Canadian Solar Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 22, 2023

There are 9 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Canadian Solar Second Quarter 2023 Earnings Conference Call. My name is Melissa, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session.

Operator

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Isabel Zhang, IR Director at Canadian Solar. Please go ahead.

Speaker 1

Thank you, operator, and welcome everyone to Canadian Solar's 2nd quarter 2023 conference call. Please note that we have provided slides to accompany today's conference call, which are available on Canadian Solar's Investor Relations website within the Events and Presentation section. Joining us today are Doctor. Sean Qu, Chairman and CEO Yan Zhong, President of Canadian Solar's majority owned subsidiary, CSI Solar Doctor. Hui Feng Chang, Senior VP and CFO and Ismael Guerrero, Corporate VP and CEO of Canadian Solar's wholly owned subsidiary Recurrent Energy, also formerly Global Energy.

Speaker 1

All company executives will participate in the Q and A session after management's formal remarks. On this call, Sean will go over some key messages for the quarter. Ian and Ismael will respectively review the highlights of the CSI Solar and Recurrent Energy Businesses, followed by Huifeng, who will go through the financial results. Sean will conclude the prepared remarks with the business outlook, after which we will have time for questions. Before we begin, may I remind listeners that management's prepared remarks today as well as their answers to questions will contain forward looking statements that are subject to risks and uncertainties.

Speaker 1

The company claims the protection of the Safe Harbor for forward looking statements that is contained in the Private Securities and the 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 final report on Form 20 F filed with the Securities and Exchange Commission.

Speaker 1

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 both a GAAP and a non GAAP basis. By disclosing certain non GAAP information, management intends 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 And now, I would like to turn the call over to Canadian Solar's Chairman and CEO, Doctor. Sean Chee.

Speaker 1

Sean, please go ahead.

Speaker 2

Thank you, Isabelle. Hi, everyone. Welcome and thank you for joining us today. Please Turn to Slide 3. We achieved a strong financial and operating result in the second quarter Of 2023, we delivered record module shipments of 8.2 Gigawatt With $2,400,000,000 in revenue and the gross margin at 18.6%.

Speaker 2

Importantly, we delivered record total net income for Canadian Solar shareholders of $170,000,000 or $2.33 per diluted share. Let me share a few key Q2 messages before Yan, Isabel and Huifeng Review our performance in more detail. Please turn to Slide 4. First, we successfully completed the IPO of our CSI Solar subsidiary On the Shanghai Stock Exchange Star Board, this was a major achievement for us And I would like to thank our entire team for their efforts in reaching this goal. Investor demand was strong and we reached approximately 9.75 $1,000,000 in gross proceeds, 70% more than our original target.

Speaker 2

These funds will be used to support our growth plans across both Our solar and energy storage businesses, including our strategic investment in Vertical integration to further drive technology and cost improvements. This is the latest example of how we are building long term value for the company and shareholders. Please turn to Slide 5. 2nd, under the backdrop of the Inflation Reduction Act, we continue To strengthen our competitive position in the U. S, one of our coal markets, In June, we announced the establishment of a solar PV module production facility in Texas.

Speaker 2

These plants will have an annual output of 5 gigawatt and represents an investment of over $250,000,000 Production is expected to begin near the end of this year With approximately 1500 skilled jobs created once Fully ramped up. We are proud to be embarking on these growth initial gaps With long term partners such as EDF Renewable, with whom we signed A multi year module supply agreement of 7 gigawatt of high efficiency n type Topgolf Solar Modules. We expect this to be the first of many important Partnerships. We also continue to solidify our market position In the U. S, in Downstream Project Development Business, Recurrent Energy Yes, developing some of the most valuable solar and battery energy storage projects, Including the 1.2 gigawatt hour Top Ago stand alone Storage project in Arizona.

Speaker 2

At the same time, our e storage team We'll be supplying the equipment integration services and the long term services for Perpagold. This is another great example of how we focus on capturing more value of each project over its lifetime. Of our 6.6 gigawatt Our solar PV development pipeline in the U. S, we have over 2 gigawatt of project with interconnection agreements, of which 45% are cited in Energy Communities. Likewise, 45% of our advanced storage Pipelines in U.

Speaker 2

S. Are also cited in energy communities. We see significant potential in the U. S. Market, particularly after the passing of the IRA and will continue to build on our competitive Hello?

Speaker 1

Yes, John.

Speaker 2

I'm still on. I'm still on, right? Okay. All right. We see significant potential in the U.

Speaker 2

S. Market potentially, particularly after the passing of the IRA and will continue to build our competitive position and track record in this market. Lastly, turning to Slide 6. I would like to highlight Canadian Solar's latest annual ESG Sustainability report, which we published a few weeks ago. This year, We made significant improvement in our systems and disclosures.

Speaker 2

We hope The report will serve as a transparent account of our efforts to integrate sustainability and the ethics into every aspect of our business. For example, we significantly expanded our participation in international ESG, Initial Cares and Certification. We are now supporters of United Nations' Sustainable Development Goals and recently joined The United Nations Sustainable Development and I recently joined the UN Global Contact, committing to support and adhere to the ten principle of the UNGC on Human Rights, Labor, Environment and Anti Corruption. We also submitted our commitment letter to SBTI, This indicates our intention to affect the near term Net 0 science based climate targets. We also continue to ensure that our own operation as well as those of our suppliers Follow ethical labor practices.

Speaker 2

I'm grateful that these efforts Have not gone unnoticed. Having received a prime ESG rating From Institutional Shareholder Services, our ISS and an excellent With that, let me turn over to Yan, who will provide more details on our CSI Solar Business. Yan, please go ahead.

Speaker 3

Thanks, John. Please turn to Slide 7. In Q2, the CSI Solar division Delivered 8.2 gigawatts of solar module shipments and $2,000,000,000 in revenue. This is A record quarter as it's the first time we're crossing the $2,000,000,000 mark. Gross margin was 14.3 percent, down around 4.2 percentage points quarter over quarter.

Speaker 3

This included a $31,000,000 inventory write down, driven by the sharp decline in raw material costs. Without the write down, Gross margin would have been 15.8%. Let me go over the key drivers behind these numbers. Please turn to Slide 8. First, while you can see that polysilicon prices declined significantly during the quarter, Wafer and cell prices have not fallen nearly as much as polysilicon.

Speaker 3

Note that we ended last year with 20 gigawatt of cell capacity despite expecting 30 to 35 gigawatt of module shipments. This means That our non vertically integrated capacity was not the most optimal from a cost standpoint. We're working to improve this meaningfully as we ramp up cell and wafer capacity in the second half of twenty twenty three. In the meantime, We're restricting our procurement of 3rd party sales in order to protect margins before our cell capacity is fully ramped up. 2nd, which is perhaps the larger factor, is the decline in module prices.

Speaker 3

This was mainly driven by the distributed generation segment across most regions and just specifically the residential sector. Overall market inventory levels are higher than usual And that has led to destocking. We expect to see improvement in the DG segment as we move through The second half of twenty twenty three once the destocking is complete. We also saw some utility steel customers post or even delay orders given the sharp pricing declines. Despite the near term Pricing volatility and destocking, we remain very confident given the strong demand across nearly every market.

Speaker 3

And we are already starting to see polysilicon prices rebounding over the past few weeks. Projects can only be delayed for so long before they start to incur liquidated damages, And the development pipeline we see in the market has eclipsed previous levels. The market to improve as we move through the second half of twenty twenty three. 3rd, our logistics costs continued to decline in Q2, mostly driven by lower logistic costs in China. We've also been locking in shipping contracts when they're lower to protect ourselves from any increase as the market rebounds.

Speaker 3

Combined with our higher operating leverage, Our operating profit nearly doubled year over year to $119,000,000 Actually, moving into Q3, we already see that the gross margin is improving. So moving to Q4, we expect further improvement. Turning into Slide 9. We made the strategic decision to rebrand our utility scale turnkey energy storage business Under our new e storage brand, which we believe more clearly articulates our business. In the Q2 of 2023, we signed approximately $630,000,000 in new bookings.

Speaker 3

As of the end of Q2, we had a contracted backlog of $2,100,000,000 Including contracts under long term service agreements, we expect shipments will ramp up significantly in the second half of 2023, as we complete our planned transition from a white label product into our own manufactured products. Importantly, given our bookings And the 26 gigawatt hour of total pipeline, we believe e storage is firmly on track to become a $1,000,000,000 business in 2024. I'm very proud of our e storage team for achieving such Impressive growth in just 3 years. Now let me pass the call to Ismail for an overview of Recurrent Energy,

Speaker 4

Thank you, Jan. Please turn to Slide 10. In Q2, we delivered $360,000,000 in revenue with a 43.9% gross margin, mainly driven by the tail of our flagship 100 Megawatts Azumakofuji project in Japan. As previously guided, Q2 was one of our largest quarters in terms of revenue and profit. We are now concentrating more of our efforts on executing projects to hold them long term as opposed to monetize them immediately in the short term.

Speaker 4

In particular, we are going to be building several gigawatts of projects over the next few quarters, Specifically in Europe and the U. S, where we believe we can capture higher value by remaining as the long term asset owner and operator. Please turn to Slide 11. As of June 30, our total pipeline stood at 25 gigawatts for solar and 62 gigawatt hours for battery storage projects. We are being more selective in originating more PV pipeline As our current pipeline is significantly mature and give us a strong visibility for execution and growth over the next few years.

Speaker 4

On the storage side, we continue to originate projects focusing on regions where solar penetration is high And grid reliability risks are also relatively high. We remain far ahead of the industry in terms of track record, Market understanding and positioning. We are very confident that we can execute on this pipeline to build increased value for the company and shareholders. Please turn to Slide 12. Over the past few years, We've seen significant inflation in CapEx costs and increases in cost of capital, which combined have driven PPA prices higher.

Speaker 4

Demand has been very strong due to the large influx of new players who were attracted by competitive economics as well as their interest to secure electricity needs through clean and reliable sources. According to SVTA data, At the end of 2020, 620 companies had publicly pledged to reduce their greenhouse gas emissions. In less than 3 years, this number has grown to over 5,800 companies, A growth of more than 9x. Yet, the lineup of good quality projects in the market remains scarce. Over the past 3 years, Ricardone Energy signed over 2 gigawatts of PPAs in late stage reconstruction projects.

Speaker 4

In addition, we have approximately 1.5 gigawatts of PPA contracts in advanced negotiations in the U. S. And Europe for projects that are expected to be held longer term. Take the U. S.

Speaker 4

Market as an example. Our long term position and ability to develop high quality clean energy assets has allowed us to successfully raise U. S. PPA prices by approximately 20% to 40%. And as Sean mentioned earlier, among the 6.6 gigawatts of Solar PV development pipeline in the U.

Speaker 4

S, we have over 2 gigawatts of projects with interconnection agreements, of which 45% are site in energy communities. In addition, 45% of our advanced storage pipeline in the U. S. Is also site in energy communities. Thanks to the IRA, we expect to monetize the ITC in a significant part of our projects.

Speaker 4

This includes the recently signed Papago standalone storage project in Arizona of 1.2 gigawatt hours, which will help the state meet surge in electricity demand. We expect the IRA to support more flagship projects like these, Now let me pass it on to Yufeng, who will go through the financial results in more detail. Yufeng, please go ahead. Thanks, Ishmael.

Speaker 5

Please turn to Slide 13. In Q2, we delivered $2,400,000,000 in revenue, Up 39% quarter over quarter and up 2% year over year, gross margin was 18.6%, a small sequential decrease of 6 basis points. Gross margin was driven by lower ASPs and an inventory write down due to the sharp decline in raw material costs, offset by high margin project sales. Without the inventory write off, gross margin would have been 19.9%. Gas and distribution expenses were flat quarter over quarter despite the significant increase in shipment volume, reflecting our operating leverage and a further decline in unit logistical costs.

Speaker 5

General and administrative expenses increased mainly due to A $36,000,000 share based compensation expense related to the CSI Solar IPO, We expect to amortize the remaining roughly $25,000,000 of IPO expense over the coming quarters. Overall, the 39% of revenue growth far outpaced The 26% increase in OpEx as we achieve greater scale and operating leverage in our business. The net foreign exchange and the derivative gain in the second quarter was $34,000,000 mainly driven by the stronger U. S. Dollar relative to the Chinese RMB.

Speaker 5

Total net income was $198,000,000 with net income attributable to Canadian Solar shareholders at 170,000,000 for diluted EPS of $2.39 Now turning to the cash flow and balance sheet. Next slide please. In Q2, we generated approximately $290,000,000 in operating cash and spend around $280,000,000 in CapEx. Our full year 2023 CapEx Expectation remains unchanged at approximately $1,500,000,000 We ended the period with a higher total cash balance of $3,300,000,000 and a total debt of $3,300,000,000 Our leverage, as measured in net debt EBITDA, excluding restricted cash, was at 1.4x, the lowest it has been in many years. As you can imagine, we have deployed cash raised from the CSI Solar IPO towards Gross projects and therefore expect the future leverage to increase slightly towards a more normal level.

Speaker 5

Now let me pass it back to Sean, who will conclude with our guidance and the business outlook. Sean, please go ahead.

Speaker 2

Thanks, Huifeng. Let's Turn to Slide 15. For the Q3 of 2023, we expect solar module shipment by CSI Solar to be in the range of 8.5 to 8.7 gigawatt, including approximately 13 Megawatt to recurrent energy project. Total revenue are expected to be in the range of $1,900,000,000 to $2,100,000,000 Gross margin is expected to be between 17.5% to 19.5%. This reflects a margin improvement in CSI Solar, offset by a lower contribution from recurrent energy comparing to Q2.

Speaker 2

For the full year of 2023, we reiterate CSI Solar's Total solar module shipment guidance should be in a range of 30 to 35 gigawatt and CSI Solar's battery storage shipment to be between 1.8 to 2 gigawatt hours, Representing this year's transition from white label to own manufactured products, Full year 2023 revenue is expected to be between $8,500,000,000 to $9,000,000,000 mainly due to the rapid decline in solar module prices, Where we expect the industry to remain highly competitive, Canadian Solar's Successful IPO of our CSI Solar subsidiary, strong balance sheet and Global brand positions us to achieve profitable growth and create Lasting value for our shareholders. With that, I would now like to open the call to your questions.

Operator

Our first question comes from the line of Brian Lee with Goldman Sachs. Please proceed with your question.

Speaker 6

Hey guys, thank you for taking the questions. Appreciate the time. I guess first question was just on the gross margin guidance here. I know you're not giving the specific numbers, but 1, are you assuming any additional inventory adjustments in the Q3 margin guidance for CSI Solar? And then 2, if you're not, which I presume you're not, how would CSI Solar Gross margins look in the Q3 guidance relative to the sort of normalized margin you would have printed in 2Q, if it wasn't for the adjustment, I think you said 19% ex the adjustment.

Speaker 6

How is CSI Solar Gross margin is expected to trend relative to that adjusted number in 3Q.

Speaker 2

Yes, Brian. I would answer your first question. We don't expect And a significant inventory adjustment for Q3. Now I would like Yan to comment on your second question. Yan?

Speaker 3

Hi. So In Q3, I think most of the revenue is going to come from CFI Solar. So that gross margin that we provided for Q3 really indicates an improvement of the gross margin for CSI Solar.

Speaker 6

Okay. So I mean the midpoint is 18.5% and you did I guess the midpoint is 18.5% and you did 19% ex the adjustment, so maybe it's flat to down a little bit is what you're inferring here? Okay, fair enough. And then maybe just looking beyond 3Q because I know you guys have a lot of visibility given Pricing environment where you see ASPs trending and margins also for CSI Solar in Q4 and then maybe into early next

Speaker 2

It's a big question. Wei Yan, you want to comment first?

Speaker 3

Yes. Well, I think, first of all, everybody would agree that in Q4, the demand will come much stronger, so overall demand. That includes both the DG market, especially the residential market has been really down since Q2, Almost globally. So that after the destocking, as we mentioned about, Moving to Q4, it's going to come back. And the utility scale is going to have a rush in Q4 as well.

Speaker 3

So we're going to see a very strong demand. And so that may cause certain rebound on upstream cost. However, At the same time, we are observing a rapid ramping up of Topcon sale capacity. The sale price has been staying high in Q2 and until now. So moving into Q4, we're going to see Significant more supply on top comp sales in the industry.

Speaker 3

So we think We're going to see it's going to be a rebalancing time, but Q4, Although it's uncertain, but we see a chance for improvement. And also for Canadian Solar in specific, We have a pipeline of utility scale storage projects. That's going to be we're going to start to ship in 2nd half, Most of that volume is going to be in Q4. So I think The worst may have passed.

Speaker 6

Okay, fair enough. And maybe 2 last ones, then I'll Pass it on. I jumped on late, so maybe I missed it. But did you provide any update on the plan to ship 1 third of 2023 volume as Topcon Technology. And then also, I think you delayed, the cell and module capacity expansion From 1Q 'twenty four to 4Q 'twenty four, if I see the if I'm reading the press release correctly, could you maybe speak to what's driving that and what the Expected ramp is from March to December.

Speaker 6

Is it going to be linear? Or how should we model that? Thank you.

Speaker 2

Yes, Brian, this is Shao. We didn't delay any of our solar cell project. However, right now, the equipment supply is quite tight. Also some of the crucial parts, for example, the quartz tubes, Not only is the quartz crucible, but quartz tubes supply is also tight. So as people are moving switching From PERC to Topgolf, there are some lease on bonds, I would say.

Speaker 2

But our target is still the same. We are ramping up about 30 to 40 gigawatt of Topcon as we speak. We have close to 20 gigawatt of Perks, capacity right now and as I said, we are ramping up around 30 to 40 gigawatt dotcom as we speak. Yes. So after that, we will have 2 once we finish the ramp up, 2 third of our Capacity will be Topgolf.

Speaker 2

And we also plan another project, Topgum project, 10 gigawatt project. And so altogether, by that's why by end of next year, The CRO 68 to 78 gigawatt of top cost. It's not the ramp up is not linear because once you Complete facility, you'll start to install those machines. And so once the machines are tuned up, then you will see A bump of the leap of the cell capacity.

Speaker 3

Yes. And in Q4, our top count capacity is going to be Significantly higher than Q3, and therefore, the top count shipment in Q4 is also much higher. So as Sean mentioned, it's not a linear. It's a jump in Q4.

Speaker 6

Okay. Thanks for all the color guys. I'll pass it on.

Operator

Thank you. Our next question comes from the line of Philip Shen with Roth MKM. Please proceed with your question.

Speaker 7

Hi, guys. This is Matt on for Phil. Thank you for taking the First, I just wanted to ask when shipping to the U. S. Market this year, have any of your modules been detained by CBP in 2023?

Speaker 7

And then secondly, on a different topic for the U. S. Module facility that you guys have announced, where do you expect to source the cells and wafers That facility and then are there eventually plans to have U. S. Seller wafer and what would it take to make that decision?

Speaker 7

Yes,

Speaker 2

Matt, this is Sean. I will answer this question. In 2023, we haven't done Any of our modules contained by CPP. And second, we will use our Thailand Solar Sean for San Antonio to supply to the our factory in Mesquite, Whiskey, the county of Dallas. And we are looking to the physicality of

Operator

Thank you. Our next question comes from the line of Colin Rusch with Oppenheimer. Please proceed with your question.

Speaker 8

Thanks so much guys. Could you

Speaker 4

give us a sense of how

Speaker 8

the shipping expenses are going to trend Through the balance of the year and the full impact on the SG and A, we think about the operating leverage as we go forward?

Speaker 2

Yes. Yan, do you want to comment on this question? The shipping And its full impact on SG and A?

Speaker 3

Yes. So the shipping cost came down in Q2. And in Q3, it's kind of Stabilizing and some lines may go up, some lines most are stabilizing. And we're actually, As we mentioned as I mentioned before, we signed we're signing a long term contract to secure The shipping space at low cost. So we believe that our shipping cost will remain at lower level.

Speaker 3

So we're helping continue to help on our SG and A.

Speaker 8

Okay. I'll take the rest offline. And then on the battery side, there's an awful lot happening from a battery chemistry perspective, As well as PAC design perspective, can you talk about the cadence of evolution of your products and how much R and D or Incremental design changes are being implemented right now and kind of the evolution of that as you look at your pipeline? Development is going to be ongoing and more in the future focus effort.

Speaker 2

Yes. As you know, we use the LFP battery, mainly use the Pete, to instruct our battery energy storage system. Our Main product, the our killer product right now is the 3 megawatt hour So bank and but we are developing new product. Now we are not releasing the new stock yet, but the new product will have much higher Power density, but also much higher safety. And so in terms of the Chemistry, we believe in the lithium battery chemistry, So we are not looking for any major change on the chemistry yet, but we are developing Designer developed new product.

Speaker 4

Thanks so much guys.

Speaker 2

Thank you, Collin.

Operator

Thank At this time, I'm not showing any other questions. I'll turn the floor back to Canadian Solar's CEO, Doctor. Sean Chu. Please go ahead.

Speaker 2

Right. Thank you and thank everyone for joining us today and also for your continued support. If you have any other questions or would like to set up a call, please contact our

Operator

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.

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