Canadian Solar Reports Third Quarter 2022 Results

Source: www.gulfoilandgas.com 11/22/2022, Location: North America

Canadian Solar Inc. ("Canadian Solar") (CSIQ) announced financial results for the third quarter ended September 30, 2022, with 57% year-over-year ("yoy") revenue growth and net income of $1.12 per diluted share as the Company continues to prioritize profitable growth.

Highlights

- 18.8% gross margin exceeds the guidance range of 15.0% to 16.5%.
- 57% increase in revenue to $1.93 billion, compared to $1.23 billion in 3Q 2021.
- 123% increase in net income attributable to Canadian Solar to $1.12 per diluted share compared to $0.52 per diluted share in 3Q 2021.
- 62% increase in solar module shipments to 6.0 GW, compared to 3.7 GW in 3Q 2021.
- Global Energy battery storage project development pipeline expands to 40 GWh and solar project development pipeline at 25 GWp, as of September 30, 2022.
- Company expects full year 2023 module shipments to be in the range of 30 GW to 35 GW, representing 56% yoy growth at the mid-point of the range.
- Carve-out IPO of CSI Solar Co., Ltd. ("CSI Solar" or the "CSI Solar subsidiary") back on track awaiting completion of CSRC registration.

Dr. Shawn Qu, Chairman and CEO, commented, "We achieved a 123% increase in net income on a year-over-year basis, despite the headwinds from ongoing COVID-19 shutdowns and macroeconomic challenges. We continue to execute our long-term strategy and build on our competitive position with a further expansion of our upstream capacity and increased level of vertical integration in our solar manufacturing capacity. The benefits of greater control over our supply chain and an improved cost structure will further strengthen our competitive moat, driving a differentiated value proposition for our customers through better products with lower carbon footprint. We are also actively evaluating options in the U.S. market given the recent passing of the Inflation Reduction Act and its potential positive impact as another growth catalyst. Finally, after a short procedural pause, CSI Solar's carve-out IPO is back on track awaiting registration with the China Securities Regulatory Commission."

Yan Zhuang, President of Canadian Solar's CSI Solar subsidiary, said, "We achieved significant growth in both profit and volume during the third quarter, driven by strong demand, ongoing reductions in manufacturing cost, and currency benefits from a strong U.S. Dollar relative to the Renminbi. CSI Solar continues to successfully balance growth and profitability, prioritizing margins by enhancing our pricing power in higher-priced markets and delivering greater system-value to our customers. With that in mind, we officially launched two proprietary battery storage products, the SolBank for large utility scale applications and the EP Cube for residential applications, which received an overwhelmingly positive response from customers. CSI Solar's battery storage turnkey pipeline at the end of the third quarter more than doubled to 25 GWh, with several new projects across the U.S. and Europe recently signed. Supported by strong partnerships through the battery storage supply chain, we are confident that energy storage will become an increasingly important driver of our long-term growth and value creation."

Ismael Guerrero, Corporate VP and President of Canadian Solar's Global Energy subsidiary, said, "The third quarter was, as anticipated, a sequentially smaller but profitable quarter for Global Energy as we monetized around 890 MWp of solar projects. The majority of projects sold were earlier-stage pre-construction projects in the U.S. and Brazil, and a small operational project in Japan, supporting a 47% gross margin during the quarter. Strategically, we are focusing more resources on developing battery storage projects, both stand-alone and hybrid, where we have an edge and can not only help our customers de-carbonize operations and electric grids, but also de-risk project portfolios, enhance overall project values and meaningfully contribute to the stability and reliability of the grid."

Dr. Huifeng Chang, Senior VP and CFO, added, "In the third quarter, we achieved 57% revenue growth year-over-year and expanded our gross margin to 18.8%, delivering net income of $1.12 per diluted share. Our team continues to do a great job managing inventory levels to support our customers, while maintaining a healthy balance sheet to support our long-term working capital, product roadmap and capacity expansion strategy. We ended the quarter with a total cash position of $2.0 billion and remain well positioned to benefit from the acceleration in growth the industry is seeing worldwide in both solar and battery storage."

Third Quarter 2022 Results

Total module shipments recognized as revenues in the third quarter of 2022 were 6.0 GW, up 62% yoy. Of the total, 196 MW were shipped to the Company's own utility-scale solar power projects.

Net revenues in the third quarter of 2022 were up 57% yoy and down 16% quarter-over-quarter ("qoq") to $1.93 billion. The sequential decline primarily reflects lower revenue from project sales and battery storage solutions and a small decline in module average selling price ("ASP"). This was partially offset by higher solar module shipment volumes. The yoy improvement was mainly driven by an increase in module shipments and ASPs.

Gross profit in the third quarter of 2022 was $363 million, up 59% yoy and down 2% qoq. Gross margin in the third quarter of 2022 was 18.8%, compared to 16.0% in the second quarter 2022, and considerably above prior guidance. The sequential gross margin increase was mainly driven by lower manufacturing costs that were also attributable to the depreciation of the Renminbi relative to the U.S. Dollar, higher margin contribution from project sales, and lower sales from battery storage solutions.

Total operating expenses in the third quarter of 2022 were $274 million compared to $255 million in the second quarter of 2022 and $176 million in the third quarter of 2021. The sequential increase was mainly driven by an impairment charge related to certain manufacturing assets and higher shipping and handling expenses.

Depreciation and amortization charges in the third quarter of 2022 were $56 million, compared to $63 million in the second quarter of 2022 and $71 million in the third quarter of 2021.

Net interest income in the third quarter of 2022 was $4 million, compared to net interest expense of $15 million in the second quarter of 2022 and net interest expense of $11 million in the third quarter of 2021. The increase in net interest income was mainly driven by a one-time interest benefit of $17 million deriving from the interest income generated by the anti-dumping and countervailing duty deposit refunds.

Net foreign exchange and derivative gain in the third quarter of 2022 was $39 million, compared to a net gain of $6 million in the second quarter of 2022 and a net loss of $14 million in the third quarter of 2021. The net foreign exchange gain was mainly driven by the strengthening of the U.S. Dollar against the Renminbi.

Net income attributable to Canadian Solar in the third quarter of 2022 was $78 million, or $1.12 per diluted share ("diluted EPS"), compared to net income of $74 million, or $1.07 per diluted share, in the second quarter of 2022, and net income of $35 million, or $0.52 per diluted share, in the third quarter of 2021.

For the three months ended September 30, 2022, diluted EPS of $1.12 was calculated to include the dilution effect of the outstanding convertible notes. Diluted EPS of $1.12 was calculated from total earnings of $80 million, adding back the 2.5% coupon of $1.3 million, divided by 71.4 million diluted shares, including 6.3 million shares issuable upon the conversion of the convertible notes. For the three months ended June 30, 2022, diluted EPS of $1.07 was calculated from total earnings of $76 million, adjusted for the effects of the convertible notes. For the three months ended September 30, 2021, diluted EPS of $0.52 was calculated from total earnings of $37 million, adjusted for the effects of the convertible notes.

Net cash flow provided by operating activities in the third quarter of 2022 was $68 million, compared to $293 million in the second quarter of 2022. The decrease in operating cash inflow was mainly driven by changes in working capital.

Total debt was $2.7 billion as of September 30 and June 30, 2022. Non-recourse debt used to finance solar power projects increased to $311 million as of September 30, 2022, from $264 million as of June 30, 2022.

Corporate Structure

The Company has two business segments: Global Energy and CSI Solar, which operate as follows:

The Global Energy segment carries out the Company's global project development activities for both solar and battery storage project development, which include sourcing land, interconnection agreements, structuring power purchase agreements (PPAs) and other permits and requirements. The Global Energy segment develops both stand-alone solar and stand-alone battery storage projects, as well as hybrid solar plus storage projects. Its monetization strategies vary between develop-to-sell, build-to-sell, and build-to-own, depending on business strategies and market conditions, with the goal of maximizing returns, accelerating cash turn, and minimizing capital risk.

The CSI Solar segment consists of solar module manufacturing and total system solutions, including inverters, solar system kits and EPC (engineering, procurement and construction) services. The CSI Solar segment also includes the Company's battery storage system integration business, delivering bankable, end-to-end, turnkey battery storage solutions for utility scale, commercial and industrial, and residential applications. These storage systems solutions are complemented with long-term service agreements, including future battery capacity augmentation services.

Global Energy Segment

Canadian Solar has one of the world's largest and most geographically diversified utility-scale solar and energy storage project development platforms, with a strong track record of originating, developing, financing, and building over 7.3 GWp of solar power plants across six continents. The Company has built a leadership position in solar project development with 25 GWp total pipeline, as well as in energy storage project development with 40 GWh of aggregate pipeline.

The continued pipeline expansion and strong project development track record will support Global Energy's growth in three key areas:

1. Project sales: The Company plans to grow its volume of project sales by a compound annual growth rate of approximately 50% to 2026, while holding and accumulating assets through investment vehicles (see below) in order to better capture asset value.

2. Investment vehicles: The Company is optimizing its project monetization strategy by establishing local investment vehicles that will help maximize the value of its project assets. The Company also intends to retain minority ownership in these vehicles. By 2026, the Company plans to reach 1.3 GW of combined net ownership in solar power projects through these vehicles. This approach will help the Company build and grow a stable base of long-term cash flows from contracted electricity. The Company plans to recycle a large portion of the capital into developing new solar projects for growth. Meanwhile, the Company expects to capture additional operational value throughout the partial ownership period, including long-term cash flows from power sales, O&M, asset management and other services (see point 3). The Company currently owns a 15% stake in the Canadian Solar Infrastructure Fund ("CSIF", TSE: 9284), the largest Japanese infrastructure fund listed on the Tokyo Stock Exchange, and has also established the CSFS Fund I, a closed-ended alternative investment fund of a similar nature in Italy. Through launching these localized vehicles, Canadian Solar is building its expertise in designing investment vehicles in local markets that will help maximize the value of its project assets.

3. Services: The Company currently manages over 3.6 GW of operational projects under long-term O&M agreements, and an additional 2.2 GW of contracted projects that will be operated and maintained by the Company once they are placed in operation. The Company's target is to reach 20 GW of projects under O&M agreements by 2026.


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