Canadian Solar Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 22, 2024

There are 9 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Canadian Solar's Second Quarter 2024 Earnings Conference Call. My name is Rob, and I'll be your operator for today. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session.

Operator

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Lina Huang, Head of Investor Relations at Canadian Solar. Please go ahead.

Speaker 1

Thank you, operator, and welcome everyone to Canadian Solar's Q2 2024 Conference Call. Please note that today's conference call accompanies slides, which are available on Canadian Solar's Investor Relations website within the Events and Presentations section. Joining us today are Doctor. Sean Chu, Chairman and CEO Yan Straub, President of Canadian Solar's subsidiary CSI Solar Giselle Guerrero, Corporate VP and President of Canadian Solar subsidiary Recurrent Energy and Kim Bo Zhu, Senior VP and CFO. All company executives will participate in the Q and A session after management's formal remarks.

Speaker 1

On this call, Sean will go over some key messages for the quarter. Yan and his Mao will review business highlights for CSI Solar and Recurrent Energy, respectively, and Tim Bo will go through the financial results. John will conclude his prepared remarks with the business outlook, after which we will have time for questions. Before we begin, I would like to remind listeners that management's prepared remarks today as well as their answers to questions will contain certain forward looking statements that are subject to risks and uncertainties. The company claims protection under the Safe Harbor for forward looking statements that is contained in the Private Securities Litigation Reform Act of 1995.

Speaker 1

Actual results may differ from management's current expectations. Any projections of the company's future performance represent management's 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 risks and uncertainties can be found in the company's annual report on Form 20 F filed with the Securities and Exchange Commission. Management's prepared remarks will be presented within the requirements of SEC's Regulation G regarding Generally Accepted Accounting Principles or GAAP.

Speaker 1

Some financial information presented during the call will be provided on both a GAAP and non GAAP basis. By disclosing certain non GAAP information, management intends to provide investors with additional information to enable 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 provided in accordance with GAAP. And now, I would like to turn the call over to Canadian Solar's Chairman and CEO, Doctor.

Speaker 1

Sean Hsu. Sean, please go ahead.

Speaker 2

Thank you, Wina, and thank you all for joining our Q2 call today. Please turn to Slide 3. In the Q2, we delivered strong results. We shipped 8.2 gigawatts of solar modules, surpassing our previous guidance of 7.5 to 8 gigawatts. While increasing volume, we maintained competitive average selling prices, resulting in revenue of $1,600,000,000 and a gross margin of 17.2%, both in line

Speaker 3

with our guidance.

Speaker 2

Over the past few months, we have observed signs of market rationalization. Record low prices are driving out uncompetitive players. Meanwhile, our industry peers re announced significant first half losses. In comparison, we have performed well, striking a delicate balance between volume and profitability. I'm proud of what we have accomplished in one of the most challenging industrialization I have experienced in my career.

Speaker 2

The underlying fundamentals of solar remain robust. As I have mentioned before, AI driven data center expansion, electric vehicles, cryptocurrency and other emerging technologies will generate substantial demand for clean energy. Solar and energy storages will also contribute will also continue to be a major trend. We must not forget that the distance to meeting our global climate goals remain large. However, the challenges ahead should not be underestimated.

Speaker 2

It will take time to rebalance supply and demand in solar, given that today's industry competitors are more have more scale and resilient than ever before. How will we navigate a potentially extended downturn? Please turn to Slide 4. Canadian Solar is a diversified business with complementary divisions that enable us to not only weather, but also succeed in this challenging industry landscape. Today, our module business has reached an optimal scale, largely enough to maintain a highly competitive cost of structural, yet lean enough to adapt swiftly for change in industry dynamics.

Speaker 2

Our approach to capacity investments has always been carefully balancing vertical integration, the right technology mix and magnitude. At the same time, we are positioning ourselves for sustainable growth through our rapidly expanding energy storage segment, a business for which we began laying the foundation 10 years ago. We are on track to grow by more than 500% this year, and we are doing so at industry leading margins. Wood Mackenzie has forecasted a cumulative energy storage base of 1 terawatt hour by 2027. We have the expertise to grow alongside this market.

Speaker 2

Complementing our global manufacturing expertise in both solar and energy storage are our outstanding business teams. These local experts have enabled us to develop both global operations and a truly global brand. Finally, our project development platform, Recurrent Energy, is poised to deliver additional long term value as it transitions to be a global developer, owner and operator of solar and storage assets. A key element of our growth strategy is to do so sustainably and ethically. Please turn to Slide 5.

Speaker 2

In May, we proudly published our latest corporate sustainability report, which features expanded disclosures and enhanced transparency. Highlighting a few achievements in 2023, Canadian Solar achieved reductions in greenhouse gas emissions by 37%, energy consumption also by 37%, water usage by 72% and waste intensity by 54% compared to the leverage in 2017. Additionally, we remain on track to meet our target of powering all global operations with 100% renewable energy by 2,030. As we have consistently emphasized, ethical labor practices are of utmost importance to us, both within our operations and throughout our supply chain. As a participant in the United Nations Global Compact, which we adhere to the UNGC's 10 principles of human rights, labor practices, environmental protection and business ethics.

Speaker 2

To ensure the integrity of our operations and supply chain, we also engage with responsible business alliance to conduct validated assessment programs audit at our facilities and those of our suppliers. The RBAVAP audit is an industry leading standard for on-site manufacturing evaluations, assessing labor practices, health and safety, environmental impact, ethics and management systems. Finally, we remain committed to promoting diversity, equity and inclusion. At Canadian Solar, we foster a productive workforce that benefits from diverse perspectives in decision making processes. Our newly included gender pay analysis revealed that women at Canadian Solar earned 95% of what men earned in 2023, with the remaining 5% GAAP deemed equitable.

Speaker 2

In conclusion, I'm pleased with our achievements in the second quarter and the first half of this year. We have demonstrated the resilience of our business in challenging circumstances and remain vigilant in our work moving forward. I will now turn the call over to Yan, who will provide more details of our CSI Business CSI Solar Business. Yan, please go ahead.

Speaker 4

Thank you, Shawn. Please turn to Slide 6. In the Q2 of 2024, we shipped 8.2 gigawatts of modules, marking a 30% quarter over quarter growth. We generated revenue of $1,700,000,000 and achieved a gross margin of 16.7%. Despite the industry facing record losses, CSI Solar delivered an operating income of $93,000,000 Our revenue and profitability were bolstered by strong performance in North America, which accounted for approximately 30% of our shipments.

Speaker 4

In most other regions, average selling prices remain challenging. We managed our orders stringently. This coupled with a reduction in costs supported our financial performance. To walk through key drivers of our module business, please turn to Slide 7. Alongside the rapid decline in polysilicon prices, the entire supply chain is under pressure, leading to continued cost reductions.

Speaker 4

While this trend may initially seem concerning, it highlights the advantages of our partial vertical integration. We can flexibly source upstream materials at prices that enhance our competitive cost structure. In line with our flexible strategic manufacturing approach, we're moderating our capacity expansion plans to capitalize on current market conditions. Specifically, we intend to delay upstream investments until a more obtune window, reducing our planned capital expenditures this year. Thanks to our ongoing technological advancements, N type Topcon costs are now nearly aligned with those of PERC.

Speaker 4

Today, Topcon Technology is an industry standard, offering lower levelized cost of energy compared to mass produced non crystalline technologies. This means our customers benefit from using less land, installing fewer trackers, reducing end of life disposal costs and more. As I mentioned, our U. S. Business remains strong with higher volumes delivered at competitive prices in the Q2 compared to the first.

Speaker 4

We currently have contracts signed and under active negotiations through to 2030. In the U. S, bankability is even more critical than in other markets, and customers prefer to buy from a select group of Tier 1 suppliers, where trust and a proven track record are paramount. As in the past, during periods of uncertainty, we continue to actively service the U. S.

Speaker 4

Market. In addition, we are investing over $1,000,000,000 in the U. S. To ramp up 2 state of the art and highly competitive manufacturing facilities. 1 facility is already producing solar modules in Muscat, Texas, while the other will manufacture solar cells in Jeffersonville, Indiana.

Speaker 4

Together, those these facilities will create more than 2,500 American manufacturing jobs. As a domestic manufacturer, we believe that regulatory certainty and clarity are essential for maintaining a long term resilient solar industry in the United States. Now turning to our e storage business. Please go to Slide 8. In the Q2, we continued to achieve record shipments, delivering approximately 1.5 gigawatt hours globally.

Speaker 4

Our backlog continues to grow and now stands at $2,600,000,000 Our key markets include the United States, where we have a long standing track record across all our businesses, as well as the United Kingdom, Australia, Canada and other countries were entering as we expand the business. One deal in our backlog that I would like to highlight is our contract with Nova Scotia Power to develop flagship energy storage projects across these across 3 locations in Nova Scotia, Bridgewater, Waverly and White Rock. These projects totaling more than 700 megawatt hours will play a crucial role in enhancing rate reliability and stability. As Canadians, we take pride in making a significant environmental impact at home, contributing to both provincial and federal targets of achieving 80% renewable energy by 2,030. The growth potential for e storage is enhanced.

Speaker 4

As of June 30, 2024, our total project turnkey pipeline for e storage stands at approximately 66 gigawatt hours. This pipeline includes both contracted and in construction projects as well as projects in various stages of negotiation. Moving forward, we expect to continue growing volume at healthy margins. With the support of our Energy Storage segment and the continued strategic management of our module business, we anticipate the second half of the year to be stronger than the first. Now, I will hand it over to Itmel to provide an overview of Recurrent Energy, Canadian Solar's Global Project Development Business.

Speaker 4

Ismail, please go ahead.

Speaker 5

Thank you, Ian. Please turn to Slide 9. 2nd quarter results were relatively modest with no major project sales. We generated $50,000,000 in revenue with a gross margin of 47.4%. During our transition to a model focused on accumulating operating assets, project sales will be lighter.

Speaker 5

In the second half, due to policy changes in Europe, our projects will experience delays between 1 to 2 quarters in Spain and longer in Italy depending on the region. Where in the U. K, we obtain approval on several projects. We also anticipate potential interconnection delays in certain parts of the U. S.

Speaker 5

These risks we will continue to manage through our hybrid developer owner and operator business model with global presence. Since the announcement of BlackRock's $500,000,000 investment in January, we have made significant progress, securing the requisite regulatory approvals and making internal operating milestones. We are pleased to have announced the initial closing, representing $300,000,000 of the planned capital infusion. A key aspect of the growth expected from this transaction is our ability to secure the financing needed to support the construction and monetization of our high value pipeline projects. Over the past few months, we continue to obtain competitive financing at both the operational and construction levels.

Speaker 5

In May, we secured a landmark multicurrency revolving credit facility valued at up to EUR 1,300,000,000 involving 10 banks to support the construction of renewable energy projects across several European countries. In June, we obtained $513,000,000 in project financing for our 1.2 gigawatt hour storage project in Maricopa County, Arizona. Papago Storage is the largest energy storage project in Arizona and holds a 20 year tolling agreement with Arizona Public Service Company. The battery energy storage system used for this historic project is sourced from Canadian Solar's East Storage division. Also in June, we closed a $103,000,000 tax credit facilitation agreement with Bank of America for our 160 Megawatt North Fork Solar Project, which is already in operation.

Speaker 5

This transaction marks our first production tax credit deal and exemplifies our ability to execute globally to optimize our funding access. Please turn to Slide 10. We continue to lay the groundwork for long term shareholder value. We have expanded our total development pipeline to 27 gigawatts of solar and 63 gigawatt hours of battery energy storage. Our pipeline is valuable not only for its scale and geographical diversity, but also because of the interconnections we can secure and the competitive PPAs we negotiate with top tier counter parties.

Speaker 5

For example, we recently signed a 10 year PPA with GKAM Automotive, a global leader in drive systems. This agreement will facilitate the annual production of approximately 200 gigawatt hours of renewable electricity and marks GKM Automotive's 1st renewable energy PPA in Europe. Across the world in Japan, we entered into a 20 year PPA with Toyota Susho Corporation to secure 100 percent of the solar power along with the non fossil certificates generated by 3 of our solar projects. This accomplishment marked our 1st private PPA with Toyota Susho, a key member of the Toyota Group. Recurrent Energy currently owns 1.6 gigawatts of projects in operation and 1.7 gigawatts under construction, along with 1 gigawatt hour of BEST projects in operation and 3.8 gigawatt hours under construction.

Speaker 5

The vast majority of these projects are fully funded and secured with PPA contracts, positioning us to begin generating substantial revenues from 2025 onwards. Additionally, we have around 10 16 gigawatts hours of BESS with granted interconnections, which are expected to be ready in the near term, driving significant growth. Our O and M business continues to grow steadily with 11 gigawatts of contracted projects, making it one of the largest operational fleets globally. This steady growth is supported by our own project portfolio, which provides clear visibility into future expansion. Now let me hand it over to Simbo, who will go through our financial results in more detail.

Speaker 5

Simbo, please go ahead please.

Speaker 6

Thank you, Ismael. Please turn to Slide 11. In the Q2, we achieved revenue of $1,600,000,000 and a gross margin of 17.2%, both of which were in line with our guidance. The sequential increase in revenue was primarily due to a higher volume of solar module shipments, partially offset by a decline in module ASP. Gross margin decreased 180 basis points quarter over quarter, mainly due to lower module prices.

Speaker 6

Total operating expenses in the 2nd quarter increased to $434,000,000 primarily driven by higher shipping and handling expenses. Freight costs are likely to remain elevated in the second half of the year, given the ongoing Red Sea issue and the industry's efforts to clear shipment backlogs from Asia to the United States and Europe. Net interest returned to a normalized level in the Q2, following the absence of an interest benefit derived from the interest income generated by antidumping and the countervailing duty deposit refunds in the Q1 of 2024. Net foreign exchange and derivative gains in the Q2 of 2026 amounted to 13%, mainly driven by the weakening of the Chinese yuan and the Japanese yen against the U. S.

Speaker 6

Dollar. Total net income was $27,000,000 while net income attributable to Canadian Solar was $4,000,000 or $0.02 per diluted share. Basic and diluted earnings per share included the Recurrent Energy Redeemable Preferred Share Dividends payable in kind that is associated with BlackRock's investment, resulting in an EPS effect of $0.03 deducted on the dilutive basis. Here, I want to address the impact of Recurrent Energy's business model transformation on Canadian Solar's P and L in the near to mid term. As Recurrent transitions to a partial IPP model and accumulates more assets, 2 key effects will emerge.

Speaker 6

1st, Recurring will sell fewer projects, leading to a lower contribution to Canadian Solar's P and L. 2nd, as more projects are retained on balance sheet, a greater portion of revenue and gross profit created by CXS Solar will be eliminated at the consolidated growth level. The unrealized CSI Solar revenue and gross profit on equipment sales to recurrent for those projects will be recognized gradually over the life of the project assets. Due to these effects, during the transition period, Canadian Solar's P and L will be systematically and consistently lower than that of CSS Solar. While recurrent assets will deliver value longer term.

Speaker 6

Now let's discuss cash flow and the balance sheet. Please turn to Slide 12. Net cash flow used in operating activities in the Q2 of 2024 was $429,000,000 The operating cash outflow was primarily driven by increased project assets built for sale and increased accounts receivables, mainly associated with higher module sales during the Q2. Regarding that, going forward, SunTrust Solar and Recurrent Energy's leverage profiles will align with their respective strategic goals. This quarter, CSI Solar reduced its debt, optimizing its financial leverage to better navigate the industry cycle.

Speaker 6

Meanwhile, Recurring Energy will continue to increase leverage in the near term to support this transition to a partial IPP model. In summary, total financing at the half year mark still at $4,200,000,000 with a decrease at CSA Solar and a net increase at Recurrent Energy. In the second quarter, we spent approximately $390,000,000 in manufacturing capital expenditures. As Yan mentioned earlier, in light of market conditions,

Speaker 2

we

Speaker 6

are dialing back our upstream capacity plans. We have revised our full year 2024 capital expenditure expectations downward to approximately $1,200,000,000 We ended the period with a cash position of $2,200,000,000 reflecting CSI Solar's debt repayments, recurrent solar and storage asset growth and change in working capital. Lastly, I would like to speak to the private convertible bond we announced on Monday. Please turn to Slide 15. The rationale for this transaction is both financial and strategic.

Speaker 6

From a financial perspective, the notes provide us a versatile financing solution, offering a flexible drawdown schedule and the reasonable funding costs. From a strategic standpoint, we are pleased to welcome PAG as a new potential equity partner. Please turn to Slide 14 for additional color. With more than $55,000,000,000 in assets under management, PAG is among a select group of global investment managers with specialized capital pools across multiple asset classes dedicated to investing in renewable energy. PAG is an experienced investor in the solar sector.

Speaker 6

After acquiring the First Solar Japan platform in 2022, it expanded its portfolio to over 600 megawatts across Japan. PAG is also the largest owner of distributed solar projects in Hong Kong. PAG is well positioned to partner with CSIQ to strengthen the company's market leading position across the solar value chain. In key operating markets, we anticipate that PAG will collaborate with Canadian Solar to explore and realize strategic synergies. Now let me turn the call back to Sean, who will conclude with our guidance and business outlook.

Speaker 6

Shawn, please go ahead.

Speaker 2

Thank you, Xinbo. Please turn to Slide 15. For the Q3 of 2024, we expect solar module shipment by CSI Solar to be in the range of 9 to 9.5 gigawatts, including approximately 100 megawatts of solar module shipments to our own project. Total battery and energy storage shipments are expected to be between 1.4 to 1.7 gigawatt hours, including about 1.2 gigawatt hours for our own project. This significant volume to our own project is primarily for PAPCO Storage, a landmark project in Arizona developed by Recurrent Energy.

Speaker 2

Total revenues are expected to be in the range of $1,600,000,000 to $1,800,000,000 Gross margin is expected to be between 14 percent to 16%. At this midpoint of the year, we observe a second half characterized by certain uncertainties by some uncertainties. Given the potential extended period required for the supply demand balance to normalize, module margins will continue to freeze pressure. However, this is counterbalanced by the strength of our e storage business. E storage is expected to deliver record revenue and profitability in the Q4, even after accounting for elimination of shipment to our home project.

Speaker 2

As such, we are revising our total solar module shipment guidance to be in a range of 32 to 36 gigawatts, including 1 gigawatt to our own project. CSI Solar's battery storage shipments are expected to be between 6.5 to 7 gigawatt hours, including approximately 2.5 gigawatt hours to our own projects. We expect full year revenue to be in the range of $6,500,000,000 to $7,500,000,000 These revised forecasts reflect our continued commitment to our strategy of prioritizing profitability and driving sustainable growth. With that, I would like to open the floor for questions. Operator?

Speaker 2

Thank you.

Operator

And our first question comes from the line of Colin Rusch with Oppenheimer. Please proceed with your question. Thanks so much guys. With

Speaker 7

the new ADCVD charges, can you talk a little bit about how you're expecting the sales and distribution cost to trend to the balance of the year? And just on a percentage of revenue would be super helpful.

Speaker 2

Yes, Collin, I don't know which ADCVD you referred to. If you refer to the new ADCVD petition for the Southeastern Asian country, then we have to wait. We have to wait for the at least for the preliminary ruling expected in October November. So it's difficult for me to speculate the impact of that ADCVD case at this moment.

Operator

Maybe I can take it

Speaker 7

offline, but the question is really around how are you accruing for that in the meantime as you bring products into the country? All right. Let me take that one offline. So the second question then is really

Speaker 2

around This

Speaker 4

is Yan. So let me answer your question. So in the meantime, we actually work with our customers on the conditioning price mechanism. So both sides are protected with assumption of different tariff level. So we are actually doing business as usual at the moment.

Speaker 4

So that's what we do right now.

Speaker 7

Okay. Thanks, guys. And then you guys have had a history of being flexible with the market in terms of building out capacity and managing margins around where best returns are. And you still got a very strong distribution business in a number of countries. Can you talk a little bit about the dynamics for that distribution business as you've seen some of the kind of disruption that's happened in that distribution channel here in the last couple of years?

Speaker 7

And how you see that opportunity evolving for your distribution business? Is that something you can grow into? Or are you still managing a lot of relationships and kind of working somewhere to some of your peers?

Speaker 4

Yes. So distribution business has always been our strong channel and they continue to be strong. Actually, we anticipate this year more than half of the volume goes to the DG market. That include the residential rooftop and the C and I rooftop market. And in particular, I would say, we're even under the current situation with a very low price in the market price module, we're doing well in the U.

Speaker 4

S, for example, on the distribution channel, and we're doing well in Japan. And we even started our bundling business bundle module and residential storage and inverters in the channel to enhance our margin. So long term wise, we will expand that bundling business in different markets and has proven to be a very profitable way of conducting sales by providing solutions.

Speaker 7

Okay. Thanks, guys.

Operator

Our next question is from the line of Philip Shen with Roth Capital. Please proceed with your questions.

Speaker 3

Hey, guys. Thanks for taking my questions. First one is on the 2024 guide. Can you share some additional color on what drove the latest 2024 shipment reduction? Was the main impact driven by the Southeast Asia, AD CBD tariff process?

Speaker 3

I know the tariffs have not come out yet, but there is uncertainty. And so just with the petition filed, did that slow business and the willingness of customers to receive modules? And if it wasn't that, then was the driver more driven or more just the global slowdown that we're seeing? Thanks.

Speaker 2

Philip, this is Sean. The new guidance is not because of the new ADCVD case in for our Southeastern countries, it's rather for other market. For U. S.-funded shipments, we are more or less on target with our previous target. There's not much impact.

Speaker 2

And as you know, the preliminary decision for the new ADCVD is only expected in October November. So it's rather late. So you won't have much impact to the total annual shipment. So the impact is really for from the other market. Now as we mentioned every time in earnings call that we want to strike a balance between shipment volume and profit.

Speaker 2

In other words, we don't want to lose money just to sustain or to achieve shipment numbers. So we look at the current situation, but as you know, our shipment has been going up every quarter, quarter by quarter. The Q1, we delivered, I think, 6.3 gigawatt and 2nd quarter, 8.2 gigawatt and 3rd quarter, we are we just guided 9 to 9.5 gigawatt. So actually, we have stabilized our sales channels and we are getting back with more and more orders, we'll still be able to protect our profitability. But still, we are already at the second half of August.

Speaker 2

And in order to strike a balance between the volume and profitability, we have taken actions. So we look at how much we can reasonably ship while still maintain the profitability, then we decide that the new guidance, the new shipment range as a reasonable estimate, as a reasonable update, Philip.

Speaker 3

Great. Okay. Thank you, Sean. Can you share any color on a potential recurrent IPO timeline? Additionally, are you thinking about spinning off the e storage business as well?

Speaker 3

And then finally related to e storage, do you plan on building a battery cell pack line in the U. S. And how much solar cell capacity while you guys talked about how much you have in the U. S. Now, how much more could it be and how much could you grow it?

Speaker 3

Sorry for so many questions in a row, but thank you.

Speaker 2

Well, Philip, thanks for highlighting so much of the strength of Canadian Solar. You'll see our strength in recurrent. You also see our strength and differentiation in the storage. So thank you very much for seeing our strength and seeing our differentiators. Now we haven't talked about our how to speculate this.

Speaker 2

However, we are moving to a partial IPP model as I myself, Ismail and Xinbo mentioned. And going through this model, you can reasonably speculate that at some point, we will look for a way to capitalize on what we accumulate and what we build. However, we just started this process. So I would say to build a good IPP, it takes a couple of years. So I guess this is the indication of any capitalization plan for recurrent.

Speaker 2

Now e storage, we don't have a plan to spin off. E storage is an important and dynamic component of CSI Solar. So and it sit well in the CSI Solar family. So we don't have a plan there. Now what's your next number 3 and number 4 question?

Speaker 3

Yes. So the next one is, do you plan on building battery cell and PAC in the U. S? And then as it relates to U. S.

Speaker 3

Solar cell and module capacity, just remind everybody kind of what the capacity is today and what your plans are for expansion? And I think that's it. Thanks.

Speaker 2

Well, we plan in other words, we have been studying the battery cell pack and the best production in U. S, no question about that. However, we haven't made announcement of any factories there. So I would not make an announcement today. Now for solar cell and solar module, the module capacity in Mesquite is 5 gigawatt.

Speaker 2

The cell capacity in Jefferson Well, Indiana is also 5 gigawatt.

Speaker 3

Great. Okay. Thanks. I'll pass it on.

Speaker 2

Thank you.

Operator

The next question is from the line of Praneeth Satish with Wells Fargo. Please proceed with your question.

Speaker 8

Thanks for taking my questions. So the guidance for the second half, it sounds like you expect margins to be under pressure because of the challenging market conditions and supply oversupply across the solar value chain. I guess when do you think things get back into balance?

Speaker 1

Do you

Speaker 8

have kind of an internal view there? And then at a high level, do you expect this challenging market conditions and margin weakness to extend into 2025?

Speaker 2

Yes. I would like to clarify that we see the margin for solar module business under pressure. However, we see sustainable and healthy margin for our energy storage business. So overall, we still have confidence for the second half of the year. Now I would let Yan to make further comment, especially for like the question of how long the pressure on the module business may continue.

Speaker 4

So first of all, as Sean has already mentioned that we're going to have a strong Q4, very strong Q4 on storage side. So we believe the pressure will continue throughout this year for sure

Speaker 2

and it

Speaker 4

may vary in next year. So I'm not a magician. I cannot tell you when it's going to be recovered. But we're already seeing it's actually reaching the bottom. So people are very careful on inventory control.

Speaker 4

And we're seeing capacity are actually start to flush out slowly, but it's going to accelerate, we believe, when we move into next year. And for us, we're going to have continue to have a very healthy business on our storage moving into next year, significantly higher volume with healthy margin. So and we believe next year's module situations will further be stabilized. I don't think it's going to worsen this year. So overall speaking, we're still confident about our business next year.

Speaker 6

Let me add additional color. The weaker gross margin in Q3 is kind of fluctuation mostly because of the gross margin recognition in Q3. E storage is kind of system sell and the revenue and profit recognition may fluctuate because of cutoffs. So we expect lower gross margin to be recognized in Q3. And as both Yan and Shawn mentioned, we confirm that even after elimination, we are going to deliver a stronger second half of the year for e storage.

Speaker 6

So it implies a very robust Q4 for e storage.

Speaker 8

Okay, got it. So maybe just to be clear on that point for as I know you haven't provided guidance for gross margin in Q4, but given the commentary around e storage being strong in Q4, the margin there is higher. Should we assume then that the gross margin increases potentially from Q3, the midpoint is 15% from Q3 to Q4?

Operator

Reasonable.

Speaker 2

Well, we're not providing Q4 gross margin yet, as you just mentioned. So it will take quite some computation to determine the gross margin range. So usually, we reserve it before the next earning call.

Speaker 4

So we already stated that we're going to have a stronger second half than first half.

Speaker 8

Okay. No, that makes sense. Okay. Thank you, guys.

Operator

Our next question is from the line of Vikram Bagri with Citi. Please proceed with your question.

Speaker 4

Hi. Thanks for taking the question. Could you give some insight into U. S. Module pricing more recently?

Speaker 4

We know that it's far higher than module pricing globally, but we've also seen an increase in module imports this year, quite a sharp increase. So could you talk about how that impacts your domestic U. S. Module pricing compared to your imported volumes? Have you seen a big change or differential in the pricing of those two markets?

Speaker 2

That would be helpful.

Speaker 4

Well, so we have a very healthy margin in the U. S. On module side and we're actually growing our volume in the U. S, shipment to the U. S.

Speaker 4

And so

Speaker 3

I think

Speaker 4

we see some price fluctuation. And however, the ADCVD, the petition actually making the price addition more complex. In general, we're seeing price trending up. So with the impact of the ADCVD. So but still, we're confident from the deals we're signing up.

Speaker 4

We're actually quite confident that our margin in the U. S. Will continue to be healthy in Q3. And even in Q4, we have a strong high confidence.

Speaker 2

Got it. That's helpful. Thank you. And just a

Speaker 6

question on the Q3 guidance,

Speaker 4

could you give some color on what's driving that step up sequentially in the module shipment to that 9 to 9.5 gigawatt range? Are there any specific regions that you're shipping to that are driving that? Just trying to understand better understand that step up, especially in light of managing volumes against pricing? Well, we have a volume increase in the U. S.

Speaker 4

In Q3 and also in Europe slightly. And other than that, it's actually small changes, small increases. So it's actually in the end, it's from 8.2 up to we give a range of 9 to 9.5. So it's like about 1 gigawatt hour.

Speaker 2

Got it. Thank you. Thank you. At this time, we've reached

Operator

the end of our question and answer session. I'll hand the floor back to management for closing remarks.

Speaker 2

Thank you for joining us today and for your continued support. If you have any questions or would like to set up a call, please contact our Investor Relations team. Take care and have a great day.

Operator

This will conclude today's conference. Thank you for your participation. You may now disconnect your lines at this time.

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Canadian Solar Q2 2024
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