Ladies and gentlemen, thank you for standing by and welcome to Canadian Solar’s Third 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 Ms. Mary Ma with Canadian Solar’s IR department. Please go ahead.

Thank you, operator, and welcome everyone to Canadian Solar’s third quarter 2016 earnings conference call. Joining us today on the call are Dr. Shawn Qu, our Chairman and Chief Executive Officer and Dr. Huifeng Chang, our Senior Vice President and Chief Financial Officer. Before beginning, 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 Form 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 would like to turn the call over to our Chairman and CEO, Dr. Shawn Qu. Shawn, please go ahead.

Thank you, Mary. We appreciate everyone taking their time to joining us today. We are pleased with our results of Q3 given the challenges facing the entire solar industry. Our team worked aggressively to offset headwinds from steep module price declines, demand weakness, capacity concerns and recent regulatory uncertainty. I will also say upfront that we view these challenges as near-term issue rather than a more prolonged deterioration of solar market fundamentals and the prospects. We remain very confident in our long-term outlook for both the industry and for Canadian Solar. Near-term volatility in the stock market does not change the fact that renewable energy sources are just scratching the surface in a single digit of worldwide penetration; lower prices of solar modules and other components ultimately means a lower cost for system ownership which will further improve the competitiveness of solar compared to conventional energy sources. In Q3, our revenue and shipments came in at the low end of our guidance, despite the dislocation of the global solar market during the quarter and the bankruptcy of Hanjin Shipping, one of the largest shipping companies in the world, which happened in September and disrupting our quarter-end logistics. Our team has effectively managed the supply chain and overall production output to offset the macro impact of solar module price decline facing the broader market. Our solar module shipments were closed to 1.2 gigawatts and revenue recognized was $657.3 million. Q3 sales to Americas represented 41% of total revenue, mainly driven by module sales in the U.S. Our shipment to U.S. in Q3 was approximately 300 megawatt. Asia represented 43% of revenue, primarily driven by solid demand in China, Japan and India. Meanwhile, Europe and other regions accounted for about 16% of revenue with strong shipments to Germany, the Netherlands, the United…

Thank you, Shawn. As Shawn mentioned, we are pleased with our third quarter results in the face of a challenging marketing environment. For Q3, net revenue was 657.3 million, down 18.4% sequentially and 22.7% compared to a year ago. Gross profit of Q3 was $117.3 million, compared to $138.5 million in Q2 and $126.8 million in Q3 of last year. Gross margin in Q3 was 17.8%, compared to 17.2% in Q2 and 14.9% in Q3 of last year. Our Q3 gross margin came in well above the guided 14% to 16%. The increase in gross margin was primarily due to lower module costs as a result of a decreased purchase price of wafer and cells as well as lower manufacturing costs, which offset module ASP pressure. We also benefited from our ongoing technology upgrade and strong inventory management. We expect to continue to benefit from improved manufacturing efficiencies following our investments in advanced production technologies such as diamond wire-saw technology combined with our proprietary Onyx black silicon multi-crystalline solar cell technology. Total operating expenses were $90.3 million in Q3 compared to $98.9 million in Q2 and $95.9 million in Q3 of the prior year. The sequential decrease was primarily due to the decrease in G&A expenses due to certain Q2 one-time charges of our terminated YieldCo launch and an estimated loss of our Funing plant resulting from the tornado in June 2016 and offset in part by product impairment charges and higher labor costs recorded in Q3. Income from operations was $27 million in Q3 compared to $39.6 million in Q2 and $30.9 million in Q3 of last year. Operating margin was 4.1% this quarter, compared to 4.9% in Q2 and 3.6% in Q3 of last year. Net foreign exchange gain in Q3 was $4.4 million compared to $24.9 million…

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

Thanks so much, guys. Can you talk about the geographic exposure for the demand through the end of the first quarter? Are you seeing significant amount of Japan in that mix and what can we expect that you work through the first part of -- or I should say after 1Q and the balance of the year in terms of geographic exposure?

Colin, this is Shawn speaking. For Q1, the silver star will be India, because many of the Indian projects have COD deadline of March 31st. Therefore, there is a very strong demand from India in Q1. And Q2, I expect China to provide silver lining as China has been talking about another adjustment date, which would be either June 30 or September 30. But we are now -- but everybody here is planning on June 30. And for Q2 and Q4, I would expect the U.S. project to gain seem. And Japan has been stable and other markets also seem to be stable; actually there is also strong demand from UK in Q1.

And then, with the recognition of these projects whether it’s 4Q or 1Q on the below the line cash. Can you just talk about the tax treatment on that; is that after tax number or should we expect in UK and Canada impact majority of that cash?

Well, if it’s Canadian project, then it’s Canadian tax; if it’s U.S. project -- if it’s China project, then maybe China tax. Those near-term projects are in Canada and China.

Okay. I am just trying to get a sense of that process, if it’s call it $55 million, should we be thinking about something closer to 30% tax rate pointed on that or should we be thinking about something much lower than that?

I am not a tax expert, but I think it’s going to be a normal Canadian tax. It’s not cash because cash wise, we do have some used tax credit in Canada but for accounting purposes, I would expect a normal Canadian tax rate.

The next question comes from the line of Philip Shen of Roth Capital. Please ask your question.

Hi. Thanks for the questions. Can you share with us what you’re seeing in terms of ASPs for Q4, as well as Q1, given that you’re fully booked for the quarter? And then, how do you expect the ASPs to trend throughout 2017?

Usually we don’t guide the current quarter ASP as we still don’t want to affect a customer’s purchasing behavior, although we have already on our book. But the Q4 ASP will be lower than Q3 because for Q3, we have some carrying over orders from Q2. So from Q2, Q3, Q4, you will see the ASP trending down but the Q1, Q2, it’s more or less at the same level of Q4. In other words, we expect Q1 and Q2 we have a stable ASP environment.

Great. Thanks Shawn. I terms of the cost structure, can you help us understand what the blended module cost structure was in Q3 and then how do you expect that to trend in Q4 and then what do you see in Q4 2017? In the past, I think you’ve talked about it hitting $0.29 a watt in Q4 2017. Just curious to see what the updated numbers might be.

Right now, we see Q4 for our cost structure maybe for the domestic insurance, the blended module cost in China will be $0.02 lower than Q3, but outside China compared to inside China will be a couple of cents higher.

Okay. [Multiple Speakers]

On blended basis our total manufacturing costs, I expect it to be close to $0.03 lower compared to the Q3 level.

Okay, great. Do you have an updated sense for where you might end up at the end of next year?

Close $0.30, but not below, I mean in the first half.

So, we guided the China based for the integrated costs to be China $0.25 by Q4 next year. I think we will be on target to achieve that. And the blended is usually couple of cents higher than the China integrated. So, if the China integrated reach $0.25, I would expect the blended could be $0.30 or could be below $0.30 just depending on the supply demand balance because for the branded costs, there for certain market fluctuations and by cell supply and wafer supply, the price will fluctuate depending on the supply demand situation. Typically, it will be a few cents from China vertical integrated provider. [Ph]

One last question here for me. You mentioned in the release a number of times the delay of the 850 megawatts cell facility in Southeast Asia. I don’t recall what the rationale for the delay was. Can you help us understand why it was, again?

It’s a construction issue, it’s on the building; the construction was delayed due to the geographic condition of that particular land. But, it will be fixed. So, the schedule is delayed for a couple of months.

Okay, great. Shawn, Huifeng, thank you very much. I will pass it on.

Thank you.

Thank you.

[Operator Instructions]The next question comes from the line of Paul Coster of JP Morgan. Please ask your question.

Hi. This is Mark Strouse on for Paul. Thanks for taking our questions. So, just one for us. Just hoping you could comment generally on gross margin. So, a lot of moving parts with ASPs coming down and costs coming down but you also have the restarts of the Funing plants over the next few quarters. So, directionally speaking, is there anything you can share on gross margins looking into the first half of next year?

Hi. This is Shawn speaking. The Q4, the current quarter, the gross margin will have the impact. So, we expect the manufacturing gross margin of the current quarter to be in low teens. It’s partially because of our -- the out of service of our own cell factory also partially because in the past several weeks, the part of the solar supply chain, the price rebound from the wafer to cell, but the module price, somehow most of the module makers have signed the module orders early on. Therefore, we are a little bit squeezed in Q4. Moving into Q1 and Q2, I expect to get back to the mid-teen range very quickly and our target is high teens to low 20, I hope by the end of next -- end of next year, we’ll be able to get back to that level.

Your next question comes from the line of Sheng Zhong with Morgan Stanley. Please ask your question.

So, I have several questions here, one is about your black silicon technology. You mentioned that you are rolling out the diamond saw slicing as well. So, basically, I want to ask you about your -- do you have any cost and cost expectation of your black silicon, actually not only in terms of the wafer cost but also of the cell level cost?

The diamond wire-saw itself we think it will be able to reduce the cost, the wafer cost and cell cost for the multi-crystalline silicon cell by $0.02 to $0.03. We think $0.02 to $0.03 is in our hand. Now, there is a chance that we can even do better than $0.02 to $0.03 cost reduction. And for the cell and module process, the cost is almost the same. So, we’ll be able to transfer that $0.02 to $0.03 cost reduction in the silicon to module level.

That’s great. So, another question on your Japanese YieldCo, can you give some more background information about the YieldCo market in Japan such as what the total project capacity like, and what the yield ratio and growth expectations of the investors Japan market? And also Japan’s FIT deadline will be April next year, so if after the deadline, will the project return in Japan be changed for you?

The demand for the solar yield of J-REIT in Japan is very high; I was there a month ago. Right now, we are planning to launch the Japanese J-REITs in either second or third quarter next year, depends on two factors. One is some internal, we need to some restructuring about the project of the business entities to enhance the tax efficiency; and the second is the Japanese government, sometime middle December, they will make a decision on some tax regulation. Now, if the tax regulation will extend as we expected, then we will probably wait a little bit longer to third quarter to launch the J-REIT, so that we can amass more projects into this launch. But if the ruling is negative, then there is a deadline end of March, we need to rush, probably launch a small J-REIT first and then in the later quarters, after we build more assets, then we will just drop down those assets into this existing YieldCo. So, right now, we have hired the bankers and hired the tax advisors in the final stage of preparing this launch. Thank you.

Yes, so about the timing. So, do you mind to give me some more information about the expected yield ratio and the growth expectation from the Japanese investors?

Since we have not launched the marketing process yet, I cannot disclose more details, but you may look at our pipeline and look at the data points in the history and then there are a couple of existing J-REITs already existing in the market. So, you can see what type of pricing investors are willing to take. So from there, maybe you can estimate what proceeds we can generate from those launches.

And my last question is -- sorry, I still have one last question, is about our project monetization. So, in this current quarter and next quarter, you are expecting to have to monetize around $500 million of your solar projects with high teen gross margin. And in meantime, you also mentioned that for your current around $915 million project, the resale value is around $1.4 billion with a gross margin around low teens. So, I guess the rest of the projects to be monetized after first quarter next year would be a majority from the U.S. market. And it looks like the margin is lower than the Canada and China projects. So, just wondering if you can give some more color about the U.S. project’s monetization gross profit outlook and what the market demand for the -- demand in the U.S. market?

We are just starting the process there, the process for the U.S. market. So, I don’t want to comment on the pricing or the margin expectation, and I don’t want to influence my potential customers. And so, let us run a process and we will let the market know once we get to the end of that process.

Your next question comes from the line of Carter Driscoll of FBR. Please ask you question.

I just wanted to follow up on a question, I mean on a comment you made earlier Shawn in your prepared remarks talking about your confidence in why the market is overestimating the overcapacity issue and maybe you could give us a little bit of color, your perception of the outdated technology, maybe quantify in your sense what the supply demand imbalance might be versus maybe the market perception. And I have a follow-up.

I think the market is really dynamic. For example, in Q3, we did see market weakness and we responded by preparing ourselves by lowering the inventory level in Q2. So, I think we partially succeeded. And therefore, we were able to maintain a relatively healthy gross margin. However, we think to be little bit -- to the conservative side at the end of Q3, so that we didn’t fully utilize our capacity or the material cost is at the low-end. And then all of a sudden, like moving into October, the demand rebounded. This shows us the demand is actually there. However, the customers were waiting, when they see the price change. But by October, the customers are also reaching the -- getting close to the COD dates so they start to purchase. That’s why I comment that the market is dynamic. We can’t say that the market is absolutely overcapacity or under capacity. For example in Q4, we easily get overbooked, and in Q1 we are also fully booked. So, the challenge is to actually predict the demand and the timing of the demand and also the supply demand balance at every step of the value chain. It’s difficult to make such an accurate prediction. So, maybe the right way is to err on the conservative side.

And then maybe just taking a step back, maybe a little bit more philosophical. If you look at obviously change in administration in the United States over the last couple of weeks, certainly has not necessarily been perceived favorably by the global energy community. What types of actions could you take if President-elect Trump were to impose some type of tariff on Chinese manufacturing? I realize a lot of it is not located there domestically anymore. But, are you concerned from a policy perspective there could be major changes or do you see them at the margin or how do you expect the next couple of quarters to play out and how do you think you can plan for that if you had such a view?

It’s too early to make such a speculation. Let’s give President-elect Trump a chance and give him -- let him articulate his policy. We don’t know yet. However, U.S. already had a 30% antidumping and anti-circumvention duty on Chinese solar modules, so how much more can they do? And there is very little shipment of solar modules from factories in China to U.S. anyway. So most of the product to U.S. suppliers either by U.S. suppliers or by the manufacturers in Southeastern Asia and also Europe. So, I don’t think duty wise, it can be any worse than this. And for other parallels -- other policies, I think we just wait for a couple of months. Whatever comes will come; we’ll see.

The next question comes from the line of Jeff Osborne of Cowen and Company. Please ask your question.

Just a couple of questions from my end. I wanted to clarify the comments on the cost structure. I think your investor presentation as of September talks about a Q4 2017 cost structure for fully integrated, so I believe the 1.3 gigawatts of capacity you are talking about, in that presentation at $0.29, and then you have a Q4 of 2020 target of $0.25. On this call, I believe you said $0.25 for the end of next year. Can you just talk about where the $0.04 improvement came or perhaps you were mistaken and were referring to 2020 target?

Let me correct myself. The $0.25 is for 2020 and $0.29 is for the Q4 2017. We might be able to do better than $0.29. Therefore, let’s say if $0.29 of fully integrated China cost, then our total blended cost will be in the low 30s.

And just so I’m clear, the $0.29 or perhaps a little bit better than, that’s only for the 1.3 gigawatts of diamond wire that you would have in place in the fully integrated, just as we try to think about the fully integrated cost?

It could be higher than 1.3 gigawatts. And after 1.3 gigawatts, we will continue and we will further ramp up the diamond wire-saw and black silicon. So, let’s wait to early next year when we provide the guidance for the capacity for 2017, end of 2017. But it’s way higher than -- I think it will be way higher than 1.3 gigawatts.

That’s good to hear. Two other quick clarifications, one, so that $0.29 target, that is just a cash cost, correct? So, do we need to add in terms of full accounting treatment, we would add back warranty, shipping and depreciation or all of those?

That’s the total CODs. I think the total CODs include depreciation, also include warranty cost, it doesn’t include the shipping cost.

Okay. And then last question from me -- go ahead.

So, shipping is extra. You just check the accounting block, we follow the GAAP accounting policy.

That’s great. And then, I think you talked about the fully baked cost last quarter was $0.39. Is there a way you could share what that cost was this quarter?

It will be below that; it will be lower than that.

Can you repeat the question, what’s the $0.39?

I thought that fully blended cost last quarter, it was according to your investor presentation on page 13 suggest that the cost in Q2 of 2016 was $0.39 a watt with $0.18 for wafers, $0.08 for cells and $0.13 for modules. I am just trying to get a sense of in particular as your acceleration as for diamond wire plays out, how we should think about that $0.39 in the third quarter that you just reported and then over the next few quarters.

Okay. For Q3, it decreased by $0.04 to $0.35 for the blended manufacturing cost in China. So, on the Companywide, the comprehensive blended manufacturing cost was $0.37, $0.02 higher than blended cost in China,

And there are no further questions at this time. I would now like to hand the conference back to Canadian Solar CEO. Please continue.

Thank you very much for everyone for attending the call. And if you have any questions, please contact us. And have a good day.