Ladies and gentlemen, thank you for standing by. Welcome to Canadian Solar's Third Quarter 2018 Earnings Conference Call. My name is Joanna, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will have a question-and-answer session. As a reminder, this conference is recorded today 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 third 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, 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. 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. The main takeaways are that Q3 was one of our most profitable quarters ever with net income of US$66.5 million. Second, we continue to execute and strengthen our business. Third, the industry has been in a period of higher uncertainty and caution since May 31 China policy change. Thus, we proved that good companies can manage it yet. Our module shipment volume was reduced compared to Q3 2017, reflecting the demand flat in China market. Pricing has been impacted. However, we have managed to reduce raw material cost, achieve greater supply chain and manufacturing efficiency, which gave Canadian Solar a cost leader edge. Our continued focus on product differentiation and operational excellence has helped us to deliver a Q3 gross margin well above plan. Our business efforts extend to communication with our shareholders and analysts. We have always tried to make Canadian Solar as transparent as possible in an effort build value for the company and shareholders. Our reporting has evolved along with our business. You hopefully noticed the latest change in our Q3 press release. We have been operating in two principle businesses, which are the module and system solutions business, also called MSS, and the energy business. We are providing additional financial details on those businesses to help you better model our business and prospects. Our MSS business primarily comprises the design, development, manufacturing and sales of our solar modules, solar system kits, as well as the EPC and O&M services. The energy business primarily comprises of development, operating and sale of solar projects. The revenue and profit of energy business primarily come from the sales of projects and the sales of electricity. Sales from our MSS business to our Energy business are on terms…

Thank you, Shawn. We are pleased with the Q3 results, particularly the gross margin. We achieved the higher-than-expected profitability through a combination of our supply chain improvement, cost-cutting in MSS business and the successful monetization in selling solar power plants. As we said in our Q2 earnings call, we would further monetize our solar assets, and we did. Looking forward, we will continue to navigate carefully and manage our production capacity to the fluctuating demand levels with innovative products such as bifacial. As we announced yesterday, we delivered 10 megawatt bifacial solar modules to Oregon recently, which in the U.S. is the first of its kind application for this new breakthrough technology. For the third quarter of 2018, net revenue was $768 million, up 18% sequentially and down 15.8% compared to the year-ago period. The sequential increase in revenue is due to the higher-than-expected module average selling price, which was offset by the deferral of certain planned product sales to later quarters. As added color on Q3, net revenue was comprised of $512.3 million from our MSS business, and it was $255.7 million from our Energy business. Gross profit in Q3 was $200.4 million compared to $159.4 million in Q2 and $159.8 million in Q3 of last year. Gross margin in Q3 was 26.1% compared to 24.5% in Q2, and 17.5% in Q3 of last year. Gross profit in the third quarter of 2018 includes the benefit of a CVD reversal of $8.3 million based on the final rate of Solar 1 CVD AR4. Excluding the CVD reversal benefit, gross margin was 25% in the third quarter of 2018. Gross margin of our MSS business for the third quarter 2018 was 25.1% or 23.4%, excluding the aforementioned CVD reversal. This compares to 19% in the second quarter of 2018, or…

Sure. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Philip Shen from Roth Capital Partners. Please ask the question.

Hi, guys. Thanks for taking the questions. First one is on the outlook for China demand, with the recent changes being talked about from the NEA. When do you expect the NEA to announce a more official policy with details on what kind of volumes we could see in 2019 and possibly 2020?

Philip, this is Shawn speaking. The answer to your question is we don't know. We have been discussing and we have been providing opinions to NEA and also to NDRC, which is the National Development and Reform Commission ever since May 30. And it looks like all these led to some positive response November 1, when the Chinese President, Xi, met with a group of private entrepreneurs, and then the NEA meeting on the following day, the November 2. But there hasn't been an official announcement of particular program yet. At this moment, every company have their own guesstimate, but we don't have a detailed policy. And NEA hasn't given us an exact date of when they will make that announcement. I assume that it will take a while and usually they don't announce all the policies in one shot. It's probably like little by little, when they - let's say, when they fixed their policy on large projects they may make announcement. And then when they finalized their policy on the [residential policy] [ph] maybe they will make one announcement. So I expect they announce those policies in a piecemeal rather than a big package. But again, this is only my guess. And we will see in the next month or two how things evolve.

Great. Thanks for color on that, Shawn. Shifting to your projects, I think the market has - maybe been expecting some more project sales in Q4 and with that guidance. So what's your expectation now? Why would those projects or some of them pushed into Q1 and next year?

Well, those projects have a [big] [ph] sales process of some of those projects. But some project get so early and some project get so later. It's just nature of the business. Sometimes we get an investor who will really like, let's say our project in California, then that sale can go very fast. Well, sometimes we went into a situation that, for example, our projects in other states, it may run into a slow buyer or maybe in the first - like in the first round we identified a buyer, we get them into the exclusivity, but after a month that buyer drop off, then we start again. So this kind of process can create some uncertainties on when the project will be sold. But eventually, all the projects will be sold, if not in Q4 then probably in Q1 or Q2.

Okay, great. And then, shifting over to your capacity expansion plans for 2019, you gave some detail there. Given where current CapEx for what levels are today by segments, what do you expect your overall CapEx to be for 2019? And what's the thinking behind that in this - given the current - certainly, the outlook for China is starting to improve, but there still seems to be pricing pressure with oversupply and more capacity coming online?

Well, as I said in my speech, so what Huifeng commented, we are taking a very cautious view in manufacturing capacity. However, it doesn't mean we don't make any investment. If we don't - we have to make certain investment in order to maintain our competitiveness and maintain the competitiveness or maintain the minimum competitiveness is the best way to protect the shareholder value. If you don't invest at all, then you lose all the shareholder value. I hope people understand this point. And talking about, also when you look at our Q3 result, our manufacturing business, also contributed a reasonable market. It means that if you have the right product, right product, high efficiency product you can still make money. It's not like manufacturing doesn't make money at all. Now talking about 2019, our manufacturing capacity plan is quite cautious. I believe that other than the project we already started, which we already started and some of the invoice may come next year, the new spending for next year is not verified comparing with our expected revenue for 2019. And we focused our manufacturing CapEx dollars into the crucial process and also into our key competitive advantages. For example, if you look at our capacity chart, we're not expanding the upstream in January 1, because we believe in the wafer side, they are - those segments have the most overcapacity. But if you look at the solar cell side, the PERC related to solar cell is not overcapacity. It's actually under capacity. So Philip, if you look at whole supply chain, some people saw that, hey overcapacity means wafer side is overcapacity, but you really have to look into the details. In certain part of the supply chain, there's no overcapacity. There is actually a under capacity. And also for certain technologies, there is an under capacity. So our investments into those key areas and into the steps, which helps to maintain and expand our competitiveness.

Great, Shawn. Thanks. Is there any way you can share what the CapEx levels for 2019 might be, and also perhaps for Q3 and Q4?

Well, we are still being the process to develop our AOP, the annual operation plan. So I would rather want to leave the answer to this question to the next earnings call. We provided a picture of the major CapEx, the major capacity change into 2019. But we haven't finished our 2019 CapEx plan yet.

Okay, great. And this following question comes from some of the investors we're in touch with. But they're interested in understanding, when you may have a more defined policy in terms of shareholder return. In other words, when might you be able to communicate a more clear strategy for dividend or buyback? Or will you guys possibly have that within the next year or two?

Well, that's a very good question. You should - well, it's a legitimate to ask me this question. But you should also ask this question to other solar companies.

Okay. Thanks, Shawn. I'll pass it on.

Thanks, Philip.

Thank you. Our next question comes from the line of Colin Rusch from Oppenheimer. Please ask the question.

Thanks so much. Shawn, obviously, you've been navigating the sales channel for the modules pretty effectively in terms of understanding the customer needs. But as you look at geographic diversity and any sort of additional specialized sales efforts, can you talk about where you might need to make some investments on that infrastructure to continue to manufacture - well, maintain this sort of margin a little bit ahead of competitors?

You mean, geographically, we're investing to manufacturing. Is that your question?

No. No. Investing in - no, in the sales - in your sales force for modules.

In to our sales force?

Yeah.

Well, actually we want all the sales force to control the costs and to be more efficient. And there's no plan in the next year to significantly increase the headcount of the sales force. We are rather investing into the new IT technologies in order to hopefully to drive up the product or megawatt sales. Because the - although the megawatt number maybe going up, the ASP is going down. So one of our target is to somehow keep our expenses to the level of absolute gross margin to the same reason of the…

That's good. I have a couple of follow-ups that I can take offline. And then on the balance sheet, as you look at over the next 12 months, what do you need to do to augment the balance sheet? Do you feel like you're in good shape here? Do you want to adjust some of those short-term borrowings and lock-in interest rates go up? How should we think about, what you're planning to do over the next 12 months?

I think our balance sheet, at this moment is very healthy. We maintained a strong cash in hand, and we managed to improve our debt equity ratio every quarter. So I think, we're in very good shape. But we're continuing to strengthen the balance sheet.

Okay. Thanks a lot guys.

Thanks.

Thank you. Our next question comes from the line of Brian Lee from Goldman Sachs. Please ask the question.

Hey, guys. Thanks for taking the questions. Maybe a couple just around the pricing and cost in the quarter, you obviously did a good job. Can you speak to maybe first on what your cost per watt was at the end of the quarter? And also what the average ASP on the module side of the business was during the quarter?

The module ASP is in low-30s, further reduced from Q2. And the module average cost of goods sold, I believe is in mid-20s.

Got it. Okay. Helpful. And then, on that low-30s ASP per watt that you average during the quarter, how much of that was impacted by previously contracted volumes that might have been done before the - or in the backlog before the China 5/31 policy shift. And then how much of that better-than-expected result was driven by either mix or - product mix or geographic mix?

That's a good question. I think typically at the beginning of every quarter, we probably have around like 30% of the contract already signed, and the balance will be signed in the new quarter. So that's the typical pattern. So - but, of course, the newly signed contract also reflect early in the quarter maybe the price is better. But later in the quarter, the price become lower, that's a situation in Q3. And - but costs also again reduced. I think, one thing we did right in Q3 is to be conservative. We were conservative in both Q2 and Q3. So we maintained a reasonably low material inventory. So we end up benefit the material cost down faster than the impact from the ASP downtrend. Now moving into Q4, at this moment, as a matter of fact, we see the recent module ASP. But also, let's say, the solar cell ASP being stable actually reflecting some end-of-year rush, right now. So my point is that this market is never like one direction even in like downward market, you still see some seasonal uptrend. And again, in the up market, sometimes you'll see seasonal downtrend, just like the stock market.

Okay. Yeah, fair enough. And then just my second question, Shawn, you mentioned in Japan, maybe potentially doing or taking some actions around legacy feed-in tariffs and assets that have not received interconnection status. You're looking through your project backlog, you have I think 300-or-so megawatts in Japan. But they all have interconnection in FIT agreements. So can you help us maybe elaborate a bit more on exactly, where you stand with respect to potential risk of economics on your existing Japan backlog chasing? My understanding was that, if you had interconnection status, you probably were not at risk, but it sounds like you think there may be risk that even if you have interconnection status, your project won't be canceled, but maybe the FIT could be reduced. So you could maybe just elaborate on your understanding of what they may potentially seek to do there.

METI, which is the Japan Ministry of Economy, Trade and Industry, they released another set of rule change just a few weeks ago. You're right that in the past, they - your project will be protected as long as you have the grid connection agreement, but the newly proposed rule set some deadlines. For example, the project has to start the grid connection work before certain date, and it has to reach COD before certain date. Otherwise, you will be - you will not enjoy the old feed-in tariff, the so called locked-in feed-in tariff, ¥36 or ¥40, ¥42 feed-in tariff and you rather only have the low feed-in tariff, let's say, ¥19 feed-in tariff. And if you missed certain COD date, then the period of the feed-in tariff can be reduced, reduce of 20 year to 19 year something like that. We have a more detailed analysis based on their draft rule, but because this is only draft rule, they are still in a hearing period, and we submitted our opinion too. So it's now finalized yet. So in this press release, we provided a warning, provide a disclosure. However, we will have provided more analysis, once METI announced the official rule. According to the current draft, our projects in the next like two years are not impacted, because those years, those projects have already met those even the newly proposed METI rules. But some later year projects, let's say, 2022, 2023 year project will be affected, if METI, indeed, make those rule change. However, I believe, METI will make the final announcement pretty soon. It should be before the end of this year. And we will communicate with our shareholders, once that rule becomes finalized.

Okay. Thank you, guys.

Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Paul Coster from JPMorgan. Please ask the question.

Yeah, thanks for taking the question. Shawn, the gross margins, obviously, have been really very good in this third quarter, and they will remain so in the fourth quarter. And you've really explained that they're not benefiting from prior generation pricing. That there's only one-third in the - at the beginning of the quarter that would have been from a contract - previously contract - previously secured. So, obviously, the momentum going into 2019 is quite good. But nonetheless, you're not adding capacity. So there's a mixed signal here. Is there - do expect the margins to decline in 2019, and if so, why?

Well, it's a good question. I guess, first of all, we listened - we heard what the shareholders asked. And now we want to take actions. And if shareholder feels like they don't want to see us to invest too much into CapEx, then we will try to be cautious. Again, I guess, that's one answer, although, being cautious means that we might lose some opportunity, if the market turned back, turned around. Now second is about next year's market. At this moment, I see some mixed signals. On one hand, we do see price competition. We do see some of our competitors like offering a quote, also a quote very low price. And we don't know why, but we do see that kind of activities. But on other hand, as what I've said to Philip, Philip Shen's question, there are some good signals from China. And I think for next year, if I use the analog to the U.S. mid-term election, China is really the swing state. If China swing low, then we are going to have a very badly priced competition. But if China swing high, then wow, you will have a recovery. And maybe all of a sudden, you guys are all laughing and some investor will ask me, well, Shawn, why you didn't invest more into a manufacturing capacity? But here since we are watching this how China swing, so we're still cautious at this moment.

Got it. You've also established yourself as best-in-class with black poly bifacial PERC. Can you talk just about that versus Mono-PERC, which clearly, the price has come down, it's now competitive with much of multi. Do you see a big shift happening in the market here? Are we essentially going mono? And how is Canadian solar positioning for that inflection, if you even agree with it?

Well, Canadian Solar produced both multi and mono, and produced both multi and Mono-PERC product. We believe - I believe, we excel in both product. However, we produced poly and multi, then mono. This is our tradition. And also reflect the fact that mutli has a longer history, longer field operation history in mono. And if you check the field operation history, and so far, until this point multi show the better performance, for example, much lower degradation than mono. Those are the fact, right. And I - we do see that in multi - the mono technology have been able to cut down their costs, and therefore, be more competitive. And also they demonstrated their further advantages on the efficiency. So that's why we also produced mono product. But I believe that our multiproduct are equally competitive, and in the Q3 results just demonstrated that. And one of my friends actually comment to me today after he saw our results. And his comment is that, it's not mono will crash multi. It's really, who is doing mono or who is doing multi. That, if Canadian Solar do multi, we will make multi successful.

Got it. Okay. One last question, if I may. The debt, can you just elaborate a little bit? I think, I heard the total debt is $2.27 billion, of which $679 million in nonrecourse, and then, I got a little bit lost on the project level debt commentary made at the end. Can you just restate or elaborate, so that we can understand what is tied specifically to projects versus that which is cooperate nonrecourse or otherwise?

Yeah, wait a minute. Huifeng is going through his files.

Okay. Yeah, total non-recourse is about over - somewhere between US$600 million to US$700 million. And total debt amounts to $2.27 billion.

Okay, great. Thanks very much.

You're welcome.

Thank you. [Operator Instructions] Our next question comes from Brad Meikle from Williams Trading. Please ask your question.

Yeah, good morning, Shawn, Huifeng. Thanks for taking my question. I wanted to follow-up on the question of servicing shareholder value through a buyback or dividend. You say we should look to your peers. But JA, Trina, Hanwha, all my private companies Yingli is at zero. JKS seems to be still in the way to zero. So aside from First Solar, you're really only U.S. listed solar manufacturer. With the China slowdown, increased difficulty of access to capital in China, it seems possibly being a public company in the U.S. could be a competitive advantage. My math, it gets to a NPV of over $30 a share. If you bought back just $50 million, it will send a clear signal to the market that you focused on shareholder alignment unlike your peers. Is it something you would consider?

Buy back shares is one way to maybe support the shareholder value. Now, invest in order to capture the growth opportunities and produce profit is also a way to enhance shareholder value. And pay back debt is also a way to enhance shareholder value. I guess we already valued all these suggestions. And we'll see which way serves shareholder value better. And I am not sure whether that answers your question.

Well, I think that there is a stigma around physically Chinese solar companies that there is never a return of cash to shareholders and that has been somewhat true based on the performance of the companies I mentioned before. But, I guess, maybe to ask in a different way, there have been proposals from shareholders in terms of other ways, other LPs to surfacing value. Is that something you're considering working with as well?

Now, I first of all, I want to say that a lot of U.S. companies, especially the growth and the technology companies have never paid dividend. So don't blame China. I don't like people always blame China and label China. And second, we've heard this option. Now, we heard this such investor suggestions. Meanwhile, we also heard from investors that we should cut down debt. So - and also, we heard some investors saying that we should invest more money into the project business. Now, those are all good suggestions. But they may be conflicting suggestions. So we have to look at all these different suggestions. I will promise that we would - we will take look into those - we will consider - we will look into those suggestions seriously. But some of those requests are conflicting.

Thank you. Our next question comes from Carter Driscoll from B. Riley. Please ask your question.

Hey, good morning, guys. First of all, thanks for providing the additional detail. I think it'd be very helpful going forward. You just - obviously, still a very healthy and growing project pipeline in the U.S. Can you just talk about return expectations today versus maybe last year and how you help mitigate them, obviously, cost side is one, but just talk in general about maybe the U.S., then just some of the other project returns in your key geographies?

Well, see, when we get into a project or when we acquire a project, usually we target, let's say, 10%, 15% gross margin. And if we target too higher gross margin, usually we lost that opportunity. But then because the project takes two to four years to build. Now, if the costs of components such as solar modules drop faster than we expected, then we have higher gross margin. I think that the fact that you see us achieving, let's say, 20% to 30% gross margin on the project business, mainly reflect the fact that the component price reduction somehow has been faster than what the industry expected in the past four, five years. However, that trend can also reverse, right? You can run into a situation that your actual cost is higher than what you expected. Or in some market you can run into a currency crisis. For example, if you have project in Argentina or in India, you'll probably have some headache. So those flips can also reduce your project profit. Now, we have been quite careful, our total portfolio. So I'm - I guess, I'm happy to see that, all in all, our project business have produced a good profit. But to answer your question, every country have a chance to produce high profitability, high profit. But also if you do it wrong, then you can run the like mine somewhere - you can run into a minefield somewhere.

No doubt. Maybe just policy-wise, obviously, there has been a lot of discussion on the call already about China and Japan. And U.S. is obviously at the state of flux. Maybe just talk about some of the other bigger regions. I mean, Brazil for example had big election. Are you anticipating any positive or negative changes there to policy or maybe just comment on some of the areas that you don't - typically you get the same level of attention.

Brazil we don't know yet. We do have project portfolio in Brazil. And at this moment, we haven't seen any change, any major policy enacted. However, the election is only over a couple of weeks. I guess, the new President hasn't really get into the office yet, right? So let's wait, I guess, let's wait for six months to see whether there will be any policy change. So far, we haven't seen much indication of any major policy change in Brazil.

Okay. And then just last question, the reception for your first shipment of bifacial in the U.S., do you anticipate that really being kind of a - you pushing or really getting pulled by the customer that wants to increase the yield? And then, would it be targeted more for those that are less cost-oriented, more yield-oriented types of projects? I'm just trying to understand the puts and takes in particular for expanding that into the U.S.

See, we had already shipped close to 200 megawatt of bifacial already this year, so bifacial module is not new to us. And bifacial module will increase the energy yield, which is no question, because bifacial module not only generates electricity from the front side, but also from the back side, right? So depending on installation you can get from somewhere from - anywhere from 5% to 20% additional energy from the same installation, same piece of land. Now, so the gain is absolutely there. The question is how much gain, now, whether it's 5% or 10% or 20%. And for that, the engineers and the banks are still looking for data. So you will see some early movers, but also see some companies who may be hesitant. Now, in case of U.S. customers, what we observe is that if the customer uses his own money, if he doesn't need a non-recourse bank financing, usually they jump on the bandwagon immediately. Now, for the company who heavily rely on banks and they will have to convince their banks first, because they have to achieve certain leverage ratio to make the project a go. So I think overall it will take a while, maybe a year or two before all the utility-scale projects switch to bifacial. But personally, I think this is a non-stoppable train. Eventually, almost all the like utility-scale and ground mounted projects will turn into bifacial. And our customers are very interested in our bifacial projects, partly also because we only have some track-record, we only delivered close to 200 megawatt, as I said.

And just maybe as a follow-up, I mean, could this help at least stabilize or slow the decline in ASP as you get an increasing mix towards it? Just trying to get a sense of how this would impact it on a…

For ASP?

Yeah.

Well, at this moment, we model or we built our operating plan assuming that ASP always go down. And I think that before you reach grid parity in most of the countries in the world, this is probably going to be the general trend. And then, we just have to manage to have the cost also go down. Also the energy yield increases so that we can maintain the same benefit. So that's the general trend. And to be conservative, we always model it that way. However, as I mentioned, there can be some swing factors. For example, China is a swing state for next year. If China swings high, maybe - I won't be surprised if for a quarter or for six months the price actually goes up. Now, you have been like watching the solar industry for so many years. I can mention to you like in the past few years or almost every we have big swings, like for a while people thought price will always go down and then all of a sudden it will swing back, so never, never assume that this market only goes one direction.

No, no, no, I completely agree. I was thinking more, especially if you got a big jump or pull through of bifacial, could that by itself help with the blended ASP at least for a period of time?

That's correct, the ASP will - the bifacial will help ASP. Not a lot, but at least it can help to stabilize the ASP.

Okay. I appreciate it. Thanks, guys.

Thank you. As there are no further questions at this time, I'll now hand the call back to Canadian Solar's Chairman and CEO, Dr. Qu, for closing remarks.

Thank you for your continued support. And Canadian Solar will continue to build on our global leadership position. We are taking definitive steps to realize greater value from our pipeline of solar power projects, redeploying capital from project sales to fortify our balance sheet and to refresh our pipeline. At the same time, we have diligently protected profitability of our modules and system solutions business through a combination of higher value technology and higher yield solar modules, improved efficiencies across our global operations and a conservative approach to our capacity. We are confident in our outlook based on the current market environment. If you have any further follow-up questions, please contact our investor relationships. Thanks and have a great day.

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