Ladies and gentlemen, thank you for standing by. Welcome to Canadian Solar's First Quarter 2020 Earnings Conference Call. My name is Amber, 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'd now like to turn the call over to Isabel Zhang, Director of Investor Relations at Canadian Solar. Please go ahead.

Thank you, operator, and welcome everyone to Canadian Solar's first quarter 2020 earnings conference call. Joining us today are Dr. Shawn Qu, Chairman and Chief Executive Officer; Yan Zhuang, President and Chief Operating Officer; and Dr. Huifeng Chang, Chief Financial Officer. On this call, Shawn will provide an update on the market impact from COVID-19 and perspective on Canadian Solar's long-term position; followed by Yan who will review our recent progress and outlook; and Huifeng will then review our financial results and actions we have taken to further improve our balance sheet and liquidity. We will then have time for any questions. Before we begin, may I remind listeners that management's prepared remarks today as well as the answers to questions will contain forward-looking statements that are subject to risks and uncertainties. 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. Any projections of the company's future performance represent management's estimates as of today. Canadian Solar assumes no obligation to update these projections in the future, unless otherwise required by applicable law. A more detailed discussion of the risks and uncertainties can be found in the company's annual report on Form 20-F filed with the Securities and Exchange Commission. Management's prepared remarks will be presented within the requirements of SEC Regulation G regarding Generally Accepted Accounting Principles or GAAP. Some financial information presented during the call will be provided on 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 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. At this time, I would like to turn the call over to Canadian Solar's Chairman and CEO, Dr. Shawn Qu. Shawn, please go ahead.

Thanks everyone for joining us today. Over the past two months, the number of COVID-19 cases assets and economic closures has steadily expanded globally. Needless to say a lot has changed since we last spoke at the end of March. At Canadian Solar, we moved quickly and took bold measures to protect and support our employees, customers and partners first in China and then in the rest of the world. We have not only implemented strict preventative protocols, but have also taken stacks to support the local communities in which we operate across the globe. According to latest data, the worst seems behind us now. Here, I hope that you and your families are safe healthy and wish you all the best. Now let me give you an overall picture of the current market situation and some color on our long-term view. In 2020 global demand for solar equipments are expected to decline for the first time in 20 years. Recent market reports forecast global demand to be somewhere in between 95 to 100 gigawatts, compared to last year's estimate of approximately 120 gigawatts. Meanwhile, supply side capacity is expected to grow which will lead to additional ASP pressure and market consolidation. These effects will likely be felt across the supply chains causing input cost to decline as well. On the flip side, currently contracted solar projects are expected to benefit from the lower equipment ASP with the deployment of solar becoming even more attractive relative to other energy sources given the lower CapEx cost. Regionally, the U.S. and the Latin America market has been the most volatile around COVID-19. In the U.S., the biggest impact has been on a reduction in the availability of tax equity financing and the increase in the cost of capital for certain project buyers.…

Thank you, Shawn. As always, let me start with some key takeaways from this quarter. Firstly, we achieved strong financial and operating results for Q1 2020, with revenue and profitability both above our expectations. We were affected by manufacturing disruptions in China. But the overall COVID-19 impact was limited. We expect a more significant impact in the second half as Shawn noted. Near term, our approach is to conservatively manage a heavy -- a healthy balance sheet and preserve cash through this period of validity. We have a strong track record in doing that. Longer term, we are reinforcing the company's position for growth. And an area we are excited about is the solar-plus-storage market. We see a window of opportunity from the declining battery storage costs, higher capacity needs and accelerating retirements of also few plants across the world. Canadian Solar is uniquely positioned to benefit from this, as we leverage our competitive manufacturing base and large captive markets. In fact, we have built a solid 2.5 gigawatts hour storage pipeline and a 320 megawatts hour backlog. We're currently in advanced negotiations on various projects and look forward to sharing more information with you as we reach key milestones. Furthermore, we continue to grow and monetize our solar assets. Currently, we have 956 megawatts in projects under operation, 807 megawatts under construction, 3.7 gigawatts in backlog and 12 gigawatts in pipeline. This quarter we are sharing with you for the first time our five years plan for growth in the energy business. We've made strategic and organizational decisions to ensure we maximize value capture in the asset monetization process. Our plan is to selectively retain minority stakes in key markets with strong energy demand, attractive power prices and stable capital markets. Over time, this will allow us to generate…

Thank you, Yan. As both Shawn and Yan noted, we delivered a strong quarter on revenue and profit, despite the sharp decline in the market ASPs. We continue to command the higher pricing than the overall market, given our strong brand and customer and channel relationships. Q1 results also benefited from a large product sale in Japan, where the revenue and the profitability pull up is several times that of other regions. Note that, for our divisional results, we reclassified our operations and the maintenance subdivision, from MSS to the Energy business, to better reflect the logical structure of our business and operations. You will find the details in our press release. Total OpEx was US$110 million during the quarter, 9% higher year-over-year, but 7% lower than last quarter. Selling expenses were higher sequentially, mainly from higher shipping and handling costs, due to the logistical challenges in Q1. However, we have put a tight lid on all discretionary spending, so G&A expenses were lower in the quarter. During the quarter we recorded an income tax benefit of $29 million, which included a $49 million tax benefit from the net operating loss carry back provision under the U.S. Coronavirus Aid and Economic Security Act. Combining all of this, we generated a Q1 2020 net income of US$111 million and a diluted EPS of $1.84. Moving on to the balance sheet, we have maintained healthy leverage and liquidity levels, pursuing a more cautious than usual approach, as we communicated in the last quarter. We reduced our total debt to $1.87 billion and further reduced our short-term debt level. As we noted last quarter, the majority of our short-term debt is rolled over annually, with Chinese banks, where we do not see any material risk. Likewise, there are no major principal repayments, due…

Thank you. Ladies and gentlemen, we'll now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Colin Rusch from Oppenheimer. Please go ahead.

Thanks so much, guys. Can you speak to the pricing dynamics and channel inventory levels for both the direct sales channel as well as the bifacial modules, that you have going on right now?

Well, this is Yan. First is the bifacial. We just heard the news actually, yesterday.

Yes.

So, well, it certainly helps both on our side and the customer side. So – but we also understand that this is not forever. So, while we're actually benefiting from this new progress, we're also preparing for the end of this. So – but yes for the next few months, I believe two to three months we don't know maybe even longer. We will have significant benefits on this policy change – policy progress. And on the –

But I'm looking in the direct sales channel I'm looking for pricing and kind of channel inventory levels. I'm trying to get a sense of sell-through on that part of the business.

For our direct sales into the residential and DG market, so we have been experiencing a downside, because of COVID-19. But what we are seeing is this is actually moving up. It's actually improving in the recent weeks. We had a – we have been observing actively – actually we've been actively contacting our customers and monitoring the inventory level. It was on the up trend for quite a while. And cost – there's some customers that had payment difficulties. So we reduced our shipment into that channel late in Q1 and early Q2, so to manage the payment risk. However, in the past two weeks, it's been improving the sell-through is improving. Pricing-wise –

Okay. Go ahead.

Yeah. For residential market the price drop is less than the utility skill projects. So it's still better pricing than utility.

Okay. Thanks. And then on the storage side, we're trying to get a sense of the real technology position that you guys have relative to some of the other solutions out there. Can you speak to your battery management system performance cycle time, how you're performing versus some of the other solutions that are out there as you're outbidding on some of these PPAs and other projects?

I think our main strength is actually, we have the ability to develop such projects, PV plus storage. So we already have a pretty significant pipeline on the ground. And we have over – actually in the past years, we've been – we had experienced accumulated from the past project executions on EPC and O&M. So we learned we have ability on the execution of solar project. And the solar-plus-storage is the space that we need to create our business model the value chain, supply chain, economic and financial modeling, risk management and how to provide the wrap-up service for the as a total solution for this project. So in terms of technology, I don't think we have time to go into details. But we have – we are actively working on closing the first solution for our first project in the U.S. It gets a little delayed, because of the COVID-19 crisis, but it's coming.

Okay. Thanks so much guys.

Thank you. Our next question comes from the line of Philip Shen from ROTH Capital. Please go ahead.

Hi, everyone. Thank you very much for sharing your five-year plan for your energy business. I think it's very helpful for everybody. So just was wondering, if you could give some additional detail on that plan. So specifically, with your targets of annual project sales in 2020 and 2021 and so forth I was wondering if you could speak to the geographic mix that you expect there. I'm guessing, it's largely based clearly on your pipeline and your backlog. But I was wondering, if certain years may have a greater emphasis in certain geographies. And then also similarly for the projects, expected to be retained for example in 2020 the 30 megawatts. I'm guessing a lot of that is Japan but was wondering if you could speak to the geographic mix for 2020, 2021 and 2022 as well for the projects retained on balance sheet. So thank you.

Philip, this is Shawn speaking. For the 2020, most of the project macro-wise is going to go into the U.S. project. And we have good premium the 10 project in terms of megawatt and the megawatt size not big. But of course every – each megawatt in Japan contributes a lot more than the U.S. project. And then moving into the future, let's say in 2023, 2024 we expect the EMEA project to catch up. Now, also we have some projects in Latin America namely Brazil and Mexico. As you know, we expect to connect those projects more or less in 2021. In terms of project retained, as you said, Japan we have the CSIF, and so most of the projects are expected to drop into CSIF as long as the yields support. Sometimes the private fund, market provide even better pricing then we might sell those projects into those kind -- those projects fund. But sometimes we hold position and our position in those funds as well. And for U.S. market, at this moment, we don't plan to hold any positions, because the ITC scheme on one hand helps to support the U.S. project. On the other hand, also distort the cash flow. So as a share B -- Class B investors, we don't get much cash flow in the first for five, six, seven years. So unless we can do some kind of discount method, put discount in a future cash flow to the near terms, unless that happen we don't plan to hold too many U.S. project. But on the other hand, the ITC is going to be phased out a few years. So I expect that going into 2004 and 2005, we are going to hold more and more U.S. projects.

Great. Thanks for the color there, Shawn. Shifting over to the scrutiny on Chinese companies listed in the U.S. I was wondering if you guys could speak to that, given the expected requirements from an accounting standpoint as well as disclosure of investments. I was wondering if you could address that and how it might impact you? And then how, if at all?

Can you repeat your question? What accounting shows?

Sure. Yeah. Given for Chinese companies listed in the U.S., the Senate and House have passed a bill and it's going to Trump now to increase the scrutiny of these Chinese companies listed in the U.S. exchanges. So there's -- they're trying to get the PCAOB to -- the PCAOB wants to collaborate more closely and get access to accounting documents with the CSRC.

Okay. I understand now.

And so, I was wondering if you could -- good. Okay. If you could speak to that overall the criteria of that upcoming bill and what it might mean for you guys. Thanks.

Now, first of all, we are a Canadian company and not a Chinese company, but we do have some Chinese operations. And so far outside -- as far as I understand, SEC and got the accounting paperwork our Auditor in China without any question. I'll leave Huifeng to provide more color. Huifeng?

Sure. Phil, thank you for asking this question. First of all, as Shawn has said that we are a Canadian company. From day one, we were legally registered in Canada, and the business started in Canada. It's like many other international companies many years ago, Shawn, when he started manufacturing, and then he opened a factory in China. So this is the fact with a very clear legal track record. Now you may ask then why our company is on the list of the PCAOB list. Now that was because a lot of operations of our company is based in China. So when we were considering hiring which auditor to audit our book, and we choose the auditor who has office in China, and for that we also -- every time we file our Form 20 with SEC, we indicated that the PCAOB at this point, they cannot regularly access the working paper at our auditor. But however, we have been in the market for many years. This issue of auditing, first of all, it's the third time this issue came to the market and some investors were spooked. And later on the issue went away. Now this time, the House has -- the Senate has passed that the House need to vote. And we don't know what White House will handle this issue. But if that happens, according to the latest bill, I mean there are several bills in the history on this issue. According to the latest version of the bill, there will be three-year window time for a company to address this issue. And for us, of course, we can switch to an auditor based in Canada and then we are on par with many other U.S. companies in terms of PCAOB compliance. Now, what do I…

Thank you, Huifeng. Hey one other quick question here, just a follow-up on the pricing question earlier. I think we roughly calculate pricing for Q1 to be roughly for this module cents per watt to be about $0.28 per watt. I was wondering if you could comment on is that first of all correct? And then how do you expect that ASP to trend on a blended basis for Q2 and into Q3? Thanks.

I think Yan will answer your question better. Yan please?

I think the price movements varies from market to market. For example the price erosion in the U.S. and Japan are much lower and the price erosion in the residential DG market is lower than utility-scale projects. So the pricing for big utility projects in other markets going down faster so in different paces. And so going from Q1 to Q2, it's the pricing -- and into second half, I think the price will go down and then stabilizing. I think the price -- we are seeing some very low pricing sub $0.20 pricing. That's the bottom is -- if you're talking about ASP, some other channels the price may continue to move. But for the lowest pricing segment, I think it's likely to be stabilized towards the end of this year. So Q1, our ASP is like $0.27 and Q2 it's like $0.20, we cannot tell you that. But for Q2 it will come down a little bit. But the drop, the reduction has slowed down. And Q4 we believe the market may warm up. It will recover the demand. So pricing is likely to be stabilized. That's my answer.

Great. Thank you. I will pass it on.

[Operator Instructions] Our next question comes from the line of Brian Lee from Goldman Sachs. Please go ahead.

Hello everyone. Thanks for taking the questions. Yan maybe if I could just follow up there. I know you don't want to give specific numbers, but the directional color on pricing is helpful here. So 2Q is going to be down from 1Q. It sounds like based on your comments 3Q pricing will also be down from 2Q and then 4Q may be stable to even better. Just based on the directional trend you sort of articulated. Given where spot pricing is today and kind of given the lag between when you contract volume and ship, it seems like the worst pricing impact in the year may be in 3Q. So is that a fair assumption that 2Q is down, but then 3Q could be down even more before you start to see stability into the very end of the year?

Well it's -- more or less that's the trend. But I wouldn't oversimplify the situation. It's out of the $0.01 in the recent months. So we've been seeing some super low prices. I would say, those super low prices will not go down anymore less likely because it's just panic pricing. So -- and also for residential market it will -- it's coming back. And the residential and DG market is coming back. And proportionally if there's more volume shipping into that channel the overall pricing down situation will be eased. So that's -- this can't be complicated. That overall I cannot -- I mean, I agree Q3 price cannot be better than Q2. But Q4 will be stabilizing.

Okay. That's helpful. And then maybe just related to that from a gross margin perspective, obviously, Q2 is down here based on the guidance. Fair to assume that Q3 is also softer on a sequential basis before you maybe see some margin stability or improvement in 4Q, and I'm speaking specifically to the module segment not the project side?

Yes. I think the uncertain -- the reason we are -- part of the reasons we're withdrawing our financial annual guidance is because of uncertainty, the big uncertainty -- significant uncertainty caused by this situation. Because we're not sure how ASP and cost is going to coordinate in the next couple of quarters. And so -- so in terms of gross margin I really cannot give you clarity at this moment. And -- but I can say that Canadian Solar we have more share of our shipments into the rooftop market as well as more share into the high price market. More proportion of our shipment goes to Japan, Korea and the U.S. and also the residential market and also to our own projects. So I think maybe our position is slightly better.

Okay. That's fair. And then last question and I'll pass it on here. I think, last quarter you guys had mentioned that the residential market rooftop was seen impact from COVID. But my read was that you weren't seeing any real impact as of that point in the utility-scale segment. Your comments today suggest that's kind of changed here where you've seen impact across all buckets of your business. So can you maybe help quantify? I know you can't give us guidance for the year, but sort of quantify what sort of impact you're expecting here in the utility-scale segment. I guess if I look at the 1.1 gigawatt to 1.3 gigawatt range for project sales for 2020 in your five-year outlook. How much would you say that's changed owing to incremental COVID uncertainty since the last quarter? I know you didn't have those targets out last quarter, but assuming you did would they have looked the same, or kind of what -- can you give us a sense of how much that's changed here?

I think the impact is mainly in U.S. and some projects in Latin America as well. So on the margin side the impact is delayed. So Q2 we have certain -- some volume gets delayed, but that comes from both the residential market and also the ground mount utility projects. That's -- the utility part is I would say, it's more like two-third of the volume. But for -- on the project sales the similar reason is delaying of project sales and project financing delaying and some of them is because of the lockdown. So the construction gets delayed. So our current five-year plan already reflect that. And if you're talking about the impact comparing to end of March, we do see some impact on the pace and speed of our financing closure and project sales. So however, we're actually trying to fix that. And there will be some impact compared to our planning in end of March. But whatever impact it is it's already within our five-years plan. So -- and we're working on solutions to deal with that.

Hi, Brian. This is Shawn speaking. The current number of 1.1 to 1.3 already takes in some of the potential delay of the project -- delay of project sales into 2021. It looks like some of the project sales closing will end up in Q4 at this moment. But Q4 means a little bit delay will become Q1 next year. So for those projects we'd rather put into next year than this year. So Q1 and -- no 1.1 and 1.3 is the number we are like reasonably comfortable in this moment. But of course, things change. So that's why we say uncertainty. So by August we'll update you again.

Okay. No, that's fair. I mean 1.1 to 1.3 I know that's your most reasonable projection at this point in time. But is that sort of embedding a 10% slippage from 2020 to 2021, or is it a larger percentage of that? I guess, just trying to get a sense of how much things have moved out to the 2021 time frame, if it's a modest amount or if it's maybe more significant?

Yes. In terms of management estimate, we always take a conservative view. So we moved more than 10% of previously planned for 2020 to 2021. But maybe we will be able to close it before December 31, then we'll get -- you'll get a pleasant surprise.

Okay, great. Best of luck. Thanks guys.

Thank you.

Thank you. [Operator Instructions] Next question comes from Mark Strouse from JPMorgan. Please go ahead.

Yes. Thank you very much for taking our questions. First, when you talk about potentially replicating the Japanese infrastructure fund strategy in other markets, how should we think about timing? Is that something that could occur within the next 12 months, or is that more of a longer term view?

Yes. Mark this is Shawn speaking. Without COVID-19, we think we would be able to sign some strong letter of intent this year. So something will be launched next year. But with this current situation, things become fluid. I still expect within 12 months we can have something more concrete, but we will have to see, because we have this structure in Japan. Japan is one of the stable countries. We are active in some other markets such as Latin America and Europe. Latin America got hit by this local currency depreciation. So we'll have to see when that market -- when that financial market stabilize. And for EMEA, we expect a large numbers of our projects reaching COD, let's say, reaching NTP and then COD in a matter of two to three years. So we only have to get our structural prepared in the next two years, then we'll be fine.

Okay. That's helpful. Thanks Shawn. And then just lastly, I think, this is pretty clear, but I just want to be certain. So regarding second half, it's fair to say that there is some uncertainties regarding potential delays. But as of today have you seen any project cancellations?

This is Shawn again. We haven't seen project cancellation. If we have the PPA, then we don't cancel it. But we do see that, sometimes the tax equity become a problem, or the financing cost become high. Although, the interest rate -- the factories move down, but people have become so risk-averse, so our actual lending rate we haven't seen really actual lending rate drop yet. So that will delay the project. And the project still have -- if we still have room before the COD drop that date then we are okay. We have time to negotiate. If we are somehow coming close to that date, we will negotiate with the local utility to extend the COD day. We haven't really run into that much situation like that. But if we do, then I will expect the delayed utilities will be honored.

Okay. Very helpful. Thank you very much.

Thank you. I'd now like to hand the conference back to management team for the closing remarks. Please continue.

All right. Thank you for joining today's call and also for your continued support. If you have any questions and would like to set up a call, please contact our Investor Relations team. We thank you for your continued support again. I hope you and your families are safe and healthy. Thanks and have a nice day.

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