are guiding conservatively on the annual total module shipments. But, we will consider further cell and wafer capacity increase if in the next while, next several months, we can further prove the technology advantage and the cost advantage of our technology and also if we can secure the financing, then, we may consider or announce further cell and wafer capacity increase.

Will that – will your - will those considerations be at all affected by what transpires with 201?

201, will be rely within but more to – but to – but even less reliant, even without U.S. market, Canadian Solar will still have 7 – 6 or 7 gigawatts of market in annual demand in other countries. So, our total cell capacity of 4.5 gigawatts is still low. However, we also want to be careful on capacity increase. We have built a few considerations. Number one is the technology differentiator. We have to make sure that the technology is really different and it’s proven and number two is financing and in today’s environment, we will only commit major CapEx further major CapEx only if we feel comfortable on the financing of a specific factory.

Okay, thank you for that. And then just as a follow-up, can you talk about the environment from a PPA perspective in different geographies? Anything surprising, obviously we've seen India clear at very low prices, that's not really much of a surprise. Any other territories where you're seeing either extremely competitive or even may be marginally some unprofitable bids versus some of your competitors?

In our case, if I just look at Q1 and Q2, Brazil is a very profitable market for us. But that’s because we have a local factory. And so, we are pretty much the only tier-1. Well, we are the only tier-1 and pretty much the only solar module company operating in Brazil. And also we have our own projects, projects we control. So, the module profit is quite good in Brazil. Although the price – the cost is also high, but the price is also high there. And Japan continue to be healthy to us because we sell large volumes, significant volumes into the residential and solar chip markets. Those markets are more or less insulated from the larger – those mass utility scale markets. And China, pricing has been healthy in some of the orders, especially moving into Q2, there is a rush to finish the installation by the mid of the year. Now those are the healthy markets. And – but, see, even in U.S. there are some healthy segments, you just have to choose to be disciplined, ship into the healthy segment but be disciplined for the low price and non-profitable markets. Now talk about non-profit, now talk about low profit, India is a pretty customer market and yes, it’s quite a customer market. So, usual – and I guess, India will be the one market, I’d say. U.S. there are some low price requests, but we don’t really respond to those requests. We only have limited capacity in Southeast Asia. So we choose to sell to the reasonably priced markets.

What about Mexico?

Well, Mexico is just starting. We don’t have significant delivery to Mexico. But, see the Mexico, the first one of Mexico bidding, right; those projects typically have COD by December of 2018. So you would expect delivery to those projects to start to either Q4 or maybe Q1 next year.

Perfect. Appreciate, that’s all. I get back to the line, gentlemen. Thank you.

Yes, for the people asking, the Mexican customers are asking, are very demanding, that’s for sure.

Thanks, Shawn.

The next question comes from the line of Jeff Osborne of Cowen. Please ask your question.

Yes, good morning. I just had two, Shawn. It sounds like you’ve gotten multiple bids for the U.S. projects that you have for sale. I was wondering if you could just talk about what the pricing environment is for those if it’s in mind with the expectations and more importantly, as we think about modeling those big piece of the prior revenue guidance that you had given for the year? How should we be thinking about gross margins for those projects?

I will leave the – this answer to after we sign definitive agreement, so we can understand. We have finished the second round of bidding. We have seen multiple healthy bids. That’s what I can say. But we will have to proceed into further – well, final negotiations and then, move – proceed to the definitive agreement and we would comment at that time.

Understand. Maybe, this one you can answer, can you just talk about what the accounting treatment would be for the JREIT formation assuming as it gets done during calendar Q3. How do we treat from a revenue perspective and cost the drop downs into that REIT itself or what’s the impact to the company financially?

You are asking the JREIT to have. Based on our preliminary estimates, we think that assets jump down to this call, we can choose the assets as the sales as revenue. It’s the preliminary analysis went up.

And then in terms of price of those assets is $4 a watt in round number is a good number, or what how are you treating those in terms of costs?

Well, the price-wise, I think the best way is to check the current listed JREITs and apply IPO discount. I think that will be the best to way to estimate. Cost-wise, we will just drop in the – it’s just the project build – project construction cost.

Got it. And then, lastly, Shawn, in response to Carter’s question about the cell capacity being constrained, it sounded like you are still in kind of an exploration mode as it relates to some of these new technologies and validating them. I just wanted to follow-up on the targeted cost structure of the company of $0.29 exiting the year. Is that something you are reaffirming today? What evidence, I guess, do you have that you will be able to hit that?

Yes, that’s – we are reconfirming this target to achieve $0.29 by the end of this year. Our diamond wire-saw black silicon, the cost will be significantly below the $0.29. But we still have certain capacity; we still have to buy some solar cell. We also have to buy some wafers, also our manufacturing cost in – let’s say, outside China will be higher. So that will be giving us a blended cost of $0.29 or approaching $0.29. But, I think we are good to – on this target.

Great. That’s excellent to hear. Thank you so much.

Your next question comes from the line of Gordon Johnson from Action Capital Management. Please ask your question.

Hey, guys. Thanks for taking the question. Can you talk a little bit about what the strategy is from some of the Tier-1s who are going for volume and using some of the OEMs? And then, can you talk about what you are seeing with respect to the consolidation and also provide us an update on what your Q1 free cash flow was? Thank you.

Hi, Gordon, this is Shawn speaking. I guess, this is the first time we talk. And the – so, thanks for participating on the call. I can’t comment on at the manufacturers. We are also watching how they working out strategies. See, we have used the OEM module in the past, but we found it difficult to control the quality. So, we think in order to be able to protect our quality reputation, we don’t want to use OEMs. Also, in today’s market price, OEM, if you do OEM module and if you buy third-party solar cell, I wonder how can you make any money. So, it looks like to me, it’s a pure like revenue or ranking game. I guess, we will focus more on profit improvement, which is to invest into the technology step. In our case, it’s the diamond wire-saw wafer plus black silicon solar module, now, a solar cell. Now the second question is on consolidation. That’s a good question. On the one hand, I don’t know, whether there is going to be any consolidation between majors through merger, but on the other hand, we do see some consolidation. For example, it looks like the module volume goes more into the a few Tier-1s and then on the solar cell side, we see our solar cell supplier also becomes more – more and more consolidated.

Okay, that’s helpful. And then can you also, I guess, talk about what the free cash flow was in the quarter? And then, lastly, with respect to the expansion in technology, could you give us some, sense of are you going with the traditional German technology and equipment providers? Or are you shifting to maybe some of the lower end – not lower end, but lower cost rather Chinese equipment manufacturers? And again, thanks for the questions.

Okay, today, we really don’t differentiate between German technology, U.S. technology, or Chinese technology. We don’t want to choose the best technology. So, in terms of – if you mean the equipment selection, on the wire-saw side, we compare the four different wire-saws, actually five different wire-saws including the European wire-saws. And then in our case, we choose two Chinese wire-saw vendors and the choice is definitely not just by price, but by the CO, the total cost of ownership. We compare the yield. We compare the processing time and we also compare the consumable time. And in terms of solar cell equipment, I guess, for perk technology, the European suppliers have a good solution or so we are used to their solution. But we also choose and used another solution which is from a vendor based in Shanghai, China. So, we next compare that equipment purely by the total cost of ownership.

The next question comes from the line of Scott Chui of Citigroup. Please ask your question.

Hello, thanks for taking my question. First, because I actually noticed that there is a depreciation in Brazilian dollars during Q2, so, do you expect it will have any FX impact due to this dollar depreciation?

Can you repeat the question?

Brazilian real.

Yes.

You are talking about the fluctuation of the Brazilian real. Just only happened recently and I am quite amazed by the news as well. However, I don’t see – I think, I don’t see, future, long-term impact. By the way, as we disclosed in this earnings call, we closed two other projects. We closed Pirapora II and Pirapora III, closed the financing and closed the investment. We are bringing – we brought in a investor which took 80% share, just like in the first Brazilian project. So now, we have all of our Brazilian projects to financially close. And that happened during the same time of this recent…

From the return.

So, I think, people are still confident. At least the investor I talked to, they don’t seem to be disturbed.

The next question comes from the line of Brad Meikle of Coker Palmer. Please ask your question.

Hey, good morning. First question I had was, on the project level debt of $1.2 billion, how much of that is associated with projects that will be sold this year? And then how much additional project level debt in the phase of that reduction will you be adding throughout the year?

I think, I think while we sold the U.S. project, we will get rid of a large part…

Two-thirds.

Probably two-thirds of our project related to that. But all those are now recourse debt.

And the next question comes from the line of Vishal Shah of Deutsche Bank. Please ask your question.

Hi, thanks for our question. Just want to get a little bit more color about the China market demand and what your expectations are for the second half of the year? And how much visibility do you have currently for the second half? Thank you.

We have meetings every day about how to serve our Chinese customers. The demand is really high. Also the demand came a little bit late. We knew there would be a rush before June 30. But only in late April, that demand, this rush got materialized. So there is only two months to complete all these orders, which is pretty, which is quite impossible. So the demand was strong. It’s strong right now. We think the demand will continue into Q3, some of the demand, or some of the demand which is less time-sensitive will be pushed into Q3 and some demand maybe pushed into Q4. For example, China issued five – there are several so-called top vendor projects bid altogether 5.5 gigawatts to be completed by September 30. That majority, most of those projects haven’t started to take the module delivery yet. So, all this demand will be pushed into Q3. Some maybe pushed past September 30. So, that’s how we see it. Now, the next question would be, whether there will be a end of year rush this year or not? Sometimes there is also end of year rush such as end of 2016, but this year, let’s see. By August, September, I guess, we will have better reading.

Our final question comes from the line of Brad Meikle of Coker Palmer. Please ask your question.

Hi, just asked before. On the project debt, how much was about outside of the U.S. so the U.S. is two-thirds of the $1.2 billion. How much debt do you have associated with Japan and UK and the other projects that are getting sold this year?

Two-thirds in the U.S. and to put it right, it’s almost – maybe 20% in UK, maybe 30% in Japan and then the rest in the module markets, such as Brazil.

And so, I guess, the question, between now and the end of the year, do you know what the change in that and that will be associated with the project debt in total as you move some of these projects of your book?

What’s your question?

I was just wondering the change in the total project debt between now and the end of the year, like how much you maybe adding in terms of other projects that moved to construction?

There will be a increase or decrease. The decrease will be somewhere around the $700 million to $800 million and depends on the pace of the project sales. And then, I would say, altogether, the decrease will in a range between US$700 million to US$1 billion, U.S. and UK and Japan, IPO included. But, since we are adding more projects, right, so they are the increased parts. So net-net, the delta maybe somewhere around the $700 million.

Thanks very much. And what’s the overhead on the project business in terms of your - just your OpEx for you, I think you said $100 million in the past, where do you see that going to by the end of this year on the solutions business?

We don’t disclose that number. But, I think, I can share with you, we have about 300 to 400 people in the energy group of business globally.

Okay, thanks. And, in terms of the manufacturing business, what’s your view on the visibility for the second half of the year and I know pricing has firmed up a little bit, I mean, how much of your capacity has been sold?

I just answered this question in previous rounds. It looks like the visibility into Q3 is good. But we will provide more clarity of the Q3, the shipment and margin structure when we do the next earnings call and if we want a lot of capacity, we can probably lock a huge percentage, six percentage of our capacity. But you don’t want to lock our capacity, right, because you will also leave some capacity to respond to the interim demand.

Yes, thanks. And then, CapEx, for the year, do you know roughly what that would be? And what the split is between the project business and the manufacturing business?

We haven’t disclosed that number for the – and really we don’t disclose, but you can check with our past numbers, but I will say, it’s a couple hundred million U.S. dollars.

Excellent. Thanks, very much.

Thank you.

At this time, I’d now like to hand the call over – I would now like to hand the call back to today’s presenter. Please continue.

Thank you, again, everyone for taking the time to join today’s call. We hope you all have a great day. Thank you.