Canadian Solar Q3 Earnings Call Transcript

123jump.com Staff
09 Dec, 2008
New York City

Canadian Solar, solar panel maker third quarter revenues rose 160% to $252.4 million for the third quarter. Net income surged to $11.1 million or $0.31 per diluted share compared to $0.52 million or $0.02 per share a year ago. The company estimates annual revenue of $650 to $750 million.

Canadian Solar Inc. ((CSIQ))
Q3 2008 Earnings Call Transcript
November 21, 2008 8:00 a.m. ET

Executives

John Robertson
Shawn Qu – Chairman and Chief Executive Officer
Arthur Chien – Chief Financial Officer

Analysts

Steve O’Rourke - Deutsche Bank Securities
Sanjay Shrestha - Lazard Capital Markets
Preetesh Munshi – Piper Jaffray & Co.
Jed Dorsheimer – Canaccord Adams
Sam Dubinsky – Oppenheimer & Company
Paul Leming - Soleil Securities

Presentation

Operator

Good day ladies and gentlemen and welcome to the third quarter Canadian Solar Incorporated earnings conference call. My name is Anne and I will be your coordinator for today''s call. If you need assistance at any time during the call, please press “*” followed by “0” and an operator will be very happy to assist you. As a reminder, this conference is being recorded for replay purposes. At this time, all participants are in listen-only mode, and we will be facilitating a question-and-answer session towards the end of the presentation. I would now like to turn the presentation over to John Robertson. Please proceed.

John Robertson

Thank you. Welcome to CSI’s third quarter 2008 results call. Joining us from the Company are Dr. Shawn Qu, Chairman and CEO and Mr. Arthur Chien, Chief Financial Officer. We will have time for your questions after Dr. Qu provides a business review and Mr. Chien reviews detailed financials. If you have not yet received a copy of today’s earnings release, please call the Ruth Group at 646-536-7024 or you can get a copy of the release off CSI’s website.

Before we begin the formal remarks, the Company’s attorneys advised that certain statements on today’s call regarding expected future financial and industry growth are forward-looking statements that involved a number of risks and uncertainties that could cause actual results to differ materially. These statements are made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by such terms as “believes,” “expects,” “anticipates,” “intends,” “estimates,” the negative of these terms, or other comparable terminology. Factors that could cause actual results to differ include general business and economic conditions and the state of the solar industry; governmental support for the deployment of solar power; future shortage or availability of the supply of high-purity silicon; demand for end-use products by customers and inventory levels of such products in the supply chain; changes in demand from significant customers, including customers of CSI’s silicon material sales; changes in demand from major markets such as Germany; changes in customer order patterns; changes in product mix; capacity utilization; level of competition; pricing pressures and declines in average selling prices; delays in new product introduction; continued success in technological innovations and delivery of products which features customer’s demand; shortage in supply of materials or capacity requirements; availability of financing; exchange rate fluctuations; litigation and other risks as described in the Company''s SEC filings, including its annual report on Form 20-F originally filed on May 29, 2007 and its registration statement on Form F-1 originally filed on October 23, 2006 as amended. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, level of activity, performance, or achievements. You should not place undue reliance on these forward-looking statements. All information provided on today’s conference call is as of today''s date and CSI undertakes no duty to update such information, except as required under applicable law.

In addition, several non-GAAP financial measures will be mentioned on this call. Information relating to the corresponding GAAP measures and reconciliation of non-GAAP and GAAP measures can be found on CSI’s press release in the Investor Relations site at www.csisolar.com. At this time, I would now like to turn the call over to Dr. Shawn Qu. Please go ahead sir.

Shawn Qu

Thanks John and thank you for everyone for joining us on today’s third quarter 2008 earnings call. First of all, we are pleased with the results for the third quarter, particularly our top line growth and gross margin. Foreign exchange was a challenge that Arthur will discuss below. On the other hand, I believe that most of you are more interested in Q4 and the future guidance. There is no doubt that Q4 is a different market than Q3 with volatility in foreign exchange and a softening demand as our end customers deal with tighter credit and weakening macroeconomic conditions.

Canadian Solar, however, always operates under our trademark flexible, vertical integration model, which emphasizes low CapEx, supplier partnerships and quick turnaround time. We believe that we are well prepared to weather the storm. We will, after a brief discussion of our third quarter results, further detail the steps we have taken in order to sustain our gross margin, maintain a positive cash flow and to make us ready to capture future market growth.

Revenues for the third quarter 2008 increased to $252.4 million from $212.6 million in Q2, up 19%. This marks our sixth consecutive quarter of top line growth. We shipped approximately 60 MW during the quarter, a 27% increase over Q2. 10 MW of these shipments was our proprietary low cost e-Module exactly in line with our expectations.

Our gross profit for Q3 was $39 million, which represents a 15.5% gross margin.

Net income for the quarter on a GAAP basis was $11.1 million or $0.31 per diluted share. The non-GAAP income was $14.6 million or $0.41 per diluted share excluding stock based non-cash compensation.

On the supply side, we signed a new long-term supply agreement with GCL Silicon during the quarter. We believe that our partnership with GCL is mutually beneficial and will provide long-term value for both companies. As you all know, Canadian Solar is very selective in signing long-term supply contracts. As a result, our total pre-payments paid out for long-term supply contracts is less than $14 million, which gives us a lot of flexibility moving forward.

On the sales side, we have signed annual sales contracts with almost all of our key customers for 2009 so that our customer base is secure. Our total 2009 order book is now approximately 320 MW.

On the capacity and expansion front, we have successfully committed 120 MW of our ingot and wafer facilities and 270 MW of solar cell capacity as of today. These capacity expansions are very timely, as it allows us to maintain the gross margins, especially for our e-Module in a challenging environment in Q4. We, however, have adopted a conservative posture going forward given the environment that we face which I would discuss shortly.

Now, let me comment on our outlook. Based on our fourth quarter outlook and external environment, we have reverted back to our previous full-year guidance given in May and now anticipate 2008 revenue of $650 to $750 million with 13% to 15% gross margin.

For 2009, we are maintaining our manufacturing output guidance of 500 MW to 550 MW based on discussions with our long-term customers and suppliers. We believe that we can price our traditional high efficiency modules and the low price e-Modules competitively despite a challenging market. These estimates are contingent however on the following factors. First, wafer and silicon prices decline to a realistic level consistent with the market price on the module and the company’s expectations. Second, our estimates depend on the availability and the cost of project financing. Third, we are assuming the Euro does not deteriorate below certain levels.

Now, let me share with you what is happening in the marketplace. Q4 and Q1 are usually slow quarters for Solar as winter sets in. This Q4 however is impacted by two additional issues. One is the credit environment at the distributor and installer level. Another is that some solar OEMs are attempting to sell their product at a clearance price, which is contributing to our temporary price dislocation in the marketplace. Customers have decided to defer contracts, defer contract delivery until they get a clear picture -- a clear price picture.

We believe that it is prudent not to push product to our customers to window dress the fourth quarter as it will only clog the distribution channel and create collection risks. As a result, we decided to implement our cautious management strategy and we have taken the following measures. First, we have been working together with our long-term customers to carefully map their inventory and sales plan in Q4 and in 2009. We have been exercising caution on doubtful accounts. Although, this will result in less sales in Q4, we believe it helps us to minimize risk, preserve cash, and make us ready to capture the future growth. Second, we have postponed further capital expenditures until there is a greater visibility in terms of demand. We will revisit our capital expenditures in the coming months depending on the market environment. Third, we have been in active discussion with both our customers and suppliers. Our customers are enthusiastic about continuing their relationship with us, but want to do so at competitive prices.

As you are aware, lower solar module pricing has led to adjustment across the entire supply chain. Our suppliers recognize the need to work together and are offering CSI prices that will allow us to compete in next year’s pricing environment. By taking these measures, we believe we will be able to maintain a reasonable gross margin and achieve operational cash flow positive in the fourth quarter and for the next year.

I would like to emphasize that we continue to achieve substantial progress at our proprietary low priced e-Module. Our UMG e-cell converging efficiency increased to an average of 14.2% in recent weeks. The yield also continues to improve and raw materials cost, cost per watt have declined making us the industry leader for this technology. We expect the improvement to continue in the coming quarters.

While the company has secured sufficient UMG feedstock to produce at least 25 MW of e-Modules in Q4, market and credit conditions have led the company to implement a more conservative production plan and may only ship around 6 to 8 MW. Next year we have the ability to change our product mix to as much as 50% e-Module. We will continue to price this product 10% below the dollar per watt price of our traditional high efficiency solar module products.

The e-Module is a low cost, high margin product which can be used to protect our margin even with lower polysilicon prices. PV products are of a highly creditworthy asset class and are an attractive investment. We anticipate that the PV market will recover starting sometime in Q2 or Q3 2009 with fewer and stronger players.

Canadian Solar, as a major solar cell and module producer is expected to automatically benefit from this development and further solidify our industry position. The company has maintained a sound cash position and one of the best debt-equity ratios in the solar industry.

In Q4, the expectation is to be operationally cash-flow positive and to maintain a cash position of more than $100 million. We anticipate that we will have at least $40 million available in unused credit line by end of Q4 and are actively negotiating more credit facilities with local banks. We feel that our balanced financial management strategy will help to mitigate risks and preserve an adequate cash position in order to respond to the future growth opportunity.

With that, I would now like to turn the call over to Arthur for review of our third quarter financials. Arthur.

Arthur Chien

Thank you Shawn. Actually I will not repeat the Q3 financial results as Shawn has already reviewed. Please refer to our press release or 6-K for additional details. The depreciation of the Euro in September had the largest impact on our financial result. It is reflected in the net loss and in others of $17.3 million in our Q3 P&L.

We started to establish a currency hedging position in May. The hedge is set (inaudible) with a strike price of 1.495. It will be settled monthly, November through January 2009, to cover more than 100 million Euro in cash flow. However, the Euro declines occurred sooner and it was much steeper than we had anticipated.

Our Q3 revenue was unhedged and it resulted in our large foreign exchange charge. For currency hedging and the cash flow projections we take the assumption that Euro will decline to 1.2 in the next year, but that there will continue to be significant volatility. We are going to use a mix of options on the forward to hedge 100% of estimated cash flow going forward. The premium objective in policy will be to provide visibility and some stability.

Gross margin for Q3 remained stable for the third quarter at 15.3% -- 15.6%. Although our gross margin will be challenging in Q4 due to high priced inventories we have right now, we continue to target 13% to 15% gross margin in 2009 despite a decline in pricing environment. Long term, we feel our margin guidance is sustainable even under volatile macro environment trends provided we carefully manage supply relationship, cost controlling operations, and our R& D activities, as well as more e-Module delivery.

In the area of accounts receivable, measured by base, analyzed on a quarterly basis we had 52 days in Q3 ’08, five days lower than 57 days in Q2 ’08.

Now for the inventory turnover analyzed on a quarterly basis we successfully reduced it from 45 days in Q2 ’08.to 41 days in Q3 ’08, will continue this trend to contribute to the possible operational cash flow in Q4 ’08. Because of the deteriorated market condition for Q4 there is a meaningful possibility to write down inventory. Accounts receivable may also be written down due to a foreign exchange issue. This may put us in a net loss position in Q4 due to the balance sheet charges.

As Shawn previously noted, we have delayed most of our capital expenditure temporarily as the company currently has both ample capacity and the wafer supply to match the current market demands. By the end of the year we will have the capacity of around 160 MW of wafer, 270 MW of cell and 400 MW of module. We do not foresee the need for additional capital expenditure until the first or second quarter of next year. We will revisit capital expenditure as market condition warrant it.

For the last several years we have grown our business significantly and have done so with less capital spending than our peers. Our business model requires less investment in fixed assets than a fully vertically, integrated business model realizing high returns on invested capital and the low depreciation and amortization. In this market we feel this best positions us to weather the storm while less competitive companies (inaudible) market.

In conclusion, we feel Canadian Solar is well positioned to cope with the challenging environment that the solar industry is facing right now through prudent financial management, leading market technology coupled with the size and scale to capitalize on new and existing opportunities in the market. We are confident in the Company''s long-term outlook.

That concludes our comments. We can now take questions. Operator.

Question-and Answer-Session

Operator

Thank you. Ladies and gentlemen, if you wish to ask a question, please press “*” followed by “1” on your touchtone telephone. If your question has been answered or if you wish to withdraw your question, please press “*” followed by “2”. Please press “*1” to begin and the first question comes from the line of Steve O’Rourke with Deutsche Bank. Please proceed.

Steve O’Rourke - Deutsche Bank Securities

Hi, good evening both Shawn and Arthur. A couple of questions. In your prepared remarks you talked about some assumptions for 2009. Can you help us understand what a decline to realistic levels of wafers and silicon means and what is your assumption for a Euro exchange rate next year?

Shawn Qu

Yes, I am going to answer the question on the wafer and also the module price. At this moment, we expect the price, let’s say the stabilized price for our traditional high efficiency solar modules to be in a range of – from 240 to 250 - averaging 240 to 250 Euro per watt, somewhere there, which is in line with the price --- some of our competitors were trying to target. We believe we can compete at this level. Now, in order to compete at this level, the wafer price must be in the range of somewhere around $160 to $190 per watt on the wafer level. Then we can meet the module price target with our net income gross margin.

Now, for the e-Module, we will continue the strategy to price e-Modules roughly 10% below the regular module – the price for the regular high efficiency modules so that we can provide customers a competitive product for the large scale (inaudible) market system.

Steve O’Rourke - Deutsche Bank Securities

Okay and when you look out to 2009, what is your outlook on ASPs? You mentioned a number just now. Is that a realistic number to assume that you can get in 2009 when you look at the present environment here in Q4 looking out in to Q1, Q2?

Shawn Qu

Steve, I believe the price dislocation will continue in Q4 and Q1. However, this kind of – this price dislocation we believe is a temporary phenomenon and it is not going to last long and typically once the IR increase the end product, the end customer market will pick up and then we will start to see a stabilized real price and I believe that we will start to see that in Q2, Q3 and Q4. Now, at the same time Steve, our customers, especially our long-term loyal customers are not only looking at the price and they know that some of the prices offered by some of the other solar companies are merely inventory clearance price and they are not going – they won’t be able to promote those brand names in the long run. So, we do have clear understanding and clear message from our customers that yes, number one, Canadian Solar will make sure they are competitive in the marketplace, and number two, they are not going to go away just because other solar OEMs offer, maybe some will offer a low inventory clearance price and we have seen this kind of phenomenon back in Q4 2006 and in Q1 2007 and we believe that we are seeing the same kind of seasonal slowness but this time because of the credit crunch the market downturn might be more severe, but basically after a few quarters the channel will be stabilized and the stronger companies will be able to grow again.

Steve O’Rourke - Deutsche Bank Securities

What is this low clearance price?

Shawn Qu

At this moment Steve, I do not want to speculate but we do know that some solar OEMs have pretty much stopped productions and they have been lowballing the price but those are mainly clearance price. Steve, if I give you a price today, it maybe different tomorrow but those are temporary stock clearance price.

Steve O’Rourke - Deutsche Bank Securities

Okay. Thank you.

Shawn Qu

Thank you Steve.

Operator

And the next question comes from the line of Sanjay Shrestha from Lazard Capital Markets. Please proceed.

Sanjay Shrestha - Lazard Capital Markets

Great. Thank you. First of all, actually a very good quarter guys. The outlook is kind of what it is right now. A quick question to you as it relates to Q4 and 2009. As it relates to your shipment levels, obviously you are focusing on managing working capital but is it also a reflection of the fact that there’s a freeze of buying in the end market and you are having maybe not as much of a success as maybe you should from getting a cheaper wafer price, and therefore, you also said we are going to ship only where we can, where it’s reasonable and I am not going to buy more wafers or the raw material because the supply chain has not essentially started work to sort of help this industry grow better going forward.

Shawn Qu

Sanjay, it’s a good question. Usually the supply chain respond – the supply chain response, it always lags the end product market a little bit but this time I believe the supply chain responded very fast, within like one month the supply chain already responded and now the wafers and also polysilicon spot market price have already pulled in dramatically. However, because of the dislocation of the module price in end markets, it does cause some of our customers, even some of our loyal long-term customers to pause because they want to see where the bottom is and their installers also want to see where the bottom is. It doesn’t mean they were switched; usually they were not because they have spent so much time to promote the one brand name but they do want to hold a little bit and think about it and the kind of guidance we give to you for Q4 reflect the management’s desire to be prudent and not to push out the product. So to answer the question the --- we believe that supply chain already responded, however, a prudent approach at this moment is to work with the distributor and work with end customers rather than to push product out of door before December 31st.

Sanjay Shrestha - Lazard Capital Markets

Okay, I got it. Another quick follow-up question on that. When you say the wafer pricing are starting to sort of respond appropriately to the end market dynamics, what type of spot prices are you seeing right now on polysilicon and also, how much is actually really available and with the decline in this price, is there enough of a transaction taking place or is there also a bit of a freeze on that front as well because the next person is looking for another price decline two days later.

Shawn Qu

Okay, to answer your question the – on the spot market we have recently seen around $150 per kilogram polysilicon offering. We also have offers for long-term – two year supply contract for polysilicon below $100 and without much down payment requirement. On the wafer level, I remember one case that is in China for five-inch mono wafers, the price including the 17% VAT used to be 55 Chinese Yuan in late October and around 30 Chinese Yuan last week. So that shows how much the wafer and the silicon market already responded. But I should caution that it doesn’t apply to every wafer and silicon maker. I guess everybody have their own strategies, some have decided not to sell rather to hold out, but some decided to sell in this kind of market.

Sanjay Shrestha - Lazard Capital Markets

Got it. One follow up on that and Shawn, right. So that should I mean, intuitively be very positive for cell and module manufacturing companies but it sounds like module prices have not just gone down but there is a bit of a freeze from a buying standpoint because everybody is waiting for the better pricing next year. So the question is how much actually then is really available in the spot market because it sounds like in some cases spotting is going to start to get lower than some of the long-term contracts, so if somebody want to bring their price down they ought to be buying aggressively in the spot. Then the question is how much can you really buy, how much is actually available and then I have one more question and I will hop back in the queue.

Shawn Qu

Sanjay, as far as I can see, the polysilicon market demand is affected by both solar and semi-conductors. Solar side, yes, we have been talking about all these price adjustments but I believe the main adjustment in the semi-conductor side is even more significant than the solar market. So, I believe the availability is getting good, and however the whole industry will have to find orders out of this price dislocation just like -- it is not a solar industry-only phenomena, it happens everywhere in the economy. So, it will be a little while before the whole industry figure out where the pricing level should be. On the other hand, Sanjay we do have customers who give orders and stick to their monthly delivery plan. So just like what we have seen in the past, our customers will like – somehow some customer a little bit later but eventually as long as -- once the price is down to a certain level IR investment will be so good that we have to pick up.

Sanjay Shrestha - Lazard Capital Markets

Great. One last question then, guys. So in your sort of prepared remarks here, you said that you do expect things to get better Q2, Q3 of ''09 with fewer but stronger players. Have you already started to see some of the smaller or the weaker players kind of stop production and wait for this market to get better, or you''re still seeing them sort of focusing more on clearing their inventory and trying to figure out a way to sort of generate cash and maybe build some working capital and things? So what are you seeing right now?

Shawn Qu

Well, we have heard -- I won''t say that -- we have heard people, rumors then, about the smaller-module OEMs have already stopped production. However, I want to emphasize this is what I''ve heard. I have not visited other solar OEMs in China in the past four or five weeks, so I don''t want to spread rumors.

Sanjay Shrestha - Lazard Capital Markets

Okay. Fair enough. Thank you guys.

Shawn Qu

Yeah. Thank you Sanjay.

Operator

And the next question comes from the line of Preetesh Munshi from Piper Jaffray. Please proceed.

Preetesh Munshi – Piper Jaffray & Co.

Hi, good evening Shawn and Arthur. A lot of my questions have been answered. Just going back to the wafer pricing, is that a $1.60 to a $1.90 per wafer should be somewhere in ’09 appropriate levels. How far away are you guys from here because you were -- one of your suppliers said that they are still getting $2.30 north of that in terms of wafer pricing in Q4? How far away -- how realistic do you think that is and how far away are you from achieving these wafer costs?

Shawn Qu

That''s a good question. As I have discussed, that there are lots of price dislocations in the marketplace in this quarter. The price is just everywhere. I do believe that some wafer OEMs may be able to get a higher average price for their products, but on the other hand, I also see a lot of other pretty reputable wafer companies’ lower price. Now, for 2009, the kind of wafer price I indicated is something we are quite confident that we will be able to achieve by discussing with our major suppliers, and also by looking at the contracts, the wafer supply contracts we already signed for 2009.

Preetesh Munshi – Piper Jaffray & Co.

Okay, thanks. Your comments on instances of spot pricing for poly being $150 a kilo and some of the two-year supply -- you know, you were offered less than $100 a kilo for a two-year supply. Now, if that continues -- and again, I don''t know where it clears -- but is there a point you think where e-Modules may not make as much sense, just given the sharp drop in the polysilicon pricing itself? Is that true? If so, when do you think -- what''s the pricing level where it wouldn''t make much sense to do e-Modules?

Shawn Qu

Another good question. We have achieved great, significant progress on e-Modules. The efficiency has been very good. As we said in the press release, the average efficiency has been 14.2 after the (inaudible) degradation/stabilization. Also, the production yield is very good. Also, don''t forget we have started our low yield ingot wafer facility, so we are achieving a good -- a great cost saving on our e-Module line, too.

We have looked at our cost model for the e-Modules and we thought that we can price our e-Module product -- we can still price our e-Module product possibly 10% below the regular module price, which people have been indicating these days will still maintain a reasonable margin for the e-Module product. And next year, in 2009, we will also receive UMG material price concessions from some of our UMG suppliers. That''s based on the contract. So the UMG material prices could also go down.

So overall, we see that we can -- our two-pronged strategy is sustainable and the e-Modules will be a competitive product at least for 2009 and maybe well into 2010.

Preetesh Munshi – Piper Jaffray & Co.

So, would it be safe to assume that your 515 MW roughly guidance for ''09 would still include 150 to 200 MW of e-Modules?

Shawn Qu

According to the material with (inaudible), we can actually produce half of our 2009 module target productions as e-Modules.

Preetesh Munshi – Piper Jaffray & Co.

Okay, thanks. One last question from me -- on your balance sheet, you have about $127 million in short-term debt. Can you tell us when that is due and what are the terms and how do you plan to address that?

Shawn Qu

I will leave this question to Arthur.

Arthur Chien

Yes, we have -- actually, most of these local bank loans are -- we can continue to use in the next one or two years, and the local bank is going to increase our credit line. We may return some small portion by the end of the year. You know, it doesn''t make sense that we hold the money and pay the interest, and we can take the loan as we have a credit line open.

So basically, this money we can, if we need, we return a portion of that and when we need to use it, we take it back.

Preetesh Munshi – Piper Jaffray & Co.

Great, thank you very much.

Operator

And the next question comes from the line of Jed Dorsheimer with Canaccord Adams. Please proceed.

Jed Dorsheimer – Canaccord Adams

Hi, thanks. A lot of my questions have been answered, but just to dig into the e-Modules, it would appear that, based on your cost structure associated with the UMG, if poly costs come down $75 a kilo, whether it''s a long-term contract or the spot, it would appear that the benefit of the e-Modules actually is diminished and the return on invested capital is not a positive one for that project. Is that the right way to look at this?

Shawn Qu

You are close. If the long-term polysilicon price did go down to $70 or even lower, then based on our estimates, the UMG material will have to be $20 to $25 in order to provide -- to sustain the 10% pricing difference while still giving us a reasonable margin structure.

According to our conversation with some of the UMG suppliers, they believe that -- we believe that that kind of level for UMG is achievable, that kind of pricing levels for UMG material is achievable. And also, we are moving quite well on our UMG product improvement roadmap and in a large commercial production scale, we have already achieved 40% of converging efficiency. That''s on a large-scale manufacturing system on the lab side, large-scale and moving forward, we see that UMG material product that you''re seeing and also the UMG product efficiency is also improving.

As a matter of fact, our UMG e-Module line start to have more and more overlap in terms of power output with our regular conventional high efficiency lines. With those improvements, e-Modules will have a pipeline. When I say reasonable, I mean two to three years at least.

Now, on the other hand, our model is flexible. We can always switch between the two products without incurring too much (inaudible). So the advantage of having the e-Module line in the next two years are two-fold. One, we now have a best-priced silicon wafer-based product in the marketplace, so even in a tough pricing environment, we can still price the e-Module to be very competitive compared with the regular silicon. Second, this product allows us to be able to build a sustainable cost structure in the next two years without committing a lot of down payment for the take-and-pay contracts. As I said in my speech, we believe that this started already up, and so Canadian Solar is probably the company right now, you know the major, one of the major -- probably the major solar module company with kind of the less amount of down payment paid out for the long-term take-and-pay contracts and UMG -- the e-Module strategy clearly contributed to this financial flexibility.

Jed Dorsheimer – Canaccord Adams

Thanks for the clarification. Then, on the e-Module, the 10% that you are confident that -- as far as a discount for the e-Modules, I was wondering if you could perhaps give a little bit more color on which particular geographies that 10% is being adopted, because the way that I understand it, the biggest risk is to the e-Modules, in terms of pricing, is not where the efficiency is. It''s the comfort by the installer to take the greater risk or the financier for the degradation over the lifetime, and that they need a lower price to compensate for that risk. So I''m just curious which particular market. Is it Germany? Is it Spain, or is it the US or all of them that you feel confident that the 10% is in fact enough to account for that additional risk? Thanks.

Shawn Qu

Yes, I will answer your question in two parts. First is the geographic profile of e-Module sales. We have been selling the e-Modules to our customers in Europe – and to Europe, US, Korea, and also in China and in Europe, the e-Modules have been installed in Germany, in Spain, and in Switzerland as far as I know and they are installed on both rooftop and for the -- like 1 MW scale projects. And the customers -- and in the first year – 2008 is the first year we promote e-Modules, so we have been careful. So far, we have been selling e-Modules to only to five customers so far. But so far, the responses from those five customers are very positive. We have not had any complaints and any problem with e-Modules and my customers showed me the kind of day-to-day monitoring of the performance and the e-Module performance -- e-Module system performance are very satisfactory to them. So this is one question.

The second question is on the customers'' confidence. I believe that e-Module has been getting -- gaining more and more acceptance and more and more confidence from installers and from the customers. As I said, the four, five customers I''m talking about, none of them had any complaints on the e-Module product and Canadian Solar has been monitoring the performance of e-Modules ourselves. We have installed quite a few e-Module systems in order to watch their performance and the largest system, which is a 10 kW system, has been installed and has been performing since February of this year. So, it has gone through the summer, and we haven''t seen any degradation of this particular system.

e-Module requires some know-how. Not everybody can master it. But I believe the top one or two companies who have really invested into e-Module R&D, like CSI, have already mastered the technology to produce a reliable product with this material.

Jed Dorsheimer – Canaccord Adams

Thanks, that''s helpful. The last question and then I will jump in the queue, just a clarifying one -- your guidance next year; did I hear correctly that''s based on $160 wafer costs on the poly side?

Shawn Qu

No, I didn''t say that. I was asking one question, and I said -- I mentioned that you would need $1.60 -- $1.60 to $1.90 per watt of wafer price in order to maintain the margin, maintain the margin or mid-teen gross margins with the module ASP at 240 to 250 levels.

Arthur Chien

It’s 240 Euro.

Shawn Qu

Euro level, right.

Jed Dorsheimer – Canaccord Adams

All right, thank you.

Shawn Qu

Thank you.

Operator

And the next question comes from the line of Sam Dubinsky with Oppenheimer. Please proceed.

Sam Dubinsky – Oppenheimer & Company

Hey guys. A couple of quick questions -- could you maybe quantify the magnitude of the inventory charge next quarter, and what gross margins you think could be with and without the charge?

Arthur Chien

I will answer the inventory charge. Actually, it''s quite difficult to give the exactly number right now because the reason is very simple. Right now, the price of material is not very stable; you have one price today and another price tomorrow. So we have to run down the inventory based on the end of the year market price. So, we cannot predict what the price will be by the end of the year, so that''s why we cannot give a precise number.

Sam Dubinsky – Oppenheimer & Company

I guess maybe another way to ask it then is could you maybe just quantify what you have in inventory in terms of polysilicon metric tons or wafers? Can you just give us a number, just so we can try to back out? Because it just seems like the industry needs to do inventory charge right now, it just seems like --

Arthur Chien

Actually, we are using our inventory in Q4, so we don''t buy any new material. By the end of the year, I''m not sure but probably we will still have like the $40 million, $50 million inventory total, but that will be mixed with the WIP, all kind of material.

Shawn Qu

So to answer your question, we are using our inventory. If we executed our Q4 plan a little bit better, then we may be in a position of not incurring too much inventory write-off. However, with an unstable environment like this, we rather want to be cautious. Therefore, we give you an indication that there is a possibility of inventory write-down. Also, if the Euro further deteriorates, then there might still be some account receivable write-down. It''s a warning. However, we really have to see where the Euro ends up at the end of the year, and also how we executed our Q4 conservative management plan.

Sam Dubinsky – Oppenheimer & Company

Okay. Well, did you mention what gross margin could be next quarter excluding inventory charges?

Shawn Qu

You mean for Q4?

Sam Dubinsky – Oppenheimer & Company

Yes.

Shawn Qu

It''s a good question. It depends on the mix of the product and if we have more e-Module output, then the gross margin will be double-digit and if we have slightly more regular silicon module products, then the gross margin will be in the high single digits, but we are certainly striking for double digit numbers.

Sam Dubinsky – Oppenheimer & Company

So essentially high single digits to low digit, excluding an inventory charge -- and with an inventory charge it will be lower, if that happens?

Shawn Qu

That''s correct.

Sam Dubinsky – Oppenheimer & Company

Okay. And then, it just seems like, on the poly side, that pricing has plummeted recently, partly a function of a big shortfall in semi-demand across the industry and also a big shortfall in solar at the same time. And if poly is really under $150 per kilogram today, it seems like that would give a lot of companies a big breathing room if the Euro depreciates further. Why not start by inventory now of low-cost poly, because I assume, at some point, demand won''t stay weak forever either in semis or solar, so why not start accumulating some low-cost inventory when this could be more of a buffer for next year?

Shawn Qu

I think this is a very good suggestion. The management will certainly look into all possibilities.

Sam Dubinsky – Oppenheimer & Company

Okay, thank you.

Shawn Qu

Thank you.

Operator

And our last question comes from the line of Paul Leming with Soleil Securities. Please proceed.

Paul Leming - Soleil Securities

Hi. I just wanted to drill down to what capital spending levels will be in the fourth quarter of this year and the first quarter of next year. Can you give us any granularity at all on what your thinking is today?

Shawn Qu

We cannot hear your last question clearly.

Paul Leming - Soleil Securities

Sorry. I wanted to get into some granularity on your capital spending. Can you tell us what you anticipate capital spending to be in the fourth quarter of this year and the first quarter of 2009?

Arthur Chien

Actually, for the Q4 of ''08, we will continue to finish our ingot and wafer plant, which probably we will spend an additional, like $20 million or more, and we don''t foresee to spend any more in Q109. The ingot and wafer factory is mainly for our UMG operation and by doing the ingot and wafer of UMG products by ourselves, it will generate much better gross margin.

Paul Leming - Soleil Securities

Could capital spending in the first quarter of 2009 literally be below $5 million for the quarter?

Arthur Chien

Yes, that will be the case. Actually, we don''t have any plans, so yes, it will -- we will buy, like, a piece of equipment here or there, but it will not be a major project, so a very less amount I can see.

Paul Leming - Soleil Securities

Then I presume the thinking is to keep it at very minimal levels until you see some signs of a return to more normal conditions in your end markets?

Arthur Chien

That''s right.

Paul Leming - Soleil Securities

Okay, thank you very much.

Arthur Chien

Thank you.

Operator

Ladies and gentlemen, this concludes the question-and-answer session. And thank you for your participation in today''s conference. This concludes the presentation and you may now disconnect. Have a good day.