Canadian Solar Beats 2Q Earnings and Revenue Estimates

GUELPH, Ontario — Canadian Solar Inc. today announced financial results for the second quarter ended June 30, 2019.

Second Quarter 2019 Results

Net revenue in the second quarter of 2019 was $1,036.3 million, compared to $484.7 million in the first quarter of 2019, and $650.6 million in the second quarter of 2018. The sequential increase was primarily due to higher solar module shipments and higher revenue from the sale of solar power plants.

Total solar module shipments in the second quarter of 2019 were 2,143 MW, compared to 1,575 MW in the first quarter of 2019 and second quarter 2019 guidance of 1.95 GW to 2.05 GW. Total solar module shipments in the second quarter of 2019 included 65 MW shipped to the Company’s utility-scale solar power projects. Module shipments recognized in revenue in the second quarter of 2019 totaled 2,376 MW, compared to 1,423 MW in the first quarter of 2019 and 1,454 MW in the second quarter of 2018.

Gross profit in the second quarter of 2019 was $182.6 million, compared to $107.4 million in the first quarter of 2019 and $159.4 million in the second quarter of 2018. Gross margin in the second quarter of 2019 was 17.6%, including the benefit of an AD and CVD true-up of $21.6 million, or 15.5% without the true-up benefit which represents the non-GAAP gross margin, compared to 22.2% in the first quarter of 2019, and 24.5% in the second quarter of 2018, including the benefits of AD and CVD true-ups of $25.8 million in the second quarter of 2018, or 20.5% without the true-up benefit. The non-GAAP gross margin achieved in the second quarter was higher than previous guidance of 13.0% to 15.0% primarily due to lower blended module manufacturing costs and slightly higher than expected average selling price of solar modules.

The Company’s Module and System Solutions (MSS) business comprises primarily the design, development, manufacture and sale of solar modules, other solar power products and solar system kits. The MSS business also provides engineering, procurement and construction (EPC) and operating and maintenance (O&M) services. The Company’s Energy business includes primarily the development and sale of solar projects, operating solar power projects and the sale of electricity. Module sales from the Company’s MSS business to the Energy business are on terms and conditions similar to sales to third parties.

The Company develops solar power projects worldwide. Where applicable, the Company may apply for and/or be entitled to receive a feed-in tariff (FIT) for its projects. Alternatively, the Company may participate in public or private energy auctions and bidding, which result in long-term power purchase agreements (PPAs). The Company may also sell all or part of the electricity generated from its solar power projects on the merchant power market. Due to the relatively long lead times (two to four years) required to develop solar power projects and bring them to a commercial operation date (COD), the actual gross margin of a project may deviate from the expected gross margin. The deviation may be caused by, among other things, changes in the political and economic conditions in host countries, project specific conditions, price movements of solar modules and other components, changes in the cost of EPC services and the capital return requirements of solar asset buyers. In recent years, the Company has sold some solar power projects before COD. We typically refer to these sales as “notice to proceed” or NTP sales. In NTP sales, revenue is lower while the gross margin percentage is higher than in COD sales, even if the absolute margin is the same. Results from the Company’s Energy business may be lumpy from quarter to quarter, depending on whether projects are sold at NTP or COD, project sale transaction dates and the profit level of each project.

The following tables provide selected financial data for the Company’s MSS and Energy businesses:

 

Total operating expenses in the second quarter of 2019 were $121.9 million, compared to $100.8 million in the first quarter of 2019 and $105.5 million in the second quarter of 2018.

Selling expenses in the second quarter of 2019 were $45.4 million, compared to $37.9 million in the first quarter of 2019 and $40.3 million in the second quarter of 2018. The sequential increase was primarily due to the increase in shipping and handling costs and project transaction fees associated with the higher quarterly revenue level.

General and administrative expenses in the second quarter of 2019 were $65.7 million, compared to $51.4 million in the first quarter of 2019 and $56.4 million in the second quarter of 2018. The sequential increase was mainly due to the impairment of $9.7 million for certain manufacturing equipment, as well as a $2.9 million increase in bad debt provision.

Research and development expenses in the second quarter of 2019 were $12.1 million, compared to $13.2 million in the first quarter of 2019 and $9.1 million in the second quarter of 2018.

Other operating income in the second quarter of 2019 was $1.3 million, compared to $1.7 million in the first quarter of 2019 and $0.3 million in the second quarter of 2018.

Income from operations in the second quarter of 2019 was $60.7 million, compared to $6.6 million in the first quarter of 2019, and $53.9 million in the second quarter of 2018. Operating margin was 5.9% in the second quarter of 2019, compared to 1.4% in the first quarter of 2019 and 8.3% in the second quarter of 2018.

Non-cash depreciation and amortization charges in the second quarter of 2019 were $39.7 million, compared to $37.6 million in the first quarter of 2019 and $30.2 million in the second quarter of 2018. Non-cash equity compensation expense in the second quarter of 2019 was $3.5 million, compared to $2.4 million in the first quarter of 2019 and $3.3 million in the second quarter of 2018.

Interest expense in the second quarter of 2019 was $20.7 million, compared to $21.7 million in the first quarter of 2019 and $26.6 million in the second quarter of 2018.

Interest income in the second quarter of 2019 was $4.5 million, compared to $2.0 million in the first quarter of 2019 and $2.9 million in the second quarter of 2018.

The Company recorded a loss on the change in fair value of derivatives in the second quarter of 2019 of $12.5 million, compared to $1.3 million in the first quarter of 2019 and $7.6 million in the second quarter of 2018. Foreign exchange gain in the second quarter of 2019 was $16.4 million, compared to a loss of $12.6 million in the first quarter of 2019, and a loss of $2.5 million in the second quarter of 2018.

Income tax expense in the second quarter of 2019 was $14.0 million, compared to income tax benefit of $7.5 million in the first quarter of 2019 and income tax expense of $7.8 million in the second quarter of 2018.

Net income attributable to Canadian Solar in the second quarter of 2019 was $62.7 million, or $1.04 per diluted share, compared to net loss of $17.2 million, or $0.29 per diluted share, in the first quarter of 2019 and net income of $15.6 million, or $0.26 per diluted share, in the second quarter of 2018.

Financial Condition

The Company had $981.0 million of cash, cash equivalents and restricted cash as of June 30, 2019, compared to $912.3 million as of March 31, 2019.

Accounts receivable, net of allowance for doubtful accounts, at the end of the second quarter of 2019 were $454.6 million, compared to $388.7 million at the end of the first quarter of 2019. Accounts receivable turnover in the second quarter of 2019 was 41 days, compared to 91 days in the first quarter of 2019.

Inventories at the end of the second quarter of 2019 were $337.8 million, compared to $385.1 million at the end of the first quarter of 2019. Inventory turnover in the second quarter of 2019 was 40 days, compared to 81 days in the first quarter of 2019.

Accounts and notes payable at the end of the second quarter of 2019 were $926.2 million, compared to $934.0 million at the end of the first quarter of 2019.

Short-term borrowings and the current portion of long-term borrowings on project assets at the end of the second quarter of 2019 were $1.3 billion, compared to $1.4 billion at the end of the first quarter of 2019. Long-term borrowings at the end of the second quarter of 2019 were $462.9 million, compared to $433.5 million at the end of the first quarter of 2019.

Total borrowings directly related to the Company’s utility-scale solar power projects were $640.5 million at the end of the second quarter of 2019, compared to $735.0 million at the end of the first quarter of 2019. Total debt at the end of the second quarter of 2019 was $1.86 billion, compared to $1.92 billion at the end of the first quarter of 2019.

Dr. Shawn Qu, Chairman and Chief Executive Officer, commented: “Canadian Solar’s strong Q2 financial performance is principally due to the resiliency of our business model and our team’s solid execution of the business plan. Our focus on achieving improved operating efficiencies with reduced manufacturing costs across global operations, while continuing to invest in R&D to ensure long-term success, puts us in the most competitive position in the Company’s history. Overall, we are incrementally more positive in the outlook for the second half of 2019 based on the improved visibility, healthy demand levels in key markets, more stable average selling prices and higher capacity utilization levels.”

Yan Zhuang, Acting Chief Executive Officer, commented: “We are pleased with the 2019 second quarter results and continue to focus on increasing shareholder value. Solar module shipments, revenue and gross margin were all above expectations, underscoring the combined strengths of the MSS and Energy businesses. The MSS business benefited from higher capacity utilization, healthy demand levels and a slightly higher average selling price than previously forecasted. We are also encouraged with the execution on the R&D roadmap, which gives us an added competitive advantage with a leadership position in sought-after high efficiency modules. During the quarter, we signed a multi-year contract with EDF Renewables North America to supply 1.8 GW of high-efficiency modules. This module supply agreement represents the largest single module supply agreement in Canadian Solar’s 18-year history and is the latest example of the trust that our clients place in our ability to execute and deliver. In the Energy business, we completed the sale of 228 MWp projects globally in the second quarter, including 134 MWp in the U.S., 68 MWp in Mexico, 20 MWp in China and 6 MWp in Namibia. We also further expanded the global late-stage, utility-scale solar power project pipeline to over 3.6 GWp as of July 31, 2019, while maintaining a portfolio of solar power plants in operation at 795.8 MWp, with an estimated resale value of approximately $1.0 billion.”

Dr. Huifeng Chang, Senior Vice President and Chief Financial Officer, added: “Our solid execution resulted in the better than expected profitability for the second quarter. We improved the gross margin to 17.6% and delivered a net income of $1.04 per diluted share on a GAAP basis, compared to a loss of $0.29 per diluted share in the first quarter. The improved profitability was driven by lower overall manufacturing costs, higher earnings contribution from unconsolidated investees, and a foreign exchange gain. In the second quarter, as compared to the first quarter, we reduced operating expenses to 11.8% of revenues from 20.8% and reduced inventories by $47.3 million. Importantly, we generated $225.8 million in cash from operations, which allowed us to further reduce total debt and strengthen the balance sheet. We are firmly on track for continued business success as we move into the second half of 2019.”

Utility-Scale Solar Project Pipeline

The Company divides its utility-scale solar project pipeline into two categories: an early-to-mid-stage pipeline and a late-stage pipeline. The late-stage pipeline includes primarily those projects that have feed-in tariffs (FITs) or power purchase agreements (PPAs) and are expected to be built within the next four years. The Company cautions that some late-stage projects may not reach completion due to such factors as failure to secure permits and grid connection, and changes of political and economic conditions in host countries, among others.

Late-Stage Utility-Scale Solar Project Pipeline

As of July 31, 2019, the Company’s late-stage, utility-scale solar project pipeline, including those in construction, totaled approximately 3.6 GWp, with 1,565 MWp in the U.S., 508.2 MWp in Brazil, 368 MWp in Mexico, 311.8 MWp in Japan, 385 MWp in China and additional 465.2 MWp in total in Australia, Canada, Israel, Taiwan, the Philippines, Malaysia, Italy and South Korea.

In the United States, as of July 31, 2019, the Company’s late-stage, utility-scale solar project pipeline in the U.S. totaled 1,565 MWp* as detailed in the table below.

 

In Japan, as of July 31, 2019, the Company’s late-stage, utility-scale solar project pipeline, for which interconnection agreements and FIT have been secured, totaled approximately 311.8 MWp, including 94.4 MWp under construction and 217.4 MWp under development. In July 2019, two projects totaling 3.3 MWp reached COD.

The table below sets forth the expected COD schedule of the Company’s late-stage utility-scale solar power projects in Japan, as of July 31, 2019:

In Brazil, as of July 31, 2019, the Company has a 508.2 MWp late-stage, utility-scale solar project pipeline as detailed in the table below.

 

In Mexico, as of July 31, 2019, the Company has a 368 MWp late-stage, utility-scale solar project pipeline as detailed in the table below.

In China, as of July 31, 2019, the Company’s late-stage power pipeline was 385 MWp.

Solar Power Plants in Operation

In addition to its late-stage, utility-scale solar project pipeline, as of July 31, 2019, the Company had a portfolio of utility-scale, solar power plants in operation totaling 795.8 MWp. The Company records these power plants on the balance sheet as “project assets (build to sell)”, “assets held-for-sale” and “solar power systems, net (build to own)”. The proceeds of project sales recorded as “project assets (build to sell)” on the balance sheet will be recorded as revenue in the income statement once revenue recognition criteria are met. The gain or loss from the sale of projects recorded as “assets held-for-sale” and “solar power systems, net (build to own)” on the balance sheet will be recorded within “other operating income (expenses)” in the income statement.

The table below sets forth the Company’s total portfolio of utility-scale, solar power plants in operation, as of July 31, 2019 (MWp):

Manufacturing Capacity

The table below sets forth the Company’s manufacturing capacity expansion plan for 2019.

The Company’s manufacturing capacity expansion plan is subject to change based on market conditions.

Senior Management Appointments
At the beginning of Q3 2019, the Company appointed Ismael Guerrero Arias as Corporate Vice President and President of the Energy Group, and Ed Job as Managing Director, Investor Relations.

Mr. Guerrero brings over fifteen years of solar energy experience to Canadian Solar, most recently as President, Head of Origination for Asia of TerraForm Global, Inc. Before joining TerraForm, Mr. Guerrero served as Canadian Solar’s Vice President of Global Projects and led the Company’s Energy Group’s project development, sales and EPC activities. He was previously Director of Operations for Asia of the Global Sustainable Fund based in Singapore. Mr. Guerrero replaces Arthur Chien, who will continue to act as an advisor on special projects, and will report to Yan Zhuang, Acting Chief Executive Officer of the Company.

Mr. Job returns to Canadian Solar following a three-year sabbatical after serving as Canadian Solar’s Director of Investor Relations. Mr. Job has over twenty years of experience in the areas of strategic development, corporate finance and investor relations. He will report to Huifeng Chang, Senior Vice President and Chief Financial Officer.

Dr. Shawn Qu, Chairman and Chief Executive Officer commented: “I am pleased to welcome back Ismael and Ed, two former colleagues who know Canadian Solar well. Both have a proven track record of excellence in their fields. Their return will further strengthen the focus of our Energy business and bolster our engagement with the investment community.”

Business Outlook
The Company’s business outlook is based on management’s current views and estimates with respect to market conditions, production capacity, the Company’s order book and the global economic environment. This outlook is subject to uncertainty on final customer demand, solar project construction and sale schedules. Management’s views and estimates are subject to change without notice.

For the third quarter of 2019, the Company expects total solar module shipments to be in the range of 2.2 GW to 2.3 GW, including approximately 160 MW of shipments to the Company’s utility-scale solar power projects that may not be recognized as revenue in the third quarter of 2019. Total revenue for the third quarter is expected to be in the range of $780 million to $810 million. Gross margin for the third quarter is expected to be between 24% and 26%, reflecting the positive impact of planned higher gross margin project sales primarily in Japan and the U.S.  The aforementioned revenue forecast does not include the potential sales of a project that may be completed in the third quarter. If the transaction is closed in time, total revenue for the third quarter is expected to be in the range of $970 million to $1 billion and gross margin between 27% and 29%.

For the full year 2019, the Company now raises its guidance for total module shipments to the range of approximately 8.4 GW to 8.5 GW from the previous guidance of 7.4 GW to 7.8 GW. Total revenue for the year is expected to be in the range of $3.5 billion to $3.8 billion.

Yan Zhuang, Acting Chief Executive Officer of Canadian Solar commented: “At our recent Solar Future Forum in New York City, we highlighted Canadian Solar’s considerable technology leadership advantages, our efforts to lower the levelized cost of energy and long-term track record. Among other things, there was a lot of excitement around the completion of the transition of all our cell capacity to PERC, which should be achieved by the end of August. This will give us a further competitive advantage as bi-facial capacity is expanded to meet increasing global demand. In the Energy business, we look forward to monetizing the late-stage, utility scale project pipeline, which now stands at 3.6 GWp and the portfolio of utility-scale, solar power plants in operation, which currently stands at 795.8 MWp. There is considerable interest in Canadian Solar power plants given the unparalleled track record of consistent module performance and reliability. As part of these efforts, we expect to complete the sale of our 80% interest in the 482.6 MWp Brazil portfolio of solar power plants in the coming months.”

Mr. Zhuang added: “We remain committed to increasing shareholder value by executing on Canadian Solar’s strategy for both the MSS and Energy businesses, while strengthening the balance sheet. In addition, we have expanded our Investor Relations team to improve our shareholder communication. We strive to enhance the investment community’s understanding of the strengths of Canadian Solar’s business model, strategy and performance track record.”

Recent Developments
On July 25, 2019, Canadian Solar announced that it signed an agreement for the purchase of electricity from its 32 MWp/23 MWac Suffield solar facility with Direct Energy. The Suffield project, located in Southeast Alberta, is anticipated to be the largest solar photovoltaic (PV) facility in the province of Alberta when it enters operation in 2020.

On July 17, 2019, Canadian Solar announced that it was awarded a 51.1 MWp solar photovoltaic project in the Sixth Brazilian Federal Energy Auction (A-4) held on June 28, 2019. 50% of the electricity generated will be purchased by two utilities under awarded 20-year power purchase agreements, with an average contracted price of 73.60 BRL/MWh, or approximately US$19.37/MWh, and the other 50% will be purchased under a long-term private PPA.

On July 11, 2019, Canadian Solar announced that it achieved commercial operation on its first third-party EPC project in Vietnam. Canadian Solar provided solar modules, inverter stations and EPC services in a joint venture with IPC Technique JSC and SD668 Vietnam JSC for the 15 MWp Chu Ngoc Solar Project owned by Licogi 16 JSC. The 15 MWp project reached commercial operation in June 2019.

On June 6, 2019, Canadian Solar announced that it signed a module contract with Solar Century to supply 500 MW modules to Solar Century’s two projects in Spain.

On June 4, 2019, Canadian Solar announced that its wholly-owned subsidiary, Recurrent Energy, LLC signed a 15-year power purchase agreement with Energy Transfer for 40 MWp/28 MWac of electricity from its Maplewood 2 solar project.

On June 4, 2019, Canadian Solar announced that its wholly-owned subsidiary, Recurrent Energy, LLC signed 15-year power purchase agreement with Anheuser-Busch for 310 MWp/222 MWac of electricity from its Maplewood solar project.

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