Ladies and gentlemen, thank you for standing by, and welcome to Canadian Solar’s Second Quarter 2017 Earnings Conference Call. My name is Cedric 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 Second Quarter 2017 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 in today's call, management's prepared remarks will contain forward-looking statements, which are subject to risks and uncertainties, and that 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 or 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 use any non-GAAP financial measures during the call, you will find the required presentation of and the reconciliation to most directly comparable GAAP financial measure in the company's earnings press release. At this time, I would like to turn the call over to our Chairman and CEO, Dr. Shawn Qu. Shawn, please go ahead.

Thank you, Mary. We appreciate everyone taking the time to join us today. We are pleased with our results for the second quarter. Solar module shipment revenue and gross margin all exceeded our expectations. Our strong performance was led by solid execution on our business strategy. We also benefited from strong demand in China, ahead of the June 30 grid connection deadline for some projects. We exited Q2 with 1.75 gigawatt of total solar module shipments. During the quarter, we also energized a total of 109.4 megawatts of solar power project and brought the scale our solar power plants in commercial operation to 1.26 gigawatts. Our late-stage utility-scale project pipeline stands at 1.39 gigawatts. In Q2, sales for Asia represented 65.3% of revenue primarily driven by solid demand in China, India and Japan. Sales to Americas represented 21.7% of total revenue. The balance was made up with sales to Europe and other regions. We are pleased with the performance of our solar modules business in the second quarter. We achieved higher-than-expected gross margin due to the higher than -- the higher average selling price and strict cost control by our operation team who also did an excellent job in keeping a very tight control on our inventory of materials and finished goods. We continue to prioritize opportunities for profitable module sales, leveraging our Tier 1 market leadership, technology, quality and strong balance sheet, bankability and global footprint. Our competitive advantages 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 have made considerable progress with respect to the development, construction and monetization of our high-value solar power plants. Our portfolio of solar power plants in operation now stands at…

Thank you, Shawn. For the second quarter, net revenue was $692.4 million, up 2.3% sequentially and down 14.1% compared to a year ago. As Shawn noted, solar module shipments revenue and gross margin all exceeded our expectations for the second quarter, which was mainly driven by the strong demand in China, India, Japan and the U.S. and the higher-than-expected average selling price and our strict cost controls. Gross profit for Q2 was $167.8 million compared to $91.4 million in Q1 and $138.5 million in Q2 of last year. Gross margin was 24.2% including the benefits of AD/CVD reversals of $42.6 million and $15 million based on the final rates of Solar 1 AR3 and Solar 2 AR1, respectively. Gross margin was 15.9% excluding the reversal benefit compared to 13.5% in the first quarter of 2017 and a second quarter of 2017 guidance of 13% to 15%. Total operating expenses were $84.1 million in Q2 compared to $93.7 million in Q1 and $98.9 million in Q2 of the prior year. Income from operations was $83.7 million in Q2 compared to the loss from operations of $2.3 million in Q1 and income from operations of $39.6 million in Q2 of last year. Foreign exchange loss in Q2 was $11.6 million compared to a foreign exchange gain of $14.2 million in Q1 and a foreign exchange gain of $24.9 million in Q2 of last year. We recorded a loss on change in fair value of derivatives of $1.8 million in Q2 compared to a loss of $7.8 million in Q1 and a loss of $1.6 million in Q2 of last year. Income tax expenses this quarter was $9 million compared to an income tax benefit of $9 - $3.1 million in Q1 and an income tax expense of $16.3 million in Q2 last…

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

Thank you so much. Guys, can you talk a little bit about the geographic mix that you're assuming in guidance and how you're making allocation decisions? And if there -I guess, the underlying question here is about which markets are being underserved here in the third quarter that may support demand as we go through the fourth quarter and into the early next year?

Hi, Colin. This is Shawn speaking. For our China capacity, the allocation first go to the Japanese and Chinese market. And yes, those are the - those two markets have the priority of allocation, and for our non-China capacity, the U.S. demand is pretty high, so we give allocation to the U.S. market. But in my speech, I also mentioned that we, our self, we have one project. It's 180-ish megawatt, what we call Great Valley Project, which is in module shipment phase right now. So that project actually takes out quite a lot of capacity from our non-China capacity. But we also give good allocation to our customers in Europe and a few other countries.

Okay, I'll have some follow-up questions, I'll that those offline. And then just a housekeeping question. For the project that you've included in the guidance for the third quarter, what's the un-leveraged IRR that you're assuming in the project sale?

You mean in the project reaching COD or the project we expect to sell in Q3?

The project you expect to sell. And yes, the underlying IRR for that sales price that you're including in guidance?

We expect to realize revenue of a few project sales in Q3, if it's about Q3. That Great Valley project in U.S. will reach -- no, we will recognize sales, but that project is a NTP sales. We haven't reached the COD yet. I have to find the IRR numbers for you later on. And I think we're also going to recognize revenue on a few of China projects. And the China project, the un-levered IRR is around 8%.

Okay. Perfect. Thanks so much guys. I’ll hope in the queue.

Thank you.

Thank you. Your next question comes from the line of Jeff Osborne from Cowen and Company. Please ask your question.

Hey. Good morning, Shawn. I was wondering if you could just update us on the U.S. projects. Now we're saying those will be Q4 or Q1. From my recollection, I thought you were originally targeting those kind of the summer of 2017. Can you just talk about what you're experiencing with the recurrent projects that you're trying to monetize?

We are in exclusive phase with the winner of the bid. So the PSA, the purchase sale agreement, should be signed soon and then there will be some regulatory approval process and that process will take longer than we expected, so we now expect the final transaction close to being in Q4 or in Q1 next year. But other than that, we didn't experience any particular issues or any particular bottleneck and the pricing is also in the range of our previous expectation.

That's good to hear. Just so I'm clear, which regulatory process is that, that you're referring to?

Well, their own process and the regulatory process in U.S.

Got it. And then two other quick ones. Can you just talk about what's your polysilicon pricing expectations are for the gross margin guidance that you're seeing or giving for Q3 and any comments for Q4? And then I was also just curious about the impact that you see with a Section 201 trade case and potentially the pulling of demand here in Q3 that might be -- lead to some softness in Q4?

Yes, we this gross margin guidance, the guidance of 15% to 17%, we assume the spot market in polysilicon price, which is around $17 per kilo in China these days. We assume this price will continue to September. So if the polysilicon price is in the next few weeks, it should be helpful to us. Now with that polysilicon price, our manufacturing growth margin will be in low teens. But we do have a few projects, which will recognize revenues in Q3 and that bring the branded gross margin to the 15% to 17% range.

And any thoughts on the pulling of demand that you're seeing ahead of the September 22 ruling and potential impact in Q4? How we should think about that?

We don't have a lot of capacity for U.S. this quarter and next quarter because we, ourselves, have one project to be shipped in the next few months. And the price in U.S. is, I will say, strong, stable at this moment.

Very good. Thank you.

Thank you.

Thank you. Your next question comes from the line of Brad Meikle from Coker Palmer Institutional. Please ask your question.

Good morning. On the sale of the project to Sempra, the Tranquillity 8, is that booked as other income for the third quarter?

Yes, I think so. We'll book revenue in the third quarter. I think the revenue will be booked in - well, when we sell the project, we recognize a development fee and also because after the sales, Sempra will now become the owner of the project. So all the project shipped to that project will -- all the modules shipped to that project we will recognize revenue.

So is the revenue for the projects sale part of your guidance including Sempra?

Yes, the revenue for the project sale is included in the guidance.

And can you tell us what that is roughly, how much is that project?

I don't remember at this moment, but it's pretty healthy. We will provided the numbers when we report Q3.

And in terms Japan, what's the timing on the J-REIT IPO and the road show? I would imagine this should be getting going in September, October, is that right?

At this point, we're targeting the final regulatory approval either end of September or early October and then we'll start the marketing. But as you know, this is IPO process, so window is important.

Right, okay. And one last clarification on the U.S. project sale. Why would it take really 6 months to get regulatory approval for such a sale? It seems like something into Q1 would be longer than typically one would expect.

Well, if you look at some of the recent examples, for example, another company bought - it was another transaction recently, not our transaction, but somebody else's transaction. That particular one involved a fund from Canada, I think, and then they opted to go through the so-called CFAST [ph] approval and that process is more than two months. So anything involving foreign capital and if they go through the CFAST approval process, it will take that long.

Thank you, Shawn. And just last question is what is the CapEx so far year-to-date?

You have the CapEx number?

Yes. Year-to-date around US$127 million.

It's around US$127 million as of today. Thank you.

Thank you. Your next question comes from the line of Sophie Karp from Guggenheim Securities. Please ask your question.

Hi, good morning. Thank you for taking the question. I just wanted to double check. How much capacity in the projects that you're trying to sell are we expecting to close in Q4, Q1, should I say, is covered under the exclusive agreement that you discussed? Like what kind of capacity in gigawatts is covered under that agreement?

Yes, 703 megawatts.

Okay. And then can you talk a little bit about when you expect to monetize the rest of the portfolio?

Pardon me?

And when do you expect to monetize the rest of the portfolio that you have in the U.S. that's not under this agreement currently?

Well, after this one, then we -- after this 703 megawatts, then after we sell this one, we will only have a one project, which is called Roserock, which is a 100-megawatt project. For that project, the Roserock, we have sold 51% to Southern so we only hold the B share and so our effective ownership will be 49 megawatts. So that's what we are still holding. And other than that, we have another project in North Carolina. It's a 90-megawatt project. That project is still in construction phase, but we are also in the monetization process for that project. But that project might be sold before COD, and that's all the projects, either COD project or a construction project we still have in U.S. after this 700 megawatts, give and take.

Got it. Thank you. And then going back to the Section 201 complaint, I'm just curious if you participate in that project - in that proceeding in any capacity? And what are your thoughts about potential implications for your project development business in the U.S.?

There's lots of uncertainties. There are some speculations, but I would rather not speculate. The module price in U.S. at this moment is somewhere from -- anywhere from $0.40 to $0.50 per watt, which is higher than other - way higher than other markets, but we don't know whether this Section 201 will go through or not go through. And if it goes through, whether that result - how much duty our import price, minimum import price or whatever, because we don't know what would be the remedy, so all those are uncertainties. So we can only use the current market price as a reference for the impact if this Section 201 become a reality.

Thank you. I’ll jump in the queue.

Thank you.

Thank you. [Operator Instructions] Your next question comes from the line of Gordon Johnson from Axiom Capital. Please ask your question.

Thanks for taking my question. Since this quarter, there was an investment of $32.6 million in a EPC company in China. You took up you're holding from 40% to 80%. Can you give us a little more detail on what that company does and what the potential return on investment is of this endeavour?

It's an EPC company we formed with 2 Chinese partners somewhere around, I think, as early as 2010 or 2011. So that company has been around for a long time. It mainly carried EPC work for our projects in China. And now we are increasing our productivity in China and so that EPC company need a little bit more capital and the other two partners don't want to inject more capital. So Canadian Solar decided to increase its holdings from 40% to 80%, but we are always the effective manager for that company. So most of those increased investments will be used as working capital either to purchase our solar modules or the BOS components of our own China project. So this is more or less a EPC arm for our own project in China.

Okay, that's helpful. And do you guys have an expected return on investment on this new investment? And was the first 40% a similar amount paid? Or was it more or less what you paid for the second 40%?

The pure EPC doesn't have high margin at all. Anywhere you go, your pure EPC, you're talking about 5% to 10% gross margin. And because this company handles most of the project -- Canadian Solar's internal project, so we don't really calculate the return. It's more for our own project.

Okay, that's helpful. And then switching gears to the 201, I've got a couple of questions there. Can you possibly give us what your current lead times are in the U.S. with respect to modules? If I wanted to buy a Canadian Solar module today, what is the lead time? And then, secondly, this is just speculation on our part, but is there a potential explanation of the Tranquillity cell, Tranquillity 8 cell, i.e., the project not being fully done, of you guys potentially trying to free up some module capacity to sell in the United States, i.e., not having to inventory those modules for that project?

This Tranquillity 8 project was scheduled long ago, so there was no Section 201 where we scheduled the delivery for the Tranquility 8. At this moment, all of our capacity are spoken for in U.S., so we really don't have much extra capacity for serving new customers. But we are looking at de-bottle-necking our factories in Southeast Asia, so maybe by October, November, we can have a little bit more extra capacity.

Okay, thanks again guys.

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

Hi, everyone. Thanks for the questions. Just a quick follow up on the U.S. asset sale process. Shawn, when you say finalize the sale of the U.S. projects, do you mean closing of sale or just signing?

I mean, when I say finalize, I mean, transaction. I mean, the money and ownership change hands.

Great. Okay. And then in terms of the U.S. outlook, we're all talking about this pulling of demand in Q3 and 4 as a result of the Section 201. As you look beyond Q4, do you see some potential weakness? And can you quantify the weakness that you're seeing in the first half of '18 in the U.S. market?

We have to make a lot of assumptions, Philip, in order to quantify the Q1, so the answer is I don't know. We don't know what will be the outcome of this Section 201 process and also what kind of remedies will be implemented or whether there will be remedy at all. So all these uncertainties. So I mean, we'll just have to see how this event unfolds.

That's fair. Switching to China, can you update us on China demand? How much specifically were your external shipments to China in Q2?

It'll be around 600 megawatts.

Did you say 600 megawatts?

Around 600 megawatts in Q2.

Great. And then bigger picture, we've seen the news of a 24 gigawatts in the first half of the year for China and then they've increased the targets as well. How many gigawatts could China install in 2017? Are we talking about a 40-gigawatt type number, you think? And if not - well, actually, and also what do you think China could do in 2018?

Well, Philip, I've been reading your report and you suggested 40 gigawatts, so we have been using this number to guide our planning.

Okay. The swing factor in that forecast that we have is DG. What's you -- how big do you think in DG volumes could be in 2017 and '18?

Good question. I don't have that number in my hand. I think the first half DG is around 6 to 7 gigawatts. So I assume the DG continue at the same pace, now probably looking at 14, 15 gigawatts DG in China this year.

Right, that's the number that we have as well and so the question is can that continue. So I guess we'll have to see. Quick housekeeping question here, Shawn and Huifeng. In terms of, Huifeng, you mentioned the CapEx is $127 million year-to-date. In the past, the 2017 CapEx expectation was a bit higher, I think last quarter you guys talked about $200 million. Is that what we should expect for '17 still? And then if you can give us a peek into 2018, what kind of CapEx number are you looking at for 2018? Thank you.

We don't have the current number for 2018 for you yet. Hopefully, in November, we'll provide you some color on that. And for 2017, we have completed most of our manufacturing CapEx this year and we will start the construction of a few new workshops late this year, but pure construction doesn't cost much. So I don't think we have that much - more CapEx for the balance of the year.

Okay, great. Thank you. I’ll pass it on.

Thank you.

Thank you. Your next question comes from the line of Sheng Zhong from Morgan Stanley. Please ask your question.

Hi, Shawn, Huifeng. So firstly, a follow-up on the Japan REIT IPO. So how much -- how many projects -- what's the project capacity to expect when we're going to do the IPO?

I think I said in my part that the initial portfolio from the J-REIT is 65 megawatts. We have connected 110 megawatts in Japan already. However, the J-REIT -- for the J-REIT, we primarily will include our small-scale project. For the big project, we have some big projects, and the big project, we can go through a private sale. The evaluation is as good as J-REIT. So for the J-REIT, our current target initial portfolio is 65 megawatts.

Thank you. And for the good margin in the second quarter, one reason is about a strong ASP. So can you give us more color on the ASP, for example, per region? And what's your expectation in the third quarter and fourth quarter?

Are you asking the ASP for different regions? Is that your question?

Yes.

In Q2 or in Q3?

Maybe Q2 and outlook in Q3.

I think Q2 global ASP is around $0.37...

$0.38, $0.39.

Already around $0.38 or $0.39 per watt. And the ASP in U.S. and Europe are higher and India has the lowest ASP and China is in the middle.

And how about the outlook in the third quarter?

Well, we don't provide the Q3 ASP. After we finish Q3, we'll share that information.

Okay, sure. So can you also please give some color about the current wafer production cost as we have…

Pardon me? Wafer?

No, modules production cost.

That'd be blended, I think the blended module production cost is around $0.32 for Q2, but that's the global blended including our Chinese factories and overseas factories and also including our internal cell wafer capacity and the externally purchased wafer cells.

Understand. So -- and guidance on the production cost if we're looking to the end of this year?

Well, we have provided a guidance, now a real guidance, but we have provided a target to exit the year with $0.39 blended production cost. That's the target we provided. So we are still sticking to this target.

Yeah, that’s very helpful. Thank you. Thank you very much Shawn.

Thank you.

Thank you. Your next question comes from the line of Paul Coster from JPMorgan. Please ask your question.

Yes. Thanks for taking my question Shawn. I wonder if you could you just give us a little bit of perspective on the China infrastructure and its readiness to absorb all of these capacity. If you could talk to us about the trends you're seeing in curtailments and cash collections, that would be very helpful.

Now for the utility-scale projects, NEA, which is the National Energy Agency in -- of China, only approve new project for the province, which doesn't have a curtailment problem. So I would say -- expect that for the new project, the curtailment issue should be under control. In terms of the payment, all the DGs are getting paid on time. And for the utility-scale projects, large ground-mounted projects, I think, I mean, in the last round, all the projects, COD that by some date in 2016 are already on the subsidy list, anything after are still waiting. So it's still the same status.

I mean, do you anticipate any issues? Or do you think that China's ahead of the deployment activity here for the foreseeable future?

I mean, the subsidy delay in China is a no-end question and I don't think you'll see a solution soon. And at this moment, people are expecting 2 to 3 years' delay on the payment of the subsidy. And so, I guess, this trend will probably continue.

Got it. And then finally...

The DG project, so far, the payment seems to be on time.

Got it. And then just a quick question on the Middle East. Obviously, there's one very sizable program that seems to be starting out there. Are you engaged in the Middle East? What's the nature of your activity there?

Well, Middle East is a big region.

Well, let me be specific, the Gulf region, Saudi Arabia, Dubai, et cetera.

Yes, we have been shipping modules to the Dubai project, the so-called DEWA 2 -- DEWA 1, right, project. And Saudi Arabia, the bidding will be late this year and we are qualified as a technical participant. So you'll probably see us participate in one consortium.

Okay, thank you.

Thank you. Your next question comes from the line of Carter Driscoll [FBR] Please ask your question.

Morning. Not to beat Section 201 too much, but forgetting the module side, is the uncertainty with 201 having any effect on your decision to continue to invest in project development in the U.S?

Well, we still we continue with investing in the project development and the Section 201 is a 3-, 4-months process. And I hope by November and December, there's a clear answer.

Okay. Is the cell factory back in 100% production that was damaged by the tornado?

Yes. It was back to a 100% production in May.

In May, got you. Okay. And then just the last question, in terms of India, are you still seeing rational pricing by a number of players? I mean, how do you seek to avoid getting into really competitive downward pressure in that such a large market? I mean, is there a floor you put on individual projects where you walk away, as you have done in the past, we continue to walk away?

Well, so our team enter a bidding, our investment committee will give them a floor price. So indeed, if they go below the floor price, then we walk away.

Next. Lastly, you didn't talk much about Brazil. You've had a lot of success there recently. Can you characterize the environment vis-à-vis your expectations from last quarter?

I think the Brazilian government just announced that there will be a wide auction late this year, so we have a few projects to prepare for the auction. Our current project, these three projects will keep us busy through the summer of next year and there we are looking at acquiring a couple of projects, which I already win the PPA in the past few months and then we are looking at new auctions.

Maybe just, lastly, haven't talked about Mexico in a while. Any activity ongoing in that market?

Well, we have one project. We win one project in the last round of bidding. And so we are -- hopefully, we can start construction on that project soon. And I think there's going to be another bidding this year, but I have the check with my team.

And then just, lastly, as a follow-up to an earlier question. I think you'd always talked about maybe exiting the year with a blended all-in module cost of around $0.29. Does that still hold, especially given all the technology developments that you have? And I guess, it'll really be 100% of your new time and more so in the PERC flowing through your entire production process? Is $0.29 still a reasonable number for year-end?

I think so. The $0.29 is our global blended. Of that cost, for factory in China using our internally produced wafer cells so it should be below that. Now the only uncertainty is the polysilicon price. If the polysilicon price stay at $17 per kilo as of today, then $0.29 will be challenging. But as long as the polysilicon price go back to a reasonable range, for a reasonable range, I mean, somewhere from $11 to $13, which was the price range early this year, then I will say $0.29 we can definitely achieve that.

Appreciate, answering all my questions here. Thank you.

Thank you. Ladies and gentlemen, unfortunately, we have run out of time for any further questions. I would now like to hand the conference back to today's presenters. Please continue.

Thank you again, everyone, for taking the time to participate in today's call. And we hope you have a great day. Thank you.

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