Ladies and gentlemen, thank you for standing by. Welcome to Canadian Solar's Fourth Quarter 2018 Earnings Conference Call. My name is Anne, and I will be your operator for today. At this time, all participants are in 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 like to turn the call over to Ms. Mary Ma with Canadian Solar's IR Department. Please go ahead.

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. Also certain 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 non-GAAP basis. By disclosing through 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 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.

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 around 1.7 megawatt megawatt of utility-scale solar project globally, which totaled annual revenue of $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 these results through disciplined order management and control of operational costs 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 reflects the strength of our pipeline of solar assets, 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 megawatt of solar modules during the quarter which exceeded our guidance. Gross revenue -- gross margin for our MSS business was 21.7% over 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…

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 improvements, cost cutting in the MSS business and the acceleration in selling solar power plants. As a result, our balance sheet has become stronger. We've 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 of 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 a $336.2 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 a 19.7% in Q4 last year. Gross profit in Q4 includes the benefit of CVD reversal of $16.1 million which was based on the final rate of Solar 1 CVD AR5. Excluding the 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 a lower blended module manufacturing cost which is, however, partially offset by a lower average module selling price.…

Thank you. Yes, ladies and gentlemen, we'll now begin the question-and-answer session. [Operator Instructions]. We have our first question coming from the line of Brian Lee of Goldman Sachs. Please go ahead.

Yes, hi guys. Thanks for taking the questions. I had a couple of that I wanted to run through. So maybe just on the guidance for 2019, too 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're saying of the 2.9 gigawatts a lot of that 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?

We provide the 2018 percentage. I believe for 2018 the module segment accounted for 52% of revenue and the project account for 48% as I said previously. Now this year will be slightly different or we'll see more revenue from the project business and less from the -- no, more from the module business and less from the project business. However, it will still -- the revenue itself doesn't always reflect the profitability because we're setting some of the project pre-NTP. As you know if we sell a project act as a NTP or pre-NTP then the margin can be high, but the revenue can be low. The current guidance -- the current annual guidance of $3.5 billion to $3.8 billion reflects our current focus of how many of the pipeline projects will be sold in 2018 at NTP or before NTP, some will be left to 2020. As you know that we have 2.9 gigawatt of pipeline, some of those projects will reach COD this year anyway, some will reach but most of them will reach COD in 2020 and 2021. So you can assume that the majority of them will be sold in 2020 or 2021. But there will be some projects which we’re already -- we have already brought on the market to sell as a NTP or pre-NTP package. We’ll update you when that process move along. But we do expect to sell some of those projects at NTP or prior NTP so those projects will contribute to the profit in 2019.

Okay, no, 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 of 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 of 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? Thanks.

Thanks. For the module business, our current guidance reflects 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, it’s because last year especially in the second half of last year the raw material costs dropped a lot, while 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 and until it achieves 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 at 6.9 and at some point even close to 7 RMB to US$1 and because a loss of our products are still made in China especially and the lot of our material -- raw material are purchased in China that help us to reduce the costs. But in past the three months, the Chinese currency appreciated a lot against US dollar. I guess expecting a resolution on the China-US trade dispute, but that has a negative impact on us because that drives up our module costs. So included these factors into our module profit guidance, however, as you know, the market can swing one way or another. So I hope by -- through 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 -- yes, the gross will probably be high, because we are selling more project NTP, therefore you'll see a high gross margin, but the revenue will be low, so the net -- if you look at the net profit, I think is more or less the same.

Okay, no, that's super helpful. Maybe last one and I'll pass it on, just more of a housekeeping question. Can you -- maybe a bigger picture question just on China demand. What percent of China represents shipments in 2018 and then how much do you expect it to be as a percent 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, when we might knew something official? Thank you.

Alright. 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 sales. So far all the third-party independent firms believe the China will install somewhere around 40 gigawatt in 2019. So we're using that as our -- as the base of our annual operating plan as well. However, China hasn't announced its 2019 policy yet. They have been in consultation for three, four months now, they're still in consultation. Before the Chinese New Year -- some people expected to be announced before the Chinese New Year, which means in January. At that point, Canadian Solar said, hey, be cautious. And there after Chinese New Year, people saw it will be announced before the end of March, but now it looks like they’re still in consultation. So personally, I don't see it will be announced in March. But I think eventually will come out, I’d just hope it come out early than later.

Thank you. Our next question is from the line of Colin Rusch of Oppenheimer. Please go ahead.

Thanks so much, guys. Shawn, could you talk about the cadence of non-silicon cost reduction with the manufacturing process, are you continuing to see ongoing benefits there or are you really shifting into higher value higher price products with a little bit more extensive process?

I think for non-silicon cost, most of the cost reduction now comes from the increase of the solar module wattage now. I don’t -- I haven’t seen that much reduction of the cost itself. I do see the reduction of silver usage, for example, 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 in non-silicon price has been going down. That seems to be the main driver now.

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

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’ve already become the strongest player in that market. So it’s not a surprise at all for us to continue to maintain the strength. 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, US market as some of analysts know that, it may have a safe harbor rush, by the end of this year. But it might be a short term rush and I am not sure how much capacity is available to supply that rush demand annually. 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.

Thank you. The next question is from Philip Shen of Roth Capital Partners. Please go ahead.

Hi, guys. Thanks for the questions. We have been hearing a lot about strong global demand outside of China. So frankly 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 the 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 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? Thanks.

Yes, Philip. We shutdown the operation for about five days in Q1 in order to complete the ERP upgrade and also the factory -- most of factories had been down for about three, five days during the Chinese New Year. So those had a major loss in production. And we're 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 products. That also results in some reduced shipment. So you’ve two lines that have typically low season, but these factors also somehow contribute massively to the production in Q1. But I expect those issues go away in Q2. Now -- and I -- but in particular another factor in Q1 is the foreign currency. Now currently 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 not see a sizable foreign exchange loss. Now what's your next question? Go ahead.

Shawn, thank you. As it relates to ERP implementation, can you talk about the cost benefit? Obviously there is a cost in terms of shutting down the facility for five days or the facilities for five days. What benefit do you expect to reap from the implementation of this new system?

Well, shutting down for five days and you will get a benefit of next five years. So overall, it’s still beneficial. And our previous SAP-based ERP system was implemented around six, seven years ago. And at that time, our production probably allowed 1 gigawatt -- 1 to 2 gigawatt. Now we only have less than 10 mega product. So the production -- like the product cost will all -- and also material cost, will all develop at that time and it doesn’t support our current production level, the complexity of our product mix and also material, and also we are now operating 15 factories around the world. So they’re total at different scales. We think that to make this upgrade will be -- it’s necessary for us to continue to be a competitive and also to handle the increased complexity of the production. Also in the long-term we have to reduce the labor costs, the headcount in our factory and to have the system ready we hope us to do that. So, there will be the future benefit. But as you know that it will take time to see the benefit of any IT upgrade and I hope to discuss this quite some review after 12 months and I hope I can -- details -- give you some clear details of what benefit we achieved.

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

I don’t think it’s that high but the ASP should be around $0.30, right. Yes, you are right, it’s around $0.30. But the manufacturing cost is in low 20s. So that gives us close to 30% gross margin.

Okay, great. And one last one here. In terms of CapEx, would 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 the cell and what the CapEx number might be for 2019? Thank you.

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

Great, and then -- thanks Huifeng. 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?

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

Thank you. Our next question is from Paul Coster of JP Morgan. Please ask.

Yes, thanks so much for taking the question. Quite a lot to unpack here. The accounts receivables going into the New Year are pretty elevated. I think nearly $500 million seems up a lot year-on-year and yet the first quarter is pretty light. Perhaps you could just sort of help us square that one away?

Yes, hi. This is Huifeng. The increased accounts receivable, the reason are two and very straight forward. One is that we are selling some project 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 its payment to be received. But nothing unusual happened.

Alright, fine. Then the next question I've got is the -- and so Shawn it sounds to me like you're seeing the impact of the second half weakness in module pricing is kind of flying through to this year and now we’re sort of paying the prices for that. 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?

Now, Paul, we believe our module price will be more or less stable. We modeled some -- I will call it 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 are -- we think we'll be able to maintain the -- let's say for the module price to orderly going down.

So I think most investors will be now looking through 2019 at least as far as it relates to Canadian Solar and to 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?

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

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

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

Thank you. Our next question is from Alex Liu of UBS. Please go ahead.

Thanks for taking my question. I have two questions. Number one is, considering the wafer rally year-to-date and potentially it heightened the wafer supply demand. So what’s your thought and strategy for wafer, will you consider maybe extending the 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 competition for this year and maybe the year afterwards? Thank you.

Yes. Thanks, Alex, I believe this is the first time I answered a question during earning call, so welcome Alex. And 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 straight forward. We believe that ingot and 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 is also 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 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 straight forward, 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 the cost of module wafers. And Canadian Solar developed the high efficiency multi-PERC technology. We became a undisputable leader in this particular segment, in multi-PERC. We've also produced very high efficiency. We can produce 400 megawatt modules and even higher, and this gives us a different advantage, a differentiator. And so, this will be our wafer -- ingot and wafer strategies. And what's your next question, Alex?

The next one is, what's your view about your multi and mono competition this year and maybe what's your estimate about demand breakdown in terms of mono and multi. And what's your current capacity breakdown of mono and multi and your further capacity expansion will be more mono or multi?

Well, now this is an interesting question. I have seen the multi-mono swing a few times, the cycle few times in my 23 years career path in solar. So it always swings back and forth. At this moment, the mono is taking more market share in multi, which is the trend in the past few years. However, we believe that multi is actually competitive in many market segments, for example, in the utility-scale project segment. Many of our customers realize that. And many of our customers actually understand that multi has much longer field track record than mono. So we see 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 products we do use mono. And for our new solar cell capacity, we announced -- actually we disclosed some of our continuous expansion on solar cell, for all those new solar cell capacities. We also make sure that those cell capacities are exchangeable between mono and multi. So we are flexible on the two technologies.

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

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

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