Ladies and gentlemen, thank you for standing by. Welcome to Canadian Solar's Second Quarter 2016 Earnings Conference Call. My name is Michelle 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 would now like to turn the call over to Mary Ma with Canadian Solar's IR Department. Please go ahead.

Thank you, operator, and welcome everyone to Canadian Solar's second quarter 2016 earnings conference call. Joining us today on the call are Dr. Shawn Qu, our Chairman and Chief Executive Officer; Dr. Huifeng Chang, Senior Vice President and Chief Financial Officer. Before we begin, may I remind our listeners that in today's call, management's prepared remarks will contain forward-looking statements, which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from management's current expectations and therefore we refer you to a more detailed discussion of the risks and uncertainties in the company's Annual Report on 20-F filed with the Securities and Exchange Commission. In addition, any projections as to the company's future performance represent management's estimates as of today's call. Canadian Solar assumes no obligation to update these projections in the future unless otherwise required by applicable law. At this time, I will like to turn the call over to Dr. Shawn Qu. Shawn, please go ahead.

Thank you, Mary. We appreciate everyone taking their time to joining us today. We thank you for your continued support. We understand the recent volatility in the market has created a lot of concerns among investors and analysts. I do not want to dismiss these concerns. However we have seen the headwinds coming early enough, we have prepared for it. Ever since March this year, we have been telling our shareholders and analysts that Canadian Solar's objective this year is to play safe, not to grow our market share that would improve our margin structure. One thing I have learned since founding Canadian Solar 15 years ago is that the market has gone through many cycles and in each of the past cycles, we have come out stronger. I can say with great confidence that Canadian Solar's business is strong. Our financial position is healthy and our prospects are good. We remain in early stage of solar energy adoption across the globe with our key markets significantly underpenetrated. We have a sound strategy for continued success. My job and focus at Canadian Solar is to ensure the health and success of the company over both the near and long-term. We must always implement and execute strategic initiatives today that needed to ensure our health and success in the future. As company's largest shareholder, I can assure you my attention and focus is on the success of the company and on building shareholder value. In terms of the second quarter of 2016, our results again trending above guidance on shipments, revenue, and gross margins. We are tracking strong demand for Canadian Solar's products and services. Our results continue to reflect the strength of our competitive position in the solar modules and downstream total solution businesses. In Q2 sales to Americas represented…

Thank you, Shawn. Before I go into the financial results of Q2, I would like to reiterate our discussion to halt the YieldCo project. This decision came after a prolonged period of waiting for a green light from the market, but the market remains unfavorable and now we have decided to move forward to monetize our assets. And I'm happy to report we have made progresses, for example, in July, we signed agreement to sell two projects in China. And meanwhile, we have been taking multiple approaches to monetize our operating assets in other countries, such as the U.S., Canada and the UK. We are committed to strengthen our balance sheet. For the second quarter, net revenue was $805.9 million, up 11.7% sequentially and up 26.6% compared to year ago. Revenue for the quarter was well above our guidance of $710 million to $760 million, driven by stable ASPs and demand out of the U.S. and our other key markets. Gross profit of Q2 was $138.5 million compared to $112.5 million in Q1, and $96.5 million in the comparable period of last year. We benefited from the combination of strong demand for our modules, better than expected selling prices, and a solid cost control at our factories. Gross margin in Q2 was 17.2% compared to 15.6% in Q1 and 15.2% in Q2 of last year. Total operating expenses were $98.9 million in Q2 compared to $74.1 million in Q1. The increase was primarily due to the higher professional service expenses and non-recurring items, including the $10.8 million write-off in deferred expenses related to our now terminated YieldCo launch and a $7.6 million estimated loss related to the tornado damage. Income from operations was $39.6 million this quarter compared to $38.4 million in Q1 and $32.5 million in Q2 of last…

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Your first question comes from the line of Mr. Colin Rusch from Oppenheimer. Please ask your question.

Thanks so much. Shawn, you've gone -- you mentioned and you've gone through a couple of cycles with this industry, and you're preparing for the tactical moves that you need to make to work through the downturn here. And you've always been kind of candid about what's happening with the industry. Obviously, 3Q guidance is solid here, but as you look into the back half of this year and early part of next year, what do you see in terms of demand, particularly in China, and global demand for modules? And how do you -- how you plan to manage that as we go forward?

Yes, Colin. I think this time, we prepare -- we have prepared ourselves much better than in the past. In the past, we don't have much command of the price and channel. And today, we have got very extensive sales channel, much more diversified and we believe -- I believe that we have seen the headwinds way before it happens. So we have been preparing for ourselves. For example, in Q2, our whole Q2 theme is to control inventory. And as a result, you see that we significantly reduced our inventory from Q1 level to Q2 level, so we are prepared for that. And Colin, if you remember, some of our past discussions I mentioned that even in the previous downturn, and the worst of quarters, let's say in 2011 or 2012, right? If you don't have inventory problems, if you don't have that, if you buy the material today, making order -- a solid order today, you still make money. This is a situation we observed today as well. Although the ASP have trended down ever since July, but if I buy the wafers, or even buy solar cell today, I'm turning to module, my cost is still way below the quoted modules in the market this day. So it's still the same that if you can maintain a good control of inventory, you will still be able to make money, even in a downturn. That seems to be the situation as of now. And you're talking about the market demand. The demand is actually there. For example, U.S. product demand is there. And also in China, the Chinese NEA, the National Energy Agency, have released the project quarter for this year, the so-called regular quarter and a so-called they call what leader quarter our new technology quarter or something like that. And also, if you add it together, still around to like over 20 gigawatts. So the demand is there. However, when you have a -- in a downtrend of the price, sometimes the customer want to wait because you don't know where is the real bottom, so there might be waiting game which expect -- which affect quarter-by-quarter, for example, the customer all have orders in September, now they may want to wait until October, and if they can still delay, they may wait till December or even well January and February, who knows. So there can be some waiting game, which is not that easy to figure out, whether -- but I think if you look at overall, if you look at let's say Q3, Q4, plus the Q1, Q2, next year together, I think it's still the same demand. But a customer may wait for a couple of weeks or even a couple of months. This is not something someone can easily predict. But we think we are still -- have realistic like reasonable chance to achieve our annual guidance.

Okay, perfect. And then two project related questions, if you can talk a little bit about the process for monetizing the Japanese projects, I'd love to hear just an update on where you're at with that? And then secondly, you've got this project pipeline in North America that needs to be monetized and certainly in a downturn and if you're conserving cash, you may slow that down. I just want to hear how you're planning to approach that pipeline with the build out in the monetization? Are you planning to find buyers before you begin construction on some of those projects? Or are you going to continue to build those things out and then monetize after they're up and running?

Sure. Japan is a bright spot, Colin. The Japanese parliament have qualified solar into the Japanese REIT, the J-REIT. So now the solar assets will enjoy the tax holiday if it's in a traded business trust. Therefore, we actually see a appreciation of the value of our Japanese assets. So our plan for our Japanese asset is to -- our first priority is to launch a solar J-REIT. In other words, a IPO, the IPO of a Japanese YieldCo, if you can call that YieldCo. But it's really a business trust, which enjoy the tax consideration of our REITs. At this moment, we think will be -- we are targeting the IPO of our Japanese solar assets, J-REIT probably in Q2 or Q3 next year. So within 12 months, if everything goes according to plan, you could see us holding, owning a Japanese solar J-REIT listed in Tokyo Exchange. And now for other assets, our strategy is to monetize our COD assets or assets to be COD, and then we'll recycle the cash and put that into new development. And our preferred strategy is to sign the asset sales agreement before NTP. So that will be our preferred strategy. Sometimes, we may proceed into NTP without a fully executed project sales plan, but we should have, already have full confidence about signing or recycling that particular asset.

Perfect, thanks so much guys. I will hop back in queue.

Thanks, Colin.

Thank you. Your next question comes from the line of Mr. Philip Shen from ROTH Capital Partners. Please ask your question.

Hi everyone. Thank you for taking my questions. Let's explore your full year guidance a bit more. During your Q1 call, your full year revenue guide included a base case, and then an upside case, on additional project sales. Given the weakness to module ASPs in the back half, does your latest full year guide of $3 billion to $3.2 billion include the extra project sales? And if possible, can you break out from the guidance, how much you set aside for project sales? Thank you.

Yes, Philip, that's a very pointed question. The guidance, let's say $3.2 billion may include more project asset sales. As we discussed in the past, our solar project asset is our buffer -- is our buffer. And those are quality assets and we can reach -- we can turn into cash and turn into revenue. So I think if the module ASP strong, let's say maintained at today's level, then -- and if we sell some more solar projects, then our total revenue may exceed the current guidance. However, if the -- somehow the module sales is not as strong, let's say, if some customer indeed want to wait until Q1 next year, then the project sale will serve as a buffer, which will help us to fill and achieve our current guidance.

Okay, that's helpful. Thanks, Shawn. In terms of the Japanese pipeline, as a follow-up here, we expect as much as half of the Japanese project backlog could become or get canceled due to limited grid connection availability. Can you just talk about how much of your pipeline has grid connection contracts in place? And then how much of your backlog could get canceled?

Now Philip that information is included in the press release. We give a very detailed countdown of how much product we already received, the grid connection, and how many project we expect to receive the grid connection before March 31 next year, it's all in the press release. And every press release, we'll update this number.

Great. Apologies I didn't see it this quarter, we got it a bit -- little bit late. Okay, so let's shift gears to one more question here.

20.4.

In terms of the U.S. project pipeline, we've seen some of your competitors talk about challenges with utility scale buyers and greater competition in the U.S. I think in your press release, you did address margins for your late-stage projects in the release but was wondering if you could provide some additional commentary as to where margins could go and what the competitive dynamics overall look like? Thank you, Shawn.

I think you're talking about the future projects, which we are bidding into the PPA, right?

I'm talking about the existing recurrent projects that you have, so of the seven projects that are expected for COD this year?

Yes. The existing projects, we already have the PPA. So the competition with the utility or whatever, it doesn't really affect the PPA of those projects. Now we do have somewhere around 3.4 gigawatts of pipelines in U.S. which we're bidding into future PPAs. We plan those project for 2017 to 2021 COD, I think. And so we will bid those projects into PPAs. You know, in U.S., there are PPAs offered by the regulated utility but also PPAs offered by the private enterprises. And some PPA request COD in 2018 and some for 2020, so we just did those projects into those PPAs. And I think because of the cost down of the solar system, not only solar module, but also in mergers, trackers, pretty much everything, so that we can -- we will continue to make money with our project pipelines. Does that answer your question?

I was actually more asking about the projects in the current pipeline that you expect the COD this year. When in turn, you expect to sell them? What does the margin outlook look like now with the possible buyers? In other words, have you seen increased competition or increased supply of projects to that buyers, they want to drive pricing down for your existing recurring projects that you expect the COD this year?

Not really. We are -- we still see, we see strong interest to the solar projects, especially operational solar projects in North America. I don't want to talk about any project in particular as I don't want to change the market dynamics. However, I want to give you one example that we recently test the market with one batch of projects, which add up to -- those are North America projects add up to a total of 100 megawatts and we received the 16 bid and bidding price, the top five bidding price all exceeded our internal expectation. So if it's good project, and stable sponsor, then you attract. The same in group of investors, and people are still very interested in the project. But the dynamic will be different if the sponsor itself is in a tough situation. For example, in the case of SunEdison, the sponsor itself is in a bad situation, therefore, from O&M to the EPC warranty wrap up, all these in linger, then, of course, the asset become a buyer sale. But in our situation, we are a strong sponsor. So everything we wrap up in good shape. So the investors are showing significant interest. I'm not saying higher price, but significant and reasonable interest to the solar asset.

Thank you. Your next question comes from the line of Paul Coster from J.P. Morgan. Please ask your question.

Yes, thanks for taking my questions. Shawn, it's probably a little bit unfair for you to be a spokesperson for the entire industry, but unfortunately I think that's what's going to happen here. So my except to your point that sponsor came through first half is unseen but it's conceivable that 2017 calendar year is a flat to down year even globally. And it's not clear to me what would spark their recovery in growth. So in such circumstances, where do you think your gross margins bottom out? I mean back in 2012, which I think is terrible; obviously, you we're in the high-single-digits. So I don't think it's going to be as bad as that. But where do you think you can -- if is it down year in volume as well as pricing, where can you stabilize your gross margin?

Our target is to, in case of Canadian Solar, our target is still to maintain a meeting gross margin. For Q3, we just guided 14% to 16% gross margin. So we're still in the meeting gross margin case. And I think we have a reasonable chance to continue to target and achieve the meeting gross margin. Paul, also like we discussed in the past, and our experience in the past cycles shows that to control the margin in a downturn. Number one, you have to be disciplined and control inventory; and number two, you make sure you don't have bad debt. So now in addition, you need a diversified sales network and also you have the right technology. I think we have all of this. And this year, this time, we have even more tough cards in our pocket in terms of technology. We mentioned a few proprietary technologies in this press release. For example, using diamond wire-saw for multi-crystalline wafering, I think we'll be the first one to introduce this technology into multi-crystalline wafers in a massive way. And so we think this will give us additional technology advantage. So I think we'll continue to more or less maintain the netting gross margin.

In the past you've had a large percentage of your cell and module manufacturing being provided by third-parties, so you've got that flexibility in the downturn, I don't think it's quite the same this time around, can you comment on that?

Well, see, this is one of our trump card to prepare ourselves for the revenue for this one. And for us to selectively increase our single wafer and cell capacity will help us to improve our margin structure. If ASP doesn't go down, then that will help us to increase our margin. Now assuming the ASP does trend down, but we are adding more internal wafer and cell capacity, this will help us to at least maintain the gross margin. Now you may ask me, hey, in this industry downturn, why do you want to add more capacity? But Paul, we discussed this question, I think last time when we met in New York. It's because the dynamic changed. These days, most of the machines for wafer and cell, and also module manufacturing are localized in China. So the CapEx investment are way, way down in the past. So the total dynamics has become different, adding a little bit capacity, as long as I can use those capacity for my own module production and not to mention that our capacity or technology give us a cost advantage now this is a plus.

Okay. My last question is a downturn, but if there is any growth to be found, it's not going to be in the typical locations, it's going to be in emerging markets probably, and in smaller markets, so the subscale generally. Can you just describe to us whether indeed that is part of your strategy going after North Africa, Middle East, Latin American nations, Southeast Asia? And if so, how do you achieve scale when it's such a fragmented opportunity?

Paul, that's a good question. There are markets where we expect a volume increase. Latin America is one example. And we are turning our module factory in Brazil as we speak. And also and I think very soon we are going to announce the partnership and finance close of our first Brazil -- Brazilian project what is 190 megawatt project, we should be able to announce the financial close and NTP very soon. And we believe we'll be if why not first, if not the first, to be able to announce a financial closure using B&BS, local financing, and to NTP, also to reach NTP of a large solar project in Brazil. And Mexico is also a bright spot. And sometime later this year, Argentina should hold its first renewable energy auction. So I do expect growth -- significant growth in Latin America. And India should continue to grow. The volume in India will definitely grow. And another spot will be -- I can see is Middle East. As you know, Dubai and I think Dubai, right, just announced a new energy auction. So we should start to see volumes, significant volumes happening in Middle East, starting from late 2017.

Thank you. [Operator Instructions]. Your next question comes from the line of Carter Driscoll from FBR. Please ask your question.

Good morning gentlemen. In light of the decision to shelve the YieldCo, do you have internally a kind of a target leverage multiple you can share with us, obviously, depending on whether you sell X number of projects or Y number of projects? But help us understand how do you think that will materially change over say the balance of this year and potentially into 2017? Thank you.

So can you repeat your question, what kind of multiple you want to know?

Looking for leverage, I’m looking for where you think through project sales you think you can recycle and monetize and bring down your current leverage that you had kind of built up in advance of the YieldCo offering. So I'm just trying to get a sense of how the balance sheet composition changes through the second half of this year and may be beyond, if you care to share that?

Yes. Well, I think that's a question difficult to discuss in a conference call. But we can probably share the model, share the numbers later on. But see many or lots of leverage is on the project, it's now will be to nonrecourse that with the project. So if we monetize the project, then the leverage of the project go with it.

70% of sales prices or value is project debt.

No. I’m just trying to get a sense as to the range whether that's changed from the past in terms of the monetization of your assets, whether that range have changed and trying to get a sense of whether there's a different pricing number embedded in there in terms of the value of the individual projects or in aggregate?

No. I think it's similar to what we experienced in Canada before. And there are some indications of value of the pipeline on the press release, and you can assume roughly 70% of the cost is project debt. That's the average for the entire pipeline.

Okay. So those parameters have really changed over to past quarter or two?

No, no.

Thank you. [Operator Instructions]. Your next question comes from the line of Paul Strigler from Esplanade. Please ask your question.

Hey guys. On the Chinese asset monetization, as I understand it, those are pretty levered assets, and you know the prices in China for project assets are not exactly strong. Would you be able to show those assets for greater than the debt -- project debt currently there is no project greater than the debt currently held by those projects?

Of course. Every project, the asset or the sales price is much greater than that. And the Chinese assets, usually the leverage is also around 70%. And some of the project actually we don't have much debt. So for every sales of those assets, we will at least recover our cash debt and also achieve a margin.

Got you. And then on the 49% stakes of the recurrent assets, the 51% stakes you sold to Southern are there any restrictions on selling those 49% stakes now that you've abandoned the YieldCo strategy? And if not, given what one of your peers in the U.S. shared about pricing for utility scale assets. I guess how do you view sort of the monetization of those assets? Are you more likely to hold those 49% until the market improves? Or are you more likely to monetize those near-term, if you can?

I don't know which solar peer company you refer to. I haven't heard anything. If you can share on this comment with me, I appreciate.

It was Tom Werner from SunPower -- it was Tom Werner from SunPower, the CEO on their last earnings call for Q2.

So what did he say?

He was saying that they're pushing up a lot of their development pipeline for 2016 into 2017 and beyond, may be because the returns that investors are requiring have edged up last year's tax equity pricing as much of an issue for your projects because severance had some equity partner. But he was saying that there we're going to people get their task down in order to sort of hit the IRR targets that large scale investors are requiring now. And I'm just wondering if you're not seeing that, that's great, may be SunPower is seeing something different?

I think -- again, I think he must be referring to the project, which they haven't closed the financing or haven't closed the tax equity yet. And for our existing project in U.S., 1.2 gigawatts, seven projects, all these projects already closed the tax equity, as you mentioned. So we don't push to 2017, and there's no reason for us to push. And after we sell the 51% to Southern, the remaining 42%, we call it B share. The B share had a cash component, right, so we sold the tax component or tax equity, whatever remaining to us is the B share, which is the cash component. But the tax component we sell to somebody who don't have the tax requirement. So actually, they are broader market. If it's tax equity, then you can only sell to U.S. companies, which make money in the past. But it's a cash component; you can sell to Chinese investors, Spanish investors, whoever comes to the table. So I don't see any like major shift there. I think people are still talking to the same IRR hurdle rates.

Great, that's good to hear. And then just my last question on sort of utilization are we pegged by, initially you were saying playbook as 2011, 2012 where utilization sort of remained high until we get closer to cash cost? Are we thinking -- are you thinking about utilization differently this time around, given the sort of ability to source cells and wafers from third-party having a lot more module capacity than integrated capacity? I guess how do we think about where do you guys might consider taking down utilization and sort of may be how that has evolved certainly the last year?

Yes. Typically, the capacity, as you know, we have wafer cells and modules and because our module capacity is larger than the cell capacity, cell capacity larger than the wafer capacity, so we have always been able to more or less fully utilize the wafer and cell capacity. So utilization ratio for those capacity will be high. If we throw down any of the cells or wafer actually must be told [ph]. We want to plan; we plan some technical improvement that will be the only reason. The module capacity, module capacity is cheap. So module -- for the module capacity, there are low seasons and high seasons. In the high season, we ran above 100%, in the low seasons, low season usually the summer season, the module capacity doesn't -- we don't use 100%, we may use just 80% or whatever of the module capacity during let's say the summer season.

Great. Thanks so much.

Yes and also further to your question, we just mentioned that by the end of this year, our module capacity will be probably 5.8 gigawatts. Now this year, we shipped more than 5 gigawatts, so next year, if we maintain some growth, I think our annual shipment will be close, somewhere close to 5.8 gigawatts. So I believe as long as we are cautious enough and be thoughtful, we build our factories, we should be able to maintain a reasonable utilization rate for our capacities to 2017, 5.8 gigawatts of module capacity we are not going to waste so much of that. But also -- as I mentioned, every year, there's high season and low season. In the low season, then for the module, the utilization is now going to be 100%.

Thanks so much guys.

Thank you. We have time for one more question from Min Li.

Yes. Your last question comes from the line of Min Li from CICC. Please ask your question.

Hi, Shawn. I want to ask you additionally about your project in China, you have above 180 megawatts of projects in China right now. So do we have any account receivable issues with the Central Government especially on the subsidy side? And also within a current high curtailment of renewable energy in China, first think you will make it more difficult for you guys with this solar project in China and to potential investors? Thank you.

Yes, Min, we would like to refer your previous colleague to answer this question, if you don't mind.

Okay, I'll first thank you.

Okay, hi Min how are you. Long time not seen. First of all, I understand that there's a lot of concern in the market regarding the solar assets, solar project in China. And clearly understand the reason behind. However, there are something I think the Street missed to see. In particular for Canadian Solar, our exposure to the Chinese downstream actually very limited, altogether about 200 megawatts. And then second, at each project level we're putting about 30% of our equity and 70% of our backlog. Of course, they are resourceful. However, after we complete the project, for example, the two projects we already signed to sell that then even though on those two projects, they are overdue government subsidies, we haven't received yet, however, when the transaction happens, all these debts go to the buyer. In other words, we get all the overdue to payment back; we get all that cash, all the investment back for a profit. Now I cannot comment on specific project and I cannot tell you more about the price because we are working on other transactions. We don't want to give our buyers more look into our previous deals that I can tell you that there are a lot of buyers out there; mainly either SOE or local government tobacco companies and they have a lot of liquidity injected from local government because the central government wants to stimulate the economic growth. But the local government don't have many opportunities to invest into and they believe that solar asset is a safe place to be. So like the one that we are dealing with it's a publicly listed company, but the largest shareholder is a local government, and then we are talking to several of them more for our other projects.

Thank you. There are no further questions at this time. I would now like to hand the conference back to Canadian Solar's Chairman and CEO, Dr. Shawn Qu for closing comments. Please continue.

Yes, thank you very much. Thanks, everyone for taking time to participate, and we hope you all have a great day. And wherever you are, enjoy the weather, enjoy the day. And let's all together enjoy a wonderful solar industry. Thank you.

Thank you.

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