Yahoo Finance Canadian Solar Inc. (NASDAQ:CSIQ) Q1 2024 Earnings Call Transcript
Canadian Solar Inc. (NASDAQ:CSIQ) Q1 2024 Earnings Call Transcript May 9, 2024
Canadian Solar Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by. Welcome to Canadian Solar's First Quarter 2024 Earnings Call. My name is May, 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 Wina Huang, Head of Investor Relations of Canadian Solar. Please go ahead.
Wina Huang: Thank you, operator, and welcome everyone to Canadian Solar's first quarter 2024 conference call. Please note that today's conference call is accompanied with slides which are available on Canadian Solar's Investor Relations website within the Events and Presentation section. Joining us today are Dr. Shawn Qu, Chairman and CEO; Yan Zhuang, President of Canadian Solar's subsidiary, CSI Solar; Ismael Guerrero, Corporate VP and President of Canadian Solar's subsidiary, Recurrent Energy; Dr. Huifeng Chang, Senior VP and CFO; and Xinbo Zhu who will be taking over the CFO position on May 15, 2024. All company executives will participate in the Q&A session after management's formal remarks. On this call, Shawn will go over some key messages for the quarter.
Yan and Ismael will review business highlights for CSI Solar and Recurrent Energy, respectively, and Huifeng will go through the financial results. Shawn will conclude the prepared remarks with the business outlook, after which we will have time for questions. Before we begin, I would like to remind listeners that management's prepared remarks today, as well as their answers to questions will contain forward-looking statements that are subject to risks and uncertainties. The company claims protection under 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. Any projections of the company's future performance represent management's estimates as of today.
Canadian Solar assumes no obligation to update these projections in the future unless otherwise required by applicable law. A more detailed discussion of risks and uncertainties can be found in the company's Annual Report on Form 20-F filed with the Securities and Exchange Commission. Management's prepared remarks will be presented within the requirements of SEC Regulation G regarding Generally Accepted Accounting Principles, or GAAP. Some financial information presented during the call will be provided on both a GAAP and non-GAAP basis. By disclosing certain non-GAAP information, management intends to provide investors with additional information to enable further analysis of the company's performance and underlying trends. Management uses non-GAAP measures to better assess operating performance and to establish operational goals.
Non-GAAP information should not be viewed by investors as a substitute for data prepared in accordance with GAAP. And now, I would like to turn the call over to Canadian Solar's Chairman and CEO, Dr. Shawn Qu. Shawn, please go ahead.
Shawn Qu: Thank you Wina and thank you to everyone for joining us, for joining our first quarter call today. Please turn to Slide 3. We delivered a strong results in line with our guidance. In the first quarter of 2024, we delivered 6.3 gigawatts of total module shipments, realizing revenue of $1.3 billion and an improved gross margin of 19%. As we have mentioned in the past, our priority is to drive high quality, profitable growth. That means at times for going low price to deal. In a challenging environment, our significant recovery in margin from that of last year's final quarter underscores our resilience. Indeed, with respect to our module business, we are at a very difficult point in the cycle. Fierce competition is creating immense near-term headwinds for the industry.
However, I hope we will see improvement in the second half as the market rationalizes. Demand continues to be strong and we are seeing signs of improvement in distributed generation market and certain regions. While prices have stabilized, we remain at historically low levels. In April, during my presentation at Harvard University, I discussed how advances in generative artificial intelligence are expected to boost electricity demand and how solar coupled with energy storage is well equipped to support AI development. For example, in the U.S., a 1 kilowatt solar system can generate approximately 4 kilowatt hours of electricity daily on average. Paired with a 2 kilowatt hour lithium battery energy storage system, this system can shift half of the electricity generated for nighttime use, creating a reliable and controllable energy supply around the clock.
The resulting levelized cost of electricity can be as low as $0.07 per kilowatt hour, comparative with fossil fuels, even without accounting the carbon credits. As AI development accelerates, it is crucial that we do not compromise our climate change objectives, ensuring that the surge in electricity demand is sourced from clean energy. The world is quickly evolving and we are instrumental in driving these changes. Amidst a dynamic industry landscape, we are deploying tailored strategies across our increasingly diverse business. In our module business, we focus on achieving profitable growth, increasing our market share in key strategic markets. At Recurrent Energy, we are in the process of finalizing the BlackRock investment and advancing our extensive pipeline of solar and battery energy storage projects.
At the same time, our eStorage platform is experiencing rapid growth as we secure contracts in new markets and enhance our proprietary technologies for both utility scale and residential applications. Next, I would like to discuss our progress and achievements in environmental, social, and governance practices. Please turn to Slide 4. Today, differentiation in our industry takes many forms. Our customers and partners ranging from financial institutions to sophisticated project developers and utility companies increasingly focused on ESG. Operating transparently and sustainably yields substantial commercial impact and here our leadership is evident. Highlighting just two of our recent achievements, we were awarded a Silver rating by EcoVadis, one of the world's largest and most trusted providers of business sustainability ratings.
Canadian Solar scored especially high in the environmental and sustainable procurement categories, placing in the top 5s of companies rated by EcoVadis in our industry. We are also pleased to win for the second time Environmental Finance Green Project Bond of the Year, awarded for our U.S. $120 million Green Samurai private placement. The award recognizes our innovative financing strategies in our global development business. We look forward to sharing more details in our upcoming annual sustainability report which we expect to release in coming weeks. Lastly, I would like to address the concerns regarding the recent filed anti-dumping and countervailing duty petition. While we will no speculate about ongoing cases, I want to convey our confidence in the face of any political -- any potential challenges that may arise.
We have been navigating similar cases for over a decade and have time and time again, managed risk effectively on behalf of both of our company and our customers and partners. Furthermore, as Thailand is both a WTO member and a market economy, it likely faces lower AD/CVD risks. All local leadership and professional cross-functional teams are among our key competitive edges. As a Canadian company with a plan to invest over $1 billion in new manufacturing in U.S., we hope to continue playing our part in ensuring a long-term and resilient domestic solar supply chain. With that, let me turn the call over to Yan, who will provide more details on our CSI Solar business. Yan, please go ahead.
Yan Zhuang: Thank you, Shawn. Please turn to Slide 5. In the first quarter of 2024, we shipped 6.3 gigawatts of modules, with North America accounting for over 20% of the total share. Revenue reached $1.3 billion and our gross margin increased 630 basis points quarter-over-quarter to 18.4%. Despite a significant decrease in module prices compared to the same period last year and a contraction in the overall profit margin of the industry, CSI Solar still posted an operating income of $82 million. As Shawn highlighted, these gains in profitability are due to our deliberate management of volume and a boost from our expanding energy storage business. While the first quarter is seasonally softer, our results were primarily driven by our team's disciplined execution.
Let us walk through some key drivers. Please turn to Slide 6. Our costs in the solo module business continue to decline as we expand our N-type TOPCon capacity, a trend bolstered by the recent reduction in polysilicon prices. Our processing costs are decreasing, although moderated by planned expansions in the second half. These include our upstream investments in ingots and wafers, as well as U.S. manufacturing. With increased vertical integration, we aim to further reduce costs and enhance control over our supply chain. Following the rationalization of our capacity expansion plans starting last year, our utilization levels have remained and healthy. In terms of the market, we see demand is robust but price sensitive. We remain hopeful of a recovery in ASPs in the second half, although this improvement may be moderated by the availability of low-cost PERC products.
Against this challenging backdrop, we are combining strategic order management with cost savings to navigate the market effectively. In the realms of both solar and energy storage, we are intensifying our investment in research and development. Our R&D team has grown to nearly 1,300 members. Today, our mass production TOPCon cell efficiency has reached 26.5%. In energy storage, we are dedicating R&D efforts to both upstream and downstream initiatives, thereby enhancing our grasp on technology for both commercial and strategic purposes. As Shawn highlighted, we are committed to ESG principles and have been continuously advancing our technology and operations to reduce carbon emissions throughout the entire product life cycles. We have received not only the French Carbon Footprint Certification or ECS, but also the Italian Environmental Product Declaration or EPD Certification.
Additionally, our Thailand module factory is the first facility outside of Korea to earn the Korean Carbon Footprint Certification. Turning to storage, please refer to Page 7. In the first quarter, we recognized revenue from over 1.1 gigawatt hours of shipped product. The revenue and volume of this quarter topped the total for whole of 2023. We currently have a significant backlog valued at $2.5 billion. Our contracted backlog reflects both newly contracted opportunities and reductions from revenue recognition. Given energy storage is a project by project business, its growth may be uneven. Regarding manufacturing capacity of energy storage, we have not only achieved our target of 20 gigawatt hours for the year, but also plan to expand further next year to 30 gigawatt hours in response to our robust demand.
Additionally with our impeccable track record e-STORAGE is proud to have earned a place on the prestigious BloombergNEF energy storage Tier 1 list for the second quarter of 2024. This award recognizes e-STORAGE as a leader in delivering bankable and reliable energy storage solutions globally. Finally, I'm pleased to provide encouraging updates regarding UFLTA detentions. Since our first detainment in the second half of last year, we have fully cooperated with CBP to provide detailed information, demonstrating our strict feasibility procedures. We're happy to share that at this point, a majority of our bonds have been approved for release and none have been excluded. In terms of the impact to our customers, we believe we have addressed associated risks almost in their entirety.
Now, let me hand over to Ismael to provide an overview of Recurrent Energy, Canadian Solar’s, global project development business. Ismael, please go ahead.
Ismael Guerrero Arias: Thank you, Yan. Please turn to Slide 8. Since the announcement of BlackRock's $500 million dollars -- in January, we have made swift progress. Having secured most requisite regulatory approvals, we anticipate closing within the next few months. As part of this transaction and in our commitment to enhancing ESG transparency, Recurrent Energy is actively developing an independent ESG strategy to guide our future growth. In early 2024, we joined forces with a reputable, sustainable firm to conduct a comprehensive double-material utility assessment, aligning with the guidelines of the European Union's Corporate Sustainability Reporting. This assessment aims to pinpoint ESG issues that holds significance for our business, including both risks and opportunities, as well as operational impact on these matters.
We remain laser focused in our goal of operating 4 gigawatts of solar and 2 gigawatt hours of BESS by 2026. We are focused on advancing our substantial amount of projects, including approximately 1.5 gigawatts of solar projects that are currently under construction. As Shawn [Technical Difficulty] AI represents a significant opportunity, and we are witnessing this demand first hand in our business. We have already secured nearly 700 megawatts of PPAs with top cloud service providers, and are in the process of negotiating hundreds more megawatts of PPAs. More broadly, we continue to target 70% to 80% of our generation capacity to be secured under long-term contracts exceeding 10 years with top-tier companies from a financial rating perspective.
Now, moving on to quarterly performance, please turn to Page 9. The first quarter was relatively modest with no major project sales. We achieved 39 million [ph] revenue with a gross margin of 33.1%. During this period, we also strengthened our footprint in Spain through a strategic acquisition, which added over 420 megawatts to our project pipeline. Currently, we have projects at different stages of development in Spain and we anticipate getting closer to more than 1 gigawatt of solar projects in the country in 2024. Turning to Page 10, we are proud to have one of the world's largest and most mature dollar and energy storage project development pipelines. I would like to particularly highlight our recent progress in the Japanese BESS market, where, as of March 31, 2024, our solar and BESS project development pipelines have reached 240 megawatts annually and 1.7 gigawatt hours respectively.
The unveiling of the Long-Term Decarbonization Auction, or LTDA, results on April 26th, represents a significant milestone for Japan's energy landscape. [Technical Difficulty] technologies provides long term income predictability for projects, including those involving battery energy storage. We are honored to have secured three of the best projects in this auction, the 93 megawatts, which accounts for 13.3% of the total awarded energy storage projects. Now, let me hand over to Huifeng who will go through our financial results in more detail. Huifeng, please go ahead.
Huifeng Chang: Thank you, Ismael. Please turn to Slide 11. In Q1, we delivered 1.3 billion in revenue and a gross margin of 19% in line with guidance respectively. The sequential decrease in revenue commonly reflects a decline in solar module shipment volume and a decline in module average selling price, which were partially offset by higher battery energy storage solution sales. Those margins improved 650 basis points quarter-over-quarter due to strategic management of a module volume coupled with uplift from e-STORAGE. Operating expenses declined in Q1 mainly driven by lower G&A costs due to cost cutting measures. Shipping costs temporarily increased due to the Red Sea crisis, but I have since decreased. Net interest expense improved sequentially by $17 million, mainly driven by $90 million of interest received on refunds of the AD/CVD deposits from the Solar, Inc.
proceedings. Total net income was $12 million or $0.19 per diluted share. Now, on to cash flow under the balance sheet, please turn to Slide 12. Net cash flow used in operating activities in the first quarter of 2024 was $291 million. The sequential decrease in operating cash flow primarily resulted from increased inventories and the project assets. Our total assets have passed 12 billion driven by significant growths in project assets and the solar power systems, having the stage for future profit generation. In the first quarter, we spent around $266 million in CAPEX, progressing our U.S. supply chain and TOPCon manufacturing capabilities. Our full year 2024 CAPEX expectation remains unchanged at approximately $1.8 billion. We ended the period with a healthy cash balance of 2.9 billion and a total debt of 4.3 billion, which will refract incremental borrowings for working capital, and additional vertical integration for CSI Solar, as well as new product development for Recurrent Energy.
Lastly, I would like to say a few words about the CFO transition. Please turn to slide 13. I want to thank Shawn, the Board of Directors, and our shareholders for the opportunity they have extended me over the past eight years. Canadian Solar has now evolved into a globally leading provider of solar and energy storage solutions, spanning both manufacturing and product development. As both our company and the world have evolved, I see my role transforming as well. I'm excited to continue making impact to the company, notably in our U.S. business operations, through my new position as Chief Strategy Officer. I confidently hand over the reins to Xinbo, whom I have worked with closely with throughout my journey at Canadian Solar. I'm confident that he will contribute to the company achieving even greater feats.
Before I hand the call over to Shawn, let's pause for a moment to hear from Xinbo. Xinbo, please go ahead.
Xinbo Zhu: Thank you Huifeng. I'm grateful to Shawn and company's Board of Directors for entrusting me with this new role. I would also like to thank Huifeng for his invaluable guidance and support throughout the transition period. I look forward to working with the Board and Canadian Solar’s Senior Management and finance team to continue executing on our vision and the strategy ensuring long term value for our shareholders. Now let me turn the call back to Shawn who will conclude with our guidance and business outlook. Shawn, please go ahead.
Shawn Qu: Thanks, Huifeng and thanks Xinbo. Let's turn to Slide 14. For the second quarter of 2024 we expect solar module shipments, but CSA Solar to be in the range of 7.5 to 8 gigawatts, including approximately 100 megawatts of solar module shipments to our own project. Total battery energy storage shipment are expected to be between 1.4 to 1.6 gigawatt hours, including about 800 megawatt hours to the company's own project. Total revenues are expected to be in the range of U.S. $1.5 billion to $1.7 billion. Gross margin is expected to be between 16% to 18%. Regarding our outlook for the later half of the year I would like to highlight four key trends. We remain hopeful of an improvement in both supply demand dynamics and profit levels within the industry during the second half.
e-STORAGE, is expected to significantly contribute to our revenue and profitability, even more so in the second half than in the first. All other advanced TOPCon capacity will continue to ramp up enhancing efficiency, yield, and cost to meet market demand, which is rapidly [indiscernible]. We expect continued improvements in distribution generation markets where we have traditionally excelled. With that in mind, for the full year of 2024 we are adjusting CSI Solar's total solar module shipment guidance to be in the range of 35 to 40 gigawatts. We expect full year revenue to be in the range of U.S. $7.3 billion to $8.3 billion. Our revised shipment and revenue forecast underscore our dedication to profitable growth as we navigate a challenging macro environment.
With that, I would now like to open the floor for questions. Operator.
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