Q4 2021 Canadian Solar Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by welcome to the Canadian Solar fourth quarter 2021 earnings conference call. My name is the land and I'll 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'd like to turn the call over to Isabella Zhang IR director at Canadian Silver. Please go ahead.
Okay.
Thank you operator, and welcome everyone to Canadian soldiers fourth quarter, 2021 conference call.
Please note that we have provided slides to accompany today's conference call, which are available on Canadian soldiers Investor Relations website within the events and presentations section.
Joining us today are Dr. Shawn Qu chairman and CEO .
President of Canadian soldiers majority owned subsidiary CSI solar.
Doctor with them Chen senior VP, and CFO and he's my Laredo, corporate VP and President of Canadian Solar is a wholly owned subsidiary global energy.
Oh 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, Yeah, and then as my well respected they reviewed the highlights of the CSI solar and global energy businesses.
But we find who will go through the financial results.
John will conclude the prepared remarks with the business outlook after which we will have time for questions.
Before we begin may I remind listeners that management's prepared remarks today as well as their answers to questions will contain forward looking statements are subject to risks and uncertainties.
The company claims the protection of 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 expectation and your projections of the company's future performance represent managements 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 the risks and uncertainties can be found in the company's annual report on form 20-F.
Files 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.
Financial information presented during the call will be provided on both the GAAP and a non-GAAP basis.
By discussing certain non-GAAP information management intends to provide investors with additional information to permit 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 is chairman and CEO , Dr. Shawn Chi Zhang. Please go ahead.
Thank you isabell and thank you everyone for joining us.
Our call today.
Please turn to slide.
Slide number three.
I am very pleased to report that Canadian solar grew revenue over 50% for the full year 2021 to a record 5.3 billion kroner.
Improved gross margin through the year to sovereignty employing 2% like a full year and achieve diluted earnings per share of $1.
For the sixth sense.
When I think back to where the company has come from.
It is humbling.
Over the past decade.
<unk> been consistently one of the Culp module companies and all brand stands for excellence worldwide.
Importantly, we continue.
To work Croatian there's tangible value for our shareholders, both in up and down market.
Yeah addition to our record revenue.
Trends in China, what we deliver.
For 225.
14.5 gigawatt.
Solar module shipments nearly 900 megawatt hour of battery storage shipments and coupon one gigawatt.
Hotels.
It is important to note that.
As we grow.
We continue.
Diversifying and strengthening Canadian solar.
The fact that we have gone from zero to a nearly 900 megawatt hours of battery storage shipments over such a short period showcases the strength and determination of our company.
This success is just one of the many opportunities that make us so excited about Canadian soldiers long term business prospects.
Now please turn to slide four.
I'm also pleased to report that we remain on track with the carve out IPO of CSI solar.
In December CSI soda received approval from the star market of the Shanghai stock exchange.
Proposed IPO.
We are currently going through the registration process.
The China Securities Regulatory Commission in line with usual procedure.
In the meantime, we have started erosion with strategic investors.
And the feedback has been encouraging.
We believe the listing.
Another important development.
It will help us capture additional profitable growth opportunities.
Further unlock value for our shareholders.
Please turn to slide five.
One of our mission.
Yes to build a better and more sustainable future athletes blended in our lost ESG report.
As a renewable energy company, we help our customers transition to clean energy.
Deals.
Very alive.
Carbon.
Internally, we are leading the way as we reduce our energy and water intensity.
Increased our use of recycled materials and to minimize our impact on the environment.
Our culture has always.
OSP.
People first and treat everyone with dignity.
This extends beyond our company to everyone we interact with.
Supply chain customers and.
<unk> partners.
I've said this before but I would like to reiterate that Canadian solar that's well tolerated foster labor or any form of modern slavery and is committed to ensuring that modern slavery does not take place.
Anywhere you know our business, including our supply chain.
We achieved this through as combination policies and procedures.
We have also established implementation measures and a verification mechanisms to ensure that our policies and procedures are in fact here.
I encourage you to review these policies, which are publicly available on the governance section of our investor relationships website, we'll welcome your feedback.
Our suppliers have signed all through our supplier code of.
Ill come back.
Which is also available on our website.
We have been carrying all at <unk>.
Higher audience.
These are just a few examples of the initiatives we have taken.
Sure, we stay true to our culture of respect and dignity.
This is a priority for us at all levels of the company.
Please turn to slide six.
Before turning the call over to yet I would like to comment on the increased awareness of Andy just secured.
Energy demand is all stripping.
<unk> worldwide.
Critical time, when Covid still lingering and supply constraints occur across almost all industries.
Yeah.
There is no way of getting around it.
But with the cost of oil and gas and many other materials, reaching new highs and with an ongoing war.
Solar.
Once again the full.
For all of solution.
We must move and move faster to install more solar systems.
<unk> is the only choice given climate change and the need for Andy just secured.
Technology advances like our high efficiency panels.
And our state of art battery storage systems will lead the way to a brighter future.
This is the right thing to do for our company and for future generations.
We remain committed.
Global citizens will continue to invest in R&D to support our vision of increased.
Access and energy security.
Let me now turn.
Turning over the call to yen.
Please go ahead.
Thank you Sean please turn to slide seven.
I would like to start by thanking our team for their focus and execution.
Which allowed us to deliver on our planned revenue growth.
Including profitability in 2021.
CSI solar revenue was $4 $4 billion.
For over 40% growth for the full year.
And $1 $3 billion in Q4.
Gross margin improved sequentially by over 600 basis points to 21, 3%.
Driven by further price increases.
Efficiency improvements in manufacturing costs, and lower raw material costs.
Gross margin was also helped by the 80 CVD reversal benefit.
But even excluding that.
Gross margin improved over 500 basis points sequentially to 19, 4%.
Q3 also had 80 CVD reversal benefit.
Slide eight please.
That sank the operating environment remains challenging.
Higher transportation and material costs.
There was some improvement on the material side in Q4.
That was shortly.
So we are factoring in higher transportation costs.
Longer shipping schedules.
And higher material costs.
Long term shipping contracts has helped us.
Do some of the impact.
This remains a challenge for the industry.
And on the materials side, given the supply and demand backdrop.
There is little incentive.
Polysilicon pricing to come down significantly.
Particularly in the first half of this year.
Cleveland will give more details on the financial impact on AUM.
Overall this is as we talked about last quarter.
Next slide please.
We do expect an improvement later in 2022.
Our silicon capacity ramps up through the year, resulting in lower material costs.
Although it is likely to decline at a variety of pace.
At the same time.
The downstream operating environment is improving meaningfully.
PPA prices are increasing across most geographies.
While you put upstream and downstream pictures together.
We're in a very strong position.
That's one of the top global solar brand.
With a very strong track record.
We're gaining share in the growing global clean energy market.
We have been growing our global market share from below 6% in 2018 to approximately 9% in 2021.
And we think we can reach 15% over the next three to five years.
We expect to extend market share evenly across the globe.
And especially in important markets, such as the U S Europe and China.
As we grow capacity to support our customer needs.
Of course, our goal is to grow profitability.
And the carve out of the IPO should help us achieve this goal.
Please turn to slide 10.
We're also making significant progress on our battery storage business.
We completed nearly 900 megawatt hours of battery storage shipments last year.
That further growth in 2022.
In fact.
This year, we think we can double our volume to one eight gigawatt hours.
These shipments are mostly to the U S.
Where the market is more mature.
But we also plan to deliver projects in China, and we plan to be active in the U K battery storage market as well.
To help accelerate our product innovation.
We established a state of the art battery storage R&D workshop in Suzhou in 2021.
Interest in this area is high and we have been working with several strategic partners.
Leveraging their expertise in lean front.
Over the next few months.
We will formally introduce Canadian solar energy storage product for utility scale applications.
Using our own crop protection design and technology.
The product was designed to be incredibly competitive and will be one of the safest in the market with long service lives.
Currently we use <unk> technology.
But we are technology agnostic.
Giving us significant flexibility to work with different types of battery technologies.
We plan to make a formal announcement as we get closer to the product launch in the few months so stay tuned.
With that let me turn over to East Smith for an overview of the global energy business.
Neil Please go ahead.
Thank you Dan.
Please turn to slide 11.
I'm proud to report that we achieved two one gigawatts in project sales in 2021 50.
50% compared to 2020.
We achieved 55% revenue growth to $1 1 billion.
Grew our operating profit by over 80% to $97 million.
We successfully monetized, both solar and battery storage projects across the U S, Brazil, Mexico, Japan, Korea, India and Australia.
Crucially, we continued to grow our global pipeline of projects, which now stands at 24 Gigawatts of solar and 27 gigawatt hour of battery storage.
This gives us.
Added confidence in future monetization and growth opportunities.
This slide provides a summary of our global pipeline as of January 2022.
In Q4.
Global energy achieved $232 million in revenue and $8 million in gross profit.
This was driven by lower margin products sales in certain regions such as in Brazil.
Combined with partial sales of projects.
Organize the food cost due to the transfer of controlling ownership of these projects, but only a portion of the profits.
Next slide please 12.
As Youre all aware power prices have increased meaningfully.
Last year, we increased our development activities in markets, where solar is competitive without incentives such as in European markets, including Spain and Italy.
Now have the dominant position.
Power prices have materially shifted upwards in most markets and likewise solar Ppas have also adjusted in the same direction.
In addition to economic and environmental considerations recent geopolitical events I'd also making solar energy more attractive.
Your security standpoint.
We expect a meaningful acceleration in growth in the European market in the coming years.
We're well positioned to contribute to this growth.
For example.
Last year in Italy, we established the <unk> fund one.
Close ended alternative investment fund.
Wondering with patient capital investors to retain ownership of projects over the longer term.
We have been building up our pipeline of projects in the region for this fund and.
We are now the largest developer in the country based on contracted volume.
Likewise, we expect to maintain an enhance our leadership position in the U S market through our <unk> subsidiary.
On the other hand, we are advancing the geographic exposure of our product portfolio as we proactively manage risk.
As an example, Latin America markets have been volatile from a Netflix on policy risk viewpoint.
We think one of the largest and most successful developers in Brazil.
The government has over two gigawatts of projects under execution.
However.
The Brazilian and utility market.
Has been impacted by inflation on hikes in interest rates.
When we have hedged our position with inflation linked ppas, the inflation adjustment or cures only once a year limit and our options to realize the true value of these projects.
As part of our broader global strategy, we continue to make progress with our Brazilian infrastructure fund.
This is on track, but hasnt been slowed since with affiliate in government bond yields are trading well into the double digits.
Please turn to slide 13.
Longer term our strategy remains to retain greater asset ownership in select markets to increase the revenues generated through recurrent income.
Such as power sales operations, and maintenance and asset management income.
Our business is difficult to forecast on a quarterly basis.
Given the Lumpiness of our project sales and the difficulty to.
Could it lead time deal closures.
With that in mind.
We expect to increase our share of our stable recurring income relative to our project monetization.
We plan to hold onto certain assets for longer.
It makes sense from at risk and value creation standpoint.
In cases, we believe we can create more value by owning the assets over the long term on operating them ourselves.
This is reflected in how we have adjusted certain project sales and retain assets targets to 2025.
We are moderating product sales growth as we will be holding a significant portion of simultaneous like.
Like we already did with the cleaned some storage projects.
Retained 20% ownership.
We have similar intentions in Europe as I mentioned earlier.
This way, we will be gradually moving from a spot sales business, who had regarding revenues one accounting for value creation.
Cash flow considerations.
Now, let me pass it to Hugh Fun, who will go through the financial results in greater detail.
Please go ahead.
Thank you used tomorrow.
Turn to slide 14.
In Q4, we delivered a one point of <unk> billion dollars in revenue.
24% over the last quarter, and a 47% year over year.
Gross margin in Q4 was 19, 7%.
Well above our guidance of 14% to 16%.
Gross margin benefited from higher Asps.
Lower costs.
Does the ADC vd reversal Chihuahua.
Without the true up benefit.
The gross margin standing at 18%.
Guidance.
At the end about the trend.
Cost improvement was short lived and resume high in Q1.
Selling and distribution expenses increased 28% quarter over quarter.
Doubled relative to last year.
Yes.
Highlights the impact of higher transportation costs, which are included in selling and distribution expenses the gross profit.
This number has been edging up.
From Iran. A one to one five cents per watt to currently approaching <unk>.
No that transportation expenses.
We are all.
The increase was higher shipment volume.
<unk> costs are increasing as well.
Our transportation costs are still lower than spot prices.
Helped by our long term contracts.
But we are slowly moving towards the spot level.
Some of these contracts are up for renewal.
We do pass on some of this cost to our customers.
Reflecting our higher ASP.
It is a higher cost of border. Nevertheless.
General and administrative expenses increased 8% sequentially.
Bias small manufacturing asset impairment.
Research and development expenses increased 43% sequentially.
Given by higher spending on both our solar and battery storage RMB workshops.
Thanks, Dan.
So.
Sure.
So it is up 33%.
And accounted for 15% of revenues.
Excluding transportation costs.
Our old packs is closer to the 8% to 9% region, which is below our historical range of 10% to 12%.
Q4 income tax expense was <unk> 7 million.
Reflecting higher revenue from higher tax jurisdictions.
This compares to a 3 million income tax benefit in Q3.
When we were able to use net operating losses.
For the full year of 2021.
The effective tax rate was 26%.
We expect this to remain around the 25%.
From an annualized standard point going forward.
Total net income was 40 million and a net income attributable to Canadian solar shareholders was $26 million.
Please note that the variance between total and our core net income will increase going forward.
This is because Canadian solar ownership in CSI Sola.
As expected it to decline from 80%.
Approximately 64% after completion of the carve out of IPO.
Basic and diluted earnings per share or <unk> 41.
And a 39.
Secondly.
We will notice.
You will notice that increased the share count.
This includes $3 6 million shares from our ATM or equity.
Equity offering of which $1 million in Q4.
When the program concluded.
Yes.
Our diluted EPS as adjusted of four six points 40 million shares to come for the additional shares.
Our convertible bond at <unk> 40 converted into equity.
Now turning to cash flow and our balance sheet.
Our working capital days increased moderately to holidays affected by logistical cycles.
For the full year 2021 capex was around <unk> $430 million.
Our previous guidance.
Adjusted the capacity expansion plans.
Right of market conditions.
This is capex is likely to be higher.
Budgeting over $700 million.
We ended the period with a healthy cash balance at $1 $4 billion.
Giving us continued financial flexibility to support long term growth opportunities.
Total debt increased to model them say $2 billion to $4 billion.
Although language measured as net debt to EBITDA, excluding those skip cash declined to three three times from three seven times in the prior quarter.
Before turning the call back to Sean I want to highlight that.
In November 2021, we completed the transfer of the charm image asset.
Yes, hi, solar for the global imaging segment.
It was down to award any potential competition between the company and its CSR solar subsidiary as part of the CSI solar carve out listing process.
As a result global image now has all of the Canadian Solar project development business, including China.
Our solar.
Of Canadian solar solar and the battery storage manufacturing and our system solutions business, including EPC.
The asset transfer has no impact on the consolidated results and it was immaterial from a business secondly mix standpoint.
Also as part of the IPO, we may incur a one time IPO related stock incentive expense in 2022.
Contingent upon the successful completion.
The IPO.
This is expected to be in the magnitude of approximately $50 million.
Approximately $40 million after tax.
Around 80% of this cost is.
<unk> to be incurred in Q2.
Whereas the remaining expected to be incurred in the second half of the year.
Now, let me pass it back to Sean who will conclude with our guidance and our business outlook Shawn.
Thanks, Paul.
Turn to slide 16.
For the first quarter of tonnage on the true we expect solar module shipment to be in the range of three six to three eight gigawatt.
Including approximately 210 megawatt of module shipment to our own project.
Total revenues.
<unk> could be in the range of $1 25 to $1 $35 billion as Q1 tends to be a seasonally smaller quarter.
Gross margin.
<unk> to be between 45 50.
<unk>, 5%, reflecting higher.
Manufacturing costs.
For the full year of China agenda to reiterate total module shipment guidance to be in the range of trendy who were trying to two gigawatt.
We raised our total battery storage shipment guidance to one eight to one nine gigawatt hours from previously one four to $1 five gigawatt hours.
Total project sales guidance, yes, trimmed a little bit to 2122 0.6 gigawatt for $12 four <unk> nine gigawatt previous Tonight.
As we expect to return more project and optimize our monetization strategy.
Revenue for the full year of China in China to.
Raced to survey for $7 5 billion U S dollar.
654 7 billion.
We face many.
Market uncertainties.
In the war in Ukraine, and recent Covid related Lockdowns in China, which may impact our operations, especially our logistics.
These are the same challenges facing the global industry.
We have been proactive risk management.
Asset.
Our forecast is for <unk>.
Increased our business risks.
Re cylinder.
Building on our long term position through strong sales channels and customer relationships and a business and technology innovation.
With that I would now like to open the call for questions operator.
Thank you Sir.
As a reminder to ask a question you would need to press star one on your telephone.
Which are your question press the pound key.
Standby, while we compile the Q&A roster.
I show. Our first question comes from the line of Colin Rusch from Oppenheimer. Please go ahead.
Thanks, So much just maybe a question for Sean what's the guidance for the first quarter relative to the full year. It looks like a return to a normal seasonal pattern that we've seen disrupted the last couple of years.
The solar industry.
I'm curious what you can say about what youre seeing in terms of initial indications on demand on a geographic basis relative to that.
No pattern.
Yes, we do see some seasonal pattern as it was then.
In Q1.
Used to be.
Samano quarter slower slower quarter.
And.
Now.
We have more gigawatt size market around the world. So some guidance.
One market can off again after another for example for this Q1.
India market.
It has to be in very strong that's because of the new import duty policy.
In fact there.
So there was a lot of our shipment.
Russia into India before April one so not.
Somehow.
The Q1 batter now on that.
And now Meanwhile, we also see.
A lot of inquiries from China market for example.
And.
As you know.
China has.
Released.
The action plan in order to reach the.
<unk> 30.
Target.
So the 26% carbon neutral target so they released a plan for beauty.
Large scale.
As our base.
Solar and wind.
Our base.
Now the <unk>.
So.
We see that.
Power companies in China very actively.
<unk> taken called and asked for a supply plan now fifth not because of the.
Polysilicon price increase in Q1 I would expect.
We have we could have already taking in.
Quite a significant holder from China.
Uh huh.
Somehow the polysilicon price.
<unk> again.
Things January .
No.
I guess some customers do.
Wade in.
And.
The Hangzhou better judge the trend.
But Q2, we should see.
Im good demand coming from China.
That's super helpful. The second question is really around the project business and it's a two part question one you've talked a little bit in the past on trajectory on PPA pricing I'm. Just wondering if you can give us an update on kind.
Kind of year over year, PK pricing trajectory, both in Europe , and North America and then the second question is about the science of the batteries that are attaching too.
So these systems are you looking at kind of a 401 energy ratio or are you looking at larger batteries potentially at six or H, one energy to our ratios on these systems.
Hi, I Ismael you want to take on this question.
Sure happy to do so thanks for the question.
The.
The PPA market has been moving.
Okay.
Last couple of years for obvious reasons right at the beginning of the.
Pandemic, what we saw is a significant drop on most of the borrower buckets legal activity was not there, but the activity started to come back what we saw was a significant increase.
From previous prices, what we're seeing today.
Is that in places like Europe for instance, the prices both on the out of the charts.
You said the concern portfolio patients right now for us to understand.
They are considering them Tianjin termination of some of these things of what we have been seeing.
And certainly in Europe in general it grew.
40% to 50%.
Say from peak, albeit ppas.
In the U S. We are seeing that the merchant coursed are being updated to buy all the consultants upwards to much lower though.
But a good good up I mean around 16% to 20%.
In Australia, we are seeing similar things.
This is what we are seeing right now, but it keeps some mobile I'm in.
At least in Europe , what we see is that the market is going to be very strong.
On that term, we anticipate the same in the U S, but let's see.
So let's look at truly depends on project by project.
And what they truly need to strike the main business drivers today remains energy trading so do we see that happening more and more in markets where volatility is high.
Whether we see that happen in the most and of course in places like Ireland right. That's right in the UK and Europe is what is this kind of thing to happen.
But we are starting to see that the regulation is just starting to change in places like Spain for instance.
When they give you capacity now do are required to have some startup tour capacity is not going to be granted.
And we see this moving into the U S too.
A market that is held in the U S or everybody is talking about is Texas for discounts, but we need to wait a little bit before that regulation there because as you know the policy set of steel under.
Under discussion, but I hope I answered your question, but if there is any.
The other way you can do.
Yes, that's helpful I'll take the rest offline. Thanks, so much guys.
Hi, <unk>.
A comment now we also see the trend of.
And the requirement to attach.
<unk> solar.
China and.
These days.
While most of province.
In China.
<unk>.
The.
Regulatory agencies are requiring for example.
20% of two hours.
For the storage attached to the solar and so yes, indeed CNS, but Meanwhile, we are.
Also.
Lot of independent.
Storage project for example.
Working on a few third party.
Storage project.
Okay.
Independent projects.
For example were working out for you.
Mac.
One hour storage project.
In the science of <unk> five megawatt.
Each.
Okay and Osaka.
Independent approach.
Power storage array.
Great that's super helpful. Thanks, so much.
Thank you I show. Our next question comes from the line of Philip Shen from Roth Capital Partners. Please go ahead.
Hi, everyone. Thanks for taking my questions.
First one is on the 22 guide I was wondering if you might be able to share the revenue mix between.
The project business and the <unk>.
Module business and then.
Also in terms of.
The margin outlook there.
2022, I know you gave Q1, but was wondering if you could talk through the.
The cadence of.
So those margins and for the rest of the year by quarter and if you can give a split.
Between.
The module business and the project business that'd be great. Thanks.
Hi, Yes about you undertake on this question.
Sure.
This is about.
So in terms of the split between PFS and global energy.
<unk> guidance for this year.
This year from a revenue standpoint, and CFO , although it will take a much bigger.
So we're talking about.
Probably around four fold.
Or even more.
Of that weight coming from CFO .
And then in terms of guidance or margin guidance I think we're looking at Q1 is a little bit softer than.
Q4.
We do expect margins to improve through the year.
Great. Thanks, as Bill can you talk about the margins.
The buys by segment between the project business in the module business.
Yes.
Yeah, Hi, guys.
Thank you.
Sorry.
I said I guess the question is also for trending trended through right.
Yes, that's right.
Sure.
Obviously, we haven't given.
Full year margin guidance points.
Overall, I would say that the margin outlook for the two businesses shouldn't vary too much.
Oh here.
Okay, great. Thanks for that.
As it relates to.
The demand outlook in Europe .
I was wondering if you guys have seen a material change yet and if you could quantify that sort of talked through.
<unk>.
How youre seeing that play out in your business and in your conversations with distributors and customers. Thanks.
Hi yen you want to take on this question module demand.
The main changes in Europe right.
Yeah. So.
For now short term action.
Actually we don't have much exposure there were actually relating to the war.
No almost no risk we have absolutely no business in Russia.
And.
Almost no business in Ukraine.
Not that logistic wise, we have we see some impact of minor impact for for now.
Long term.
Yes.
Long term wise.
We see actually some positive movements because it looks like that.
Demand for renewable energy in Europe is actually going up and the increasing.
Power price in Europe also.
Actually benefit renewable energy so.
So we see it.
Actually we see actually emit long term this is actually that we see.
Our increasing demand.
Okay. Thanks again.
Then as it relates to <unk>.
Four four for the demand.
<unk> also.
Warming up actually it was a bit difficult.
Yes.
The entire last year from Europe , but now we see.
Steady growth.
Overall as well.
Okay. Thanks, Ken.
As it relates to the.
U S. ADR delisting risk I was wondering if you might be able to talk through that a bit. This has been a theme over the past couple of weeks and a key reason cited for.
Weakness in your stock and other stocks.
What do you expect to happen to head.
With the SEC.
And do you expect to be in compliance with the relevant regulations.
Et cetera. Thanks.
Fair enough.
Yes, we are implying so that's <unk>.
And.
Yeah, Okay. Thank you.
Great. Okay, I'll leave it there and pass it on thanks.
Thank you I show. Our next question comes from the line of Brian Lee from Goldman Sachs. Please go ahead.
Hey, guys. Thanks for taking the questions maybe just a quick follow up to to Phil's question around margins by segment I know there was some.
Lower margin project sales in Q4 that depressed the margin to that low single digit level.
It sounds like you're inferring that.
Margins will bounce back to sort of.
The mid teens ish level.
For projects and then for modules for CSI solar.
It's going to come off the kind of 19% level I suppose into the mid teens is that what you're.
Inferring here for Q1 as well as for 2022.
Okay.
Hi, Brian .
As Archie.
Akshay you smell.
Now given the first of all we're not giving.
Turning to margin guidance, yes, we only provide the.
Q1 margin guidance for Q1.
The CSI solar margin and.
The project margin.
Similar all in the same range now moving.
The quarter, although we're not giving margin guidance yet.
We are on.
Back pain.
Molecule solar molecule.
<unk> gross margin to go up.
<unk>.
And.
Sure.
Hopefully the walk to 18, 19% level.
Which match, China, China wireless annual level. However.
You should note that we now face yet another challenge, which is the largest.
Logistic used to be just over <unk> <unk> per watt.
When the module price is that fair.
<unk> stands for Awhile now module price dropped and.
The.
<unk> had logistic price went up so.
<unk>.
819% gross margin in U S GAAP.
It doesn't translate to a better high.
Margin after you take out the.
The.
The selling expenses.
Which include the logistic.
Okay Fair enough I appreciate that color I guess, maybe to follow up on that then two questions just.
I know last quarter away from you had talked about pricing.
On panels, obviously last year, it was up but it sounds like they're already starting to <unk>.
To soften a bit here can you kind of speak to what you're quoting generally over the next couple of quarters are you anticipating modest kind of low single digit mid single digit declines in module pricing and then.
Secondly, on the logistics costs shipping costs Youre talking about Sean do you have any.
I guess mitigation strategies or or contracts or any arrangements, where you can.
Sort of.
Offset these shipping cost headwinds or are you just purely.
Exposed to whatever spot.
Freight and shipping rates are doing in the market.
Yes.
Yen too.
Take on discretionary first and then.
I will add my comment yet.
Alright.
On pricing side.
Hey, Ken.
The the <unk>.
<unk> site, we're observing that PPA is.
Actually.
Turning up.
Together with the power price going out.
And so we are observing that projects and lastly investors are slowly slowly.
Moving up their tolerance level on the cask. So this is we are observing as well so it's not going really fast, but that is steadily going up.
So this is something that has allowing us.
True to absorb for the the <unk>.
High cost.
Increasing module price.
Slowly whenever necessary.
Over the year regarding the price trend.
I would say we're in the very elastic market.
In the past the total installation installer de installation base annually, it's relatively more independent because its more policy driven.
But now it's different it's more free market. So it's more elastic against.
Material.
Supply and price.
Uh huh.
So we also observe on supply side that silicon capacity, it's going to be ramp up.
Rapid over the year.
So we think in the second half of the certain point, we shoot observed that silicon price is going down.
So.
So together.
It's going to how pass on gross margin over the year in terms of the shipping cost.
On one hand, we have that we have.
Locked part of the total with shipping plan seeks to shipping cost.
Not 100% for sure because we know were at their high point in <unk>.
Secondly.
We also believe that.
If the war situation being resolved.
We may see a chance that shipping cost me cedar each maybe east actually we already observed.
Already observing that.
S side.
The largest especially the port.
Congestion situation has been.
Improved already significantly.
Especially on the east to East course, and now the West course hits.
Observing treatment.
So that's how we think.
We remain.
Positive moving into second half.
Yes.
Hi.
This is Sean in terms of the shipping.
Arrangement.
In the past two years, we're typically locking apart.
40%, 50%.
So shipping company.
For annual contract last year, we've had from those are annual.
From those.
Shipping contract so that.
Or.
Mixed.
The average shipping costs, yes, lower than the swap cost.
Over those are annual shipping.
Shifting com.
Contracts and those contract.
Expire, we have to Si and you and Youre shipping contract.
And the shipping and Youre shipping calendar for triennial trended to.
Higher the price are higher tonnage.
And one that's why it was the more the shipping cost impact.
This quarter in Q1, however, Meanwhile, Aussie handset, we also observed that the largest the situation start to improve.
Some of the.
Area for example for the lives to South America.
And the.
Ocean cargo price high.
Thank you significantly.
Reduced yes.
And also the asset and the.
The.
For the U S.
I think the U S.
East Coast shipping cost.
Alright.
Start will go down now.
U S West coast stripping and ocean cargo price stable high however, the port congestion situation is getting improve so.
We do see.
The hope for that.
The logistic.
It's getting improved.
From Q1.
Okay, that's great to hear I appreciate that additional color, Sean and Jan maybe.
One last one for me I'll pass it on.
The battery storage business I appreciate you breaking out the $500 million revenue target here for 2022.
Can you speak to sort of what what's.
What's happening in that business from a <unk>.
Margin perspective.
Given.
All of the different.
Inflationary trends that are happening in certain raw materials for batteries kind of what your supply situation, what's your cost situation.
And maybe just level set us as to the types of cells, you are using and what sort of exposure you have in general, but really wanted to understand the margin situation. There. Thank you guys.
Yes.
Again take on there.
Next question.
Thank you Sean.
Yes.
That's a good question first of all I want to say that the planned volume for 2022, we already secured the sale supply.
That is already building and.
Secondly in terms of margin.
It is.
10%.
At low teen.
10% and gross.
However.
In terms of the net profit is actually.
Are you called that contribution margin it's actually.
Much better than module.
Because this business. So we do not have a heavy opex or neither heavy capex. So it translates into a <unk>.
Net profit better.
In terms of our.
Our business model I want to point out that Canadian so satisfy solar.
Business model.
Utility scale storage is quite different from our competitors.
The reason for that is.
You know that the summer module manufacturers in China also do.
<unk> business, but our business model is we are not just the shipping equipment to the project. We are the system integrator ourselves. So we do the EPC ourself and we also provide.
Solutions equipment and aside from the turnkey.
Side of the project, which is the first contract and fund any project, we have a second contract leeches. The long term service agreement. So we also enjoy a lifelong service fleet.
Our NIM and.
<unk> mutation.
And any possible.
Storage expansion projects. So so this is.
Something that makes us unique and more robust in terms of.
Volume sorry in terms of the remedy on profit sustainability.
Cell lies.
As I said, it's the <unk> and <unk>.
We are working with that.
Both.
<unk> and <unk> and as well as the EV and some other tier two.
Yes.
The battery cell manufacturers and we're actually as we already mentioned to wear.
<unk> to ship our own projects our own system.
Storage containers, so start in the in a couple of months' time.
<unk>.
Which is a very competitive competitive.
Product.
So we're actually taking control of the manufacturing process and we're also growing our per stream.
Other technologies for example, we invested in the leading BMS company, leading storage BMS company in China.
We were we were.
Are you master in another company.
In London, right, So we talked about that before.
Habitat.
AI. So so this is our strategy. So we start from system integration and long term service agreement and then from there we're taking control of our manufacturing process as well as.
Ill try to take ownership of technologies.
Stream. Thank you.
Alright, Thanks, a lot guys I appreciate it I'll pass it on.
Thank you.
Thank you I show. Our next question comes from the line of J B Lowe from Citi. Please go ahead.
Okay.
Hey, guys. Thanks, I know, we're running out of time here I just wanted to throw a couple of quick ones. If I could number one have you seen any impacts from.
Covid Lockdowns in China on your business.
Hi, Jonathan.
You want to handle this.
Yes.
Yeah. So it.
It has the third minor impact on logistics right now.
Or mainly for the month of March.
I would say more like after mid of March so at the 10th of March So the impact is very limited miner.
Okay. Great next one was could you I know we talked that you mentioned this in your prepared remarks on the cost of logistics on a per well basis can you kind of.
Describe how like what was the logistics costs on a per watt basis in <unk> and what are you kind of expecting that to be in <unk> and then given that you're re contracting some of your volumes with shipping companies over the course of 2022 hour. How do you expect those logistics costs on a per watt basis to trend over the course of 2022. Thanks.
Yes about do you want to handle this question.
Yeah, Hi, Jamie this is about so the.
Cost in Q4 was between sort of application.
And for most of this year, we're expecting it to be around this level.
Sorry around what.
Two and a half to three one.
Okay. So same level in 2022 versus <unk>, Okay, perfect, Yes, and then last one for me is.
Could you just tell me what your exposure is to Europe or what was your exposure to Europe in 2021.
In the CSI solar business.
On a percentage of revenue basis, or do you expect that to be higher in 2016.
Hi, yes.
You want to handle this question about.
It's about 20%.
We expect.
Waiting to be at roughly the same.
Yeah.
Okay, great. Thanks, so much.
Thanks, Jamie.
Thank you.
Sure. Our last question comes from the line of <unk> <unk> from Wells Fargo. Please go ahead.
Thanks for taking my question I was wondering if you could just elaborate on the new battery product that you plan to launch I guess, what are the key benefits versus competitors and then do you expect a material margin improvement from from launching your own product.
Yes. This is your favorite word I.
I don't know it.
[laughter] well so.
The short answer sure.
By our manufacturing our own product.
With our own technology will significantly improve our margin.
So <unk>.
Comparing just buying ODM product from suppliers.
In terms of our technology our product.
So we have compared our.
Lead the lead the current available products in the market and obviously, we're very confident about our product in terms of the different dimensions in the first of all is.
The cost when we talking about cost it's not just a street.
Street Capex, but it's also you can start cost so.
Whatever solution.
Uh huh.
The different design you have different shipping costs do you have different installation cost.
So so on that we are confident that we have advantage and also.
On the safety side, it's a liquid cooling system and.
And we have studied the older markets.
Product in the market and we were confident that the safety standards that we have since actually.
We think we have a clear advantage.
It's not just the.
The temporary management, but also the poisonous gas.
Management and.
Also of course energy density as well so.
So it's a weed.
We've been into this area for a long time.
Starting from many years ago, we had the first project in Canada and then for.
Four years ago.
Had our own R&D team in the U S and then grabbed that into Canada into the China in England.
We spend.
A number of years in those areas already.
So we also start to do R&D.
<unk>.
And he just storage tailor made.
Battery cell technologies, so we understand that we have to.
Think about it.
Technology.
Asian against the industry.
So this is something that are important but the short mid term. We also spend a lot of effort working with our.
Suppliers some battery sales side. So we have established a quite a few strategic partnership for the suppliers and we do see some.
Battery cell suppliers start to pay increasing attention to Andy just storage because oh the newcomers in this industry. They have to think box there fast entry into this industry with volume and Andy just started its obviously its a.
Easier access to them so badly.
But we but but talking about that.
We also see that.
Differentiation of already battery cell site.
In terms of design for example, the size of the battery itself.
It is now a bigger than the EV industry.
So I hope this answer your questions.
No. That's very helpful. I appreciate it and then I guess just last question for me, maybe if you could comment on your Capex spending outlook for 'twenty, two and and also just on your funding needs. We will continue to access the ATM program. This year.
Thanks.
Hi, Paul.
Very well.
Yeah, Hi.
Hey, Tim.
Yeah. The ATM program, we have registered last year has already completed the 150 million U S. Dollar of course, we have the option to do another one.
At this point.
We don't see the need it yet.
Also for Capex last year, we spent about 400.
$50 million, which is less than what we budgeted.
And then for 2022.
Our scale now is much larger.
See more opportunities so the capex on the budget.
<unk> raised that to 700 million desktop.
Great. Thank you.
Yes, I would like to argue colors.
I would like to call some color sphere. This is Sean.
No.
Our strategy is to it.
Inquiries the vertical the level of vertical integration.
Hello module business.
So our target is to have.
Our cell capacity, roughly 70% to 80% of our module capacity, well, our ingot and wafer capacity at <unk>.
72.
The percent of our solar cell capacity.
That's why.
In order to support the.
Seven gig.
Trying to a gigawatt module shipment this year and probably even.
Higher module shipment in China, China is three.
We need to.
Further expand our solar cell.
And also the solar wafer capacity and not to mention that.
We are.
To expand our capacity now we can use the.
State of art newer technologies, so that to or be able to have better technology and better equipment than you are.
All combated, our that's why you will see higher <unk>.
Oh gosh numbers the cabinet Capex budget this year and of course this.
Subject to change, especially subject to the timing of the Colorado to IPO in China and right now as we said the Carnival IPO in China is on track.
Great. Thank you.
Thank you.
Thank you.
I'm showing no further questions in the queue. So this concludes our Q&A session. At this time I'd like to turn the call back over to management for closing remarks.
Thank you and thank you everyone for joining us today for your continued support if you have any questions. Our <unk> set up a call pretty contact our investor relations team take care and have a nice day.
Yeah.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
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The.
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