Canadian Solar Inc. (CSIQ) 21st Annual Needham Growth Brokers Conference (Transcript)

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About: Canadian Solar Inc. (CSIQ)
by: SA Transcripts
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Earning Call Audio

Canadian Solar Inc. (NASDAQ:CSIQ) 21st Annual Needham Growth Conference January 15, 2019 4:50 PM ET

Company Participants

Huifeng Chang - SVP and CFO

Steven Pan - Head of Financial Reporting,

David Pasquale - IR Advisor

Mary Ma - Supervisor, IR Department

Conference Call Participants

Unidentified Analyst

All right, get going here. Welcome to NGC. I'd like to introduce Huifeng Chang, SVP and CFO of Canadian Solar.

Huifeng Chang

Thank you, [indiscernible] for inviting us to be here. And I don't know if there are shareholders in the room I need to thank but before I start I like to introduce my colleague our Head of Financial Reporting, Steven Pan; and then David our IR Advisor and Mary Ma, our Supervisor of the IR Department.

I just flew in from Dubai this morning, so I am going to give safe harbor trying to do my best. So there is a standard Safe Harbor statement in our presentation. I am going to read it. So I like to give you a - and then quickly give you an update about what's going on in the solar sector.

I would say three things, number one the market sentiment marginal demand of pricing has now been as bad as people thought after China's policy change at the end of May 31. Cost has declined significantly. ASP has also declined but the margin is probably better than what people expected earlier.

And then second on the project installation side, we see demand from all over places in the world and our pipeline has been stronger than before. On the policy side, the Japanese government METI they finalized their policy, and makes it better than the earlier version and on the U.S. side to my best of my knowledge there hasn’t been any new bad news so that's all I think.

For the solar factor for many years it’s been supported by government subsidiary for the better climate, for better air quality. However I would say since the decline of ASP and the cost in 2018, we have reached a point of grid parity for many places in the world.

This LCOEs delivers cost of energy from solar as competitive compared to natural gas, coal et cetera. So for that reason many places in the world are installing solar panels and this is a growth of the solar installation each year for the last 10 years and it keeps growing. But people ask the question, yes looking to the past it has been growing strongly but how much potential it can grow.

This slide tells us for the entire energy space so far actually solar accounts only about 2% of the total, and there is a potential to grow into 10% till 2030. The major markets are China, U.S., Japan et cetera.

In Germany, solar now accounts for about over 20% of the total production. So there is a huge room to grow for the next 10 years. Now the position of our company creating solar in this sector has been stronger than ever before. We have 12,000 employees worldwide. We have production spaces in China, in Thailand, in other places. And we have sold the products into close to 100 countries, we are operating, we are building projects in over 20 countries.

If I have to summarize what's unique about Canadian Solar compared to our peers, I would say there are three things very unique to Canadian Solar. First of all, we are truly a globalized company. The talent and the management has a global frontline. For example, our top 50 managers there are more than 25 nationality in the top 50 managers. And the top management mostly Chinese who are educating in the West who lived in the West more than the time they spend in China that's why it can culturally, very comfortable developing new business in new markets.

And the second we have only solar manufacture successfully build a significant size of project business. At this point roughly speaking more than one third of our revenue comes from our project business but more than 70% of profit comes from project business.

Unidentified Analyst

The project business that you build claims from others or you’re building themselves?

Huifeng Chang

Building themselves.

Unidentified Analyst

Building themselves.

Huifeng Chang

Yes, we do have new deals actually starting very recently it’s like we build and transfer. We are hired to build for other developer, yes especially in the U.S.

Unidentified Analyst

But the older that you build, you own and then you sell the do you operate and you sell them?

Huifeng Chang

In some cases we will become the own and operator for our client and sometimes the buyer they have their own operator. And also third strength of our company is we have been profitable. We have been profitable since third quarter 2013, now 20 quarters quarter-after-quarter we have been made a profit. Expect for one quarter when U.S. Department of Commerce made a calculation mistake on the ABCBD tariff but later on they corrected that.

You see that we have built a significant project business. Our project business started off in Canada around 8 years ago. And then later on we got into new markets we got in Europe, Japan and recently we got into three years ago we brought recurrent energy and then we kind even play in the U.S. market and 2016 we started a project in Brazil, and now we are everywhere in the Americas from Canada all the way to Argentina actually right now we are building 120 megawatt project in Argentina, and then we are building projects in China all the way to Australia from Europe to South America, and we have never failed on any project even single one project.

The utility scale project in the U.S. has presented a big opportunity for the coming three to five years. We have late stage pipeline over [indiscernible] late stage I mean the PPA or the off taker side and we have the interconnection permit ready and future there will be built in the next step two to three years.

Also last four the PPA rates it depends on the state year California somewhere I would say recently around maybe $0.08 per kWh but Texas much lower. But the economics equation for us is still the same, we want to make a profit on the project.

Unidentified Analyst

So you’re not selling the power you are just selling?

Huifeng Chang

A little bit of project margin correct.

Unidentified Analyst

Do you get sense that these higher - customers getting on those projects?

Huifeng Chang

The concept of IRR, IRR is a written concept and the project business sometimes it’s very difficult to define because the numerator can change and the duration of the numerous various project by project. Now I’ll later on explain to you how we do the financial modeling and we are moving away from the build and hold and the sell model to sell before built. So the time we invest on capital is very short and also varies project from project.

Unidentified Analyst

So do you have to permitted these before you sell it so that's the plan?

Huifeng Chang

Absolutely, yes. We have all the permits ready and permits and also PPA ready and then we find a buyer and then we sell them or build them. In that case, our capital committed to the projects can be mineralized.

Unidentified Analyst

So you're more of a developer than you're an engineering company - developer?

Huifeng Chang

Yes.

Unidentified Analyst

And then you sell it but [indiscernible] not like you're hired by someone to go build this?

Huifeng Chang

Correct. And sometimes we hire EPC company to manage our project for us.

Unidentified Analyst

Okay. So you hire EPC company?

Huifeng Chang

Yes. And now since - I think last year we have seen more and more opportunity in the PV Plus battery storage. In the last fall we announced that we have won the largest PV Plus battery storage prize in the future of U.S. in California. Going forward we'll be doing more PV Plus battery storage and that will present a huge opportunity for us to come.

Unidentified Analyst

What was the PPA range for battery process - solar process?

Huifeng Chang

I cannot speak for specific project but latest news from Hawaii, which is my home state, I think it's about $0.12 per kWh, but going rate for electricity on the island of Oahu is about $0.25 per kilo watt and Maui is about $0.45. So very, very competitive.

In Japan we have built a huge pipeline. Right now we have some [indiscernible] pipeline. In the fall of 2017, we have successfully packed our operating assets and get it listed on the Tokyo Stock Exchange, we call it gateway [ph], it's similar to the real estate rate, but the FFO behind is a lot of solar project.

So we now have that financial vehicle anytime we finish a project between drop into fiduciary rate and then monetize the assets.

Unidentified Analyst

That's only your Japanese projects?

Huifeng Chang

For the Japanese projects. In theory we can also drop certain projects outside Japan into that financial platform.

Unidentified Analyst

And trade in Tokyo?

Huifeng Chang

Yes. That's called CSIF [ph] entity now has a market cap a little over US$300 million, and we still own about 15% to 20% of the total. And we are the manager for that entity. So since we got into the Brazil market 2016 after we completed three big projects, we continued to add on more projects into pipeline and now we're moving to - we're moving to Argentina. And so far even though the PPL rates are low but we've been able to make a profit because there the cost of the land is lower and also the interconnection process is much easier than U.S.

Now move to our manufacturing side. We have been always the top tier manufacturer in the solar space. However we have a strategy of a reverse pyramid that is for example as of now for 2018 we have close to 94 [indiscernible]. But our cell capacity is only about 60 gigawatt and wafer about five. Of course we have to procure certain volume of cell and wafer from other manufacturers.

Now why is that? The idea behind is for risk management especially in the low tide time. If the demand becomes a problem we can just reduce the module capacity which is a very cheap and procure less from other manufacturers. So this strategy has been very successful that's why our financial performance in the last 20 quarters have been very stable.

Going forward, we are inclined to build more capacity on the downstream which is a module but as a reasonable pace. We never go for growth-for-growth or growth for market share. We always see profit as a priority. So we will remain as a - capacity wise we will remain as the tier one player, but profitability is the number one priority for us.

Technology wise we have invested heavily in R&D. Right now the average investment in R&D is about US$40 million, US$50 million, and for that our concentration is on the module side. We have a lot of - have rolled a lot of innovative products and we will remain competitive on the cost side. However our quality and also performance on our part will be much better than the peers.

People ask the question, what is the limit, what is the cap for energy efficiency, what's the energy conversion ratio the technology can possibly achieve? From this chart we see what happened in the history, the cell efficiency has been always improving. And then in the next two years for the Mono-PERC we'll be exceeding 23% [ph].

Our management team has been very stable. The top of management from CEO and also SVP, mostly share the same benchmark. We left to China in the 1980s for all kinds of PhD degree in the science field. And later on we come together, joined the company and the team has been very stable. Actually related to change is my joining into the company as a CFO, but before that I've been [indiscernible] for about 18 years.

And our board has been all Canadians and people who have deep knowledge and compliance in capital market. We have been listed on NASDAQ since 2006 and we have seen a lot of changes. However Canadian solar has become stronger and stronger in the solar space.

So from here I'd like to give the podium to Steven. He is going to walk you through our financial numbers. Steven?

Steven Pan

Okay, let's start from the income statement. You can see that we did very good in Q3 numbers. Actually you know our numbers for the entire 2018 were good. Revenue for the third quarter was US$768 million, and our gross profit for the third quarter was around $200. Gross profit margin was 26%. For our module business, module and system solutions business the margin was around 23.4% excluding the AD/CVD reversal.

The margin for our energy business was around 28% in the third quarter. But the higher gross margin for our MSS business was benefited from our continuous focus on the profitability of volume shipment. What is worth mentioning is that as a personal comment we have been profitable for nearly 20 quarters in the past excluding the AD/CVD charges.

This is the financial performance of our two business segment, module and system solution and our energy business. You can see from this fact that our third quarter out of the 768 million revenue, around 30% [ph] of it came from our energy business for nine months ended September 30, 2008 around 43% of our revenue was came from our energy business. We have been monetizing the project in the U.S. in Japan, in U.K. and in China to recycle our capital.

This is our operating expense as of the net revenue. You can see that for the 2016 and 2017 the percentage was around 11% for the policy use and the company is trying to improving efficiency and capital on a all path in this year.

This is our guidance for 2018. For the shipment side we focus that we can deliver 6.3 gigawatt to 6.8 gigawatt and for the revenue we are in the range of the 3.5 billion to 3.6 billion, this is above. Do you any questions?

Question-and-Answer Session

Q - Unidentified Analyst

Coming back to the IRR question, right now it doesn’t affect you specifically but from my point of view if the owners of the asset are not getting appropriate returns in the long-term what that demand in solar developing. And so from my point of view I think solar developers getting unrealistic returns that are not sustainable like 4% or 5% maybe professional funds that works but that remains kind of least for the market. So the rising rate environment as of - peaking rates like sub $25 from…

Huifeng Chang

Yes for the developers the IRR concept is hard to be [indiscernible] buyers for the investors into IRR is the benchmark. I have met few important transactions selling asset to our clients back in the U.S. call it for transaction, there is transaction by transaction but overall running now the IRR benchmark is somewhere around 6.5% on IRR yes. So it is indeed much lower than three or four years ago when I joined the company the IRR when we sold assets it was around 9 percentage.

And so it declined significantly for a reason the buyers start generating in the last three years have made a significant expansion. And you are seeing companies pension fund, insurance companies they are become very active into solar assets for a reason because first of all the duration is long. Second is through years realized the actual performance later on has matched the model earlier very well because the solar radiation for tomorrow is uncertain or next week is uncertain but for the next one year or three year it’s very certain.

So people like to buy first of all real assets long duration and with content cash flow so that is the backlog. I see late last year even the sell side are lost in purchase JPMorgan those facts, now they build internal investment good talking to people like us for assets, for pipeline they want to invest in for their clients.

Now back to your question why the rate can go such a lower level. I think one factor is supply/demand. Now supply capital is based is significant however supply access for many reason such as trade war into modifies men higher than off tariff, the higher than we expected earlier.

So indeed a lot of regional developer they have suffered in the last one and half years and some of them selling them like talking to people like us, okay. And then in terms over the long-term interest rate people have begin to believe - myself believe that the world again now back to something which grows and then even U.S. the federal fund rates probably is not going to be "non rise'' to 5% or 6% range maybe remains in this 3% range and possibly even go lower.

The entire world has plenty capital so our capital planning the prior year capital which is interest rate is hard to go higher. So assets with counter cash flow becomes something they are attractive to especially pension fund who has long duration liability to match so that's why we find this need and opportunity.

Unidentified Analyst

6.5 our numbers, would consider it all leverage that we see to our numbers but we order alternative investors?

Huifeng Chang

For the owners yes they have act like repeat, so they are also back to back the investor and then they can tolerate lower level. For those that few equity/equity investor and then of course their retaining rate is lower because they have to find a counter party on the contracting side. But overall there is also a possibility that going to the future by repowering the value of owning demand, only interconnection can be doubtful yes.

You’re right the CPR rate are going downwards but the modify is also going downwards but to the second point, I don’t personally believe because our solar accounts for only about 2% of the total in the U.S. So there is a power of competition from solar so that it does not have to go further lower but to grow in the U.S.

Unidentified Analyst

Yes, California and let me just correct timing on the [indiscernible] for the first time we are entering winter in California in places turn to negative till today and that becomes solar process?

Huifeng Chang

Otherwise probably battery storage it will be quick.

Unidentified Analyst

It's not question of if it will have to yes because 30 percentage is incremental solar you add today your effective power you’re driving passed on right because [indiscernible] when we're not consuming enough power to give today. Like I take power I get paid to take power in California then we sell [indiscernible] perfectly we will be able to do that [indiscernible]?

Huifeng Chang

Any other question?

Unidentified Analyst

And your modules are pure commodity?

Huifeng Chang

Module actually every brand or every set product is different at least once difference is profitability that is the confidence the market is special funding to institutions in the company the manufacture. Can the company be around 30 years later so that’s why even though in certain markets such as India and China, the competition is very tough. But in certain markets people care about the project life 30-years beyond and they like to buy products from company like us because we have a very strong [indiscernible]. And then [indiscernible] will be around and they are willing to finance the project and also the insurance company are willing to give sort of warranty for certain years.

Unidentified Analyst

There are no other questions, that’s it.

Huifeng Chang

Thank you very much.