Canadian Solar shipments and revenue up on loss of US$43.9 million: claims market share gains

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Although gross margin just beat the low range of recently revised guidance, Canadian Solar said it was gaining market share and expected margin improvement in the fourth quarter along with strong sales, roughly inline with third quarter shipment levels, a contrasting position on both counts compared to its tier-1 piers. Canadian Solar reported a third quarter loss of US$43.9 million, gross margin of 2.4% and revenue of US$499.6 million.

Total solar module shipments in the third quarter of 2011 reached 355MW, an increase over second quarter shipments of 287MW. Total solar module shipments for the third quarter of 2011 included 19.4MW used in its total solutions business, which was noted in the call to be primarily to the Japanese customers.

In contrast to rivals such as Suntech, Canadian Solar guided fourth quarter shipments to be in the range of 340MW-360MW, noted by Dr. Shawn Qu, Chairman and Chief Executive Officer, in the call as having a “strong sales pipeline roughly inline with Q3.”

Management noted in a conference call that inventory levels at the end of Q311, which were valued at US$407 million, had already been shipped in Q4. The company was tightly controlling supply and demand via production levels. Dr. Qu noted that with a strong and stable pipeline Canadian Solar did not have to sell any inventory at discount.

Michael G. Potter, senior vice president and chief financial officer of Canadian Solar, commented: “Our previous efforts to closely manage capacity and our flexible business model have positioned Canadian Solar with strong cash flow from operations despite the difficult current market environment. Unlike many other companies, Canadian Solar has adequate capacity – not overcapacity and an inventory of high performance modules that customers want – not excess inventory of non-desired products.  We will continue to evaluate and match resources to demand levels as we manage our cost structure.  We are confident that, through continued strict management of our supply chain, inventory, operating costs and balance sheet, especially our working capital, Canadian Solar will emerge from this period in an even stronger financial and competitive position in the markets that we serve worldwide.”

Manufacturing

Although plans had been in place to increase advanced cell capacity by 600MW in 2012 and expand module production further, Dr. Qu highlighted that the company would wait and see how demand dynamics develop before committing to the expansions next year.

Dr. Qu pointed-out that the 600MW cell expansion would cost approximately US$100 million and the module expansion about US$40 million but that both were currently on hold. The cell expansion would be for Canadian Solar’s ELPS, MWT cell technology. The impression given in the call was that there would be little capital spending made in the first-half of 2012, except in maintenance.

One of the surprises was the non-silicon production cost reductions noted by management in the call. Non-silicon production costs had been reduced to US$0.75 per watt and guided cost per watt of US$0.65 in the fourth quarter.

Dr. Qu noted that the US$0.65 per watt non-silicon cost expected in the fourth quarter was due to ingot and wafer cost reduction in slurry and wire saw savings giving all in costs at that level in the 20 cents range, while a reduction in silver paste consumption helped reduce cell costs to the same level and module costs were in the 25 cents range.

The CEO also noted that the company had been working hard on qualifying its ‘quasi-mono’ ingot technology and would be using the material for its ELPS cell technology shortly.

Capital expenditures in the first nine months of 2011 totalled approximately US$177 million. However, Canadian Solar said it would reduce capital expenditures in the fourth quarter to approximately US$30 to US$35 million, with the full year 2011 expected to be approximately US$210 million, down approximately US$90 million from previous planned spending.

Revenue

Canadian Solar reported net revenue for the third quarter of US$499.6 million, up 3.7% from US$481.8 million for the second quarter and up 32.5% from US$377.2 million for the third quarter of 2010. 

Operating margin was negative 6.1% in the third quarter of 2011, compared to positive 5.2% in the second quarter of 2011, due to lower gross margin and higher operating expenses.

Canadian Solar reported a gross margin of 2.4% in the third quarter of 2011, compared to 13.2% in the second quarter of 2011 and 17.3% in the third quarter of 2010. The margin decline was primarily due to lower average selling prices and approximately US$36.1 million in non-cash inventory write-offs and non-cash loss on firm purchase commitment in the third quarter of 2011. Management noted that it didn’t expect further write-downs in the fourth quarter.

Net loss attributable to Canadian Solar in the third quarter of 2011 was US$43.9 million, compared to net income of $7.1 million in the second quarter 2011.

Guidance

Canadian Solar guided fourth quarter shipments to be in the range of approximately 340MW to 360MW, with gross margin expected to be between 5% and 8% as cost reductions and silicon and other material prices closed the gap between ASP declines seen in previous quarters.  

The company reiterated its previous full-year 2011 guidance of shipments of approximately 1.2GW to 1.3GW. 

Dr. Shawn Qu, Chairman and Chief Executive Officer of Canadian Solar, remarked: “We saw significant declines in raw materials costs in the third quarter of 2011, including lower costs for polysilicon, wafers and cells, which we expect to help lessen the impact of expected declines in module average selling prices.  We are pursuing further internal cost reduction measures. On the module side, we expect to benefit from price declines in glass and other materials.  We continue to believe that our long-term mid-teens target for gross margin on our module sales is achievable.”

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