Updated: ‘Silicon Module Super League’ (SMSL) member Canadian Solar reported mixed third quarter results that were impacted by shipment logistics issues and capacity constraints that led to various guidance metric misses, while the company is sold out of PV modules for the next six months.
Canadian Solar reported third quarter 2016 PV module shipments of 1,185MW, of which 1,161 MW was recognized in revenue, compared to 1,290MW recognized in revenue in the second quarter of 2016.
The company had previously guided shipments in the quarter to be in the range of 1,200MW to 1,300MW. Management indicated that it may have been more selective in taking module orders at unattractive prices after a general industry 25% ASP decline in the quarter. The lower shipments may also be due to logistic issues outside its control.
Dr. Shawn Qu, Chairman and Chief Executive Officer of Canadian Solar, noted: “Our solar module shipments and revenue came in at the low end of our guidance, due to the dislocation of the global solar market during the quarter and the quarter-end logistic disruption caused by the bankruptcy of Hanjin Shipping in September. Our team has effectively managed the supply chain and our own production output to offset the macro impact of solar module ASP declines in the broader market. We achieved a gross margin of 17.8%, which was well above our guidance and reflects our strong inventory management and continued improvement in manufacturing efficiencies.”
A key change was shipments by revenue to the Americas, which were down quarter-on-quarter and year-on-year, accounting for 41.1% of revenue in the quarter that was reported to be US$270.2 million, down from US$383.9 in the previous quarter and down from US$447 million in the prior year period.
However, less of a surprise was shipments by revenue to Asia, which accounted for 42.7% of sales on revenue of US$280.6 million, down from US$318.4 million in the previous quarter and down from US$351.1 million in the third quarter of 2015.
Shipments by revenue to Europe and ROW were relatively flat quarter-on-quarter, accounting for US$106.5 million of total revenue in the quarter. Europe and ROW shipments were up over 50%, compared to the prior year period.
Canadian Solar reported several issues related to manufacturing that also impacted shipments in the quarter and would result in capacity constraints through the next two quarters, partially due to strong demand, according to the company.
During the third quarter of 2016, Canadian Solar adjusted its end of 2016 manufacturing capacity for the fourth time, since providing initial 2016 plans.
Although Canadian Solar noted that its wafer manufacturing capacity had reached 1.0GW in the quarter, which included 400MW using slurry wire-saw and 600MW using the new diamond wire-saw technology, capacity would not reach 1.3GW until April, 2017, compared to 1.3GW by the end of 2016, according to its previous (third revision) guidance.
However, Canadian Solar had initially said that wafer capacity would reach 1GW by year-end. The company had previously noted that at least 900MW of ingot/wafer capacity would utilize diamond wire-saws by the end of 2016, the first major PV manufacturer to use the technology for multicrystalline wafer production.
The company said in its fourth revision that all its wafer capacity would be converted to diamond wire-saw technology in tandem with the 1.3GW milestone in April, 2016.
Management also highlighted in its earnings call that it would provide updated wafer expansion plans in the next quarterly call, indicating that more multicrystalline wafer capacity using its diamond wire-saws and black silicon surface treatment was being planned. The company expected higher production to support lower wafer costs that would retain its cost competitive position in 2017.
Canadian Solar said that its in-house solar cell production capacity would reach around 2.4GW by the end of 2016. This fourth revision compares to its third revision that expected cell capacity to reach 3.05GW by the end of 2016, compared to the second revision expectation of 3.9GW.
The company noted that significant decrease was primarily due to an unspecified delay in the construction of its 850MW solar cell plant in Southeast Asia. The construction completion date of the solar cell plant was said to have been extended to the first quarter of 2017.
The decrease in solar cell capacity would be partially offset by an earlier than expected partial resumption in production at its Funing cell factory, which was damaged by a tornado in June 2016.
Canadian Solar had said in its third revision plans that the Funing facility would be out of action until the first quarter of 2017. This would mean that volume production would be back online in the second quarter of 2017. The Funing plant would have added a further 500MW of capacity by July, 2016 to reach a nameplate capacity of 1GW, according to previous analysis by PV Tech.
Dr. Huifeng Chang, Senior Vice President and Chief Financial Officer of Canadian Solar, added: “The work to restore our Funing cell factory is proceeding on schedule. We expect to have the first two of our ten production lines up and running by the end of 2016, and remaining production lines back in full production by the end of the first half of 2017.”
“We continue to discuss the amount of our total damages claim with our insurers and have received prepayments totaling RMB120 million from the insurer. Importantly, all of the equipment we are installing features the latest production technologies,” added Dr. Chang.
For reference, the nameplate capacity at the South Eastern Asia cell plant had previously been increased twice. Initially, Canadian Solar said that plant would have a nameplate capacity of 500MW that was later raised to 700MW and last quarter was raised to 850MW.
Canadian Solar also noted that the module assembly side of the South Eastern Asia plant went on line on schedule in September, 2016. Canadian Solar had previously said that the 650MW module assembly plant in South Eastern Asia had been commissioned in early August, 2016.
The company continues to expect total in-house module capacity would reach 5.8GW by the end of 2016, compared to its second revision that expected module capacity to hit 6.43GW.
Canadian Solar reported third quarter 2016 revenue of US$657.3 million, compared to us$805.9 million in the second quarter of 2016, and third quarter guidance in the range of US$660 million to US$710 million.
Net revenue from the total solutions business as a percentage of total net revenue was 10.4%, compared to 8.5% in the second quarter of 2016.
Gross margin was 17.8%, compared to 17.2% in the second quarter of 2016, and third quarter guidance in the range of 14.0% to 16.0%.
Cash, cash equivalents and restricted cash balances at the end of the quarter totalled US$986.0 million, compared to US$1.0 billion at the end of the second quarter of 2016.
Net cash used in operating activities was approximately us$205.7 million, compared to net cash provided by operating activities of US$145.2 million in the second quarter of 2016.
The company reported income from operations of US$27.0 million in the third quarter of 2016, compared to US$39.6 million in the second quarter of 2016, and US$30.9 million in the third quarter of 2015. Operating margin was 4.1% in the third quarter of 2016, compared to 4.9% in the second quarter of 2016 and 3.6% in the third quarter of 2015.
PV projects update
Canadian Solar said that its portfolio of solar plants in operation totalled 948MWp at the end of the third quarter, up from 472MWp in the previous quarter.
The late-stage (utility-scale) solar project pipeline stood at 2.0GWp, compared to 2.4 GWp in the previous quarter.
With a recent change in strategy away from a listed yieldco, Canadian Solar has been recirculation capital investments in PV projects with selective project sales. The company noted that it was targeting to complete the sale of certain solar power plants in Canada and China either by the end of 2016 or early next year and had started the sales process of projects in the US as the projects were reaching COD.
Recently, the company sold an 80% equity in the 191.5 MWp Pirapora 1 solar power project in Brazil to EDF EN do Brasil.
“Developing and transferring will be an important strategy in our downstream energy business as it bolsters our balance sheet, reduces market risk, and allows us to redeploy our capital, while providing an attractive return for our shareholders,” noted Dr. Qu.
Utility-scale solar project pipeline includes 940MWp in the US, 597MWp in Japan, 390MWp in Brazil, 38MWp in China, 63MWp in Mexico, 15MWp in the UK and 6MWp in Africa.
Canadian Solar said that it expected total solar module shipments in the fourth quarter of 2016 to be in the range of approximately 1.4GW to 1.5 GW, including approximately 30MW of shipments to its downstream projects business that may not be recognized as revenue in fourth quarter.
The company guided revenue to be in the range of US$600 million to US$750 million with gross margin between 11% and 16% for the quarter.
However, the company noted that it was overbooked for the fourth quarter of 2016 and fully booked for the first quarter of 2017.
This would result in using third party solar modules for some of its own projects, in order to satisfy the demand from its solar module customers.
The gross margin in the quarter would be impacted by the ‘loss-of-service’ of the company's Funning solar cell plant and the delay in construction of the company's 850 MW new cell factory in Southeast Asia.
Canadian Solar also noted that it expected to complete the sale of certain utility-scale solar power plants in Canada and China either in the fourth quarter of 2016 or early 2017, estimated to be valued at approximately US$500 million with a blended gross margin in high teens.
Canadian Solar said that it expected its full year 2016 guidance for total module shipments to be in the range of approximately 5.073GW to 5.173GW, compared to 5.4GW to 5.5GW as previously guided.
US GAAP revenue for the full year is expected to be in the range of US$2.78 billion to US$2.94 billion, compared to US$3.0 billion to US$3.2 billion as previously expected. The updated revenue guidance said to not contain the sales of approximately US$300 million of solar power plant assets, which may occur in the fourth quarter or early 2017.