Earnings Call Transcript - CSIQ Q3 2023

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to Canadian Solar's Third Quarter 2023 Earnings Conference Call. My name is Shamali and I will 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 would now like to turn the call over to Isabel Zhang, Investor Relations Director at Canadian Solar. Please go ahead.

Isabel Zhang, Investor Relations Director

Thank you, operator, and welcome everyone to Canadian Solar's Third Quarter 2023 Conference Call. Please note that today's conference call is accompanied by slides that are available on Canadian Solar's Investor Relations website within the Events and Presentations section. Joining us today are Dr. Shawn Qu, Chairman and CEO; Yan Zhuang, President of Canadian Solar's majority-owned subsidiary, CSI Solar; Dr. Huifeng Chang, Senior VP and CFO; and Ismael Guerrero, Corporate VP and CEO of Canadian Solar's wholly-owned subsidiary, Recurrent Energy, also formerly Global Energy. All 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. Yan and Ismael will review business highlights for CSI Solar and Recurrent Energy, respectively, and Huifeng will go through the financial results. Shawn will conclude the 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 forward-looking statements that are subject to risks and uncertainties. The company claims 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 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 Regulation G regarding generally accepted accounting principles, or GAAP. 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 prepared in accordance with GAAP. And now, I would like to turn the call over to Canadian Solar's Chairman and CEO, Dr. Shawn Qu. Shawn, please go ahead.

Shawn Qu, Chairman and CEO

Thanks, Isabel, and thank you to everyone for joining our Q3 call today. Please turn to slide three. We achieved solid Q3 results despite the continued challenging environment. During the quarter, we delivered 8.3 gigawatts in solar module shipments. We generated $1.85 billion in net revenue, a 16.7% gross margin, and total net income attributable to Canadian Solar shareholders of $22 million, or $0.32 per diluted share. Let me share a few key takeaways. Please turn to slide four. First, even with the challenging operating environment, the industry is healthy. To give you some color, I have worked in the solar industry for well over 20 years, but only just witnessed total cumulative solar installed capacity finally reach 1 terawatt worldwide in 2022. As we look ahead, strong global demand is on track to drive that number up to 1 terawatt in annual installations. I strongly believe this can happen before the end of the decade or 2030. That is an incredible amount of growth ahead of us. Adding to this, the battery energy storage system market, our best market, is also growing rapidly. I believe that best market is also on pace to reach terawatt generation over the coming decade as it hits its first terawatt hours of cumulative deployments. Of course, short-term market cyclical fluctuations are inevitable with demand and supply constantly rebalancing. However, even with the current high cost of capital, solar and energy storage project returns are more economically attractive today than ever before. This is due to the lower equipment costs and higher electricity prices. The push towards decarbonization and net-zero emissions is stronger than ever before and the challenges of energy security remain. I strongly believe that the solutions we provide the market are truly the most competitive, impactful, and scalable in a fight against climate change. So, long-term, we believe the market fundamentals remain very strong. Turning to slide five, technology remains a key driver of growth and progress in the industry. Over the past 20 years, conversion efficiencies improved from less than 15% to well over 25% now. N-type is the next big technology driver and we have already ramped capacity. N-type TOPCon cell capacity now accounts for half of our total cell capacity and is expected to reach 60% by the end of this year. This gives us a major competitive advantage over other companies that have far greater exposure to older legacy technologies. Please turn to slide six. The third point I would like to make is on the continued strategic long-term investments we are making in key premium markets, including the US, where we are making major inroads. We recently announced a new 5 gigawatt solar cell investment in Jeffersonville, Indiana. Jeffersonville is on the northern side of the Ohio River, on the border between Indiana and Kentucky. We chose this location after extensive analysis and evaluation of 85 different sites across the US. It is going to be one of our largest single investments, which will enable us to not only better serve US customers with the most advanced technology, but also fulfill the local-content rules of the Inflation Reduction Act, or IRA. We are excited because our new 5 gigawatt cell facility will complement the new 5 gigawatt solar module facility in Mesquite, Texas, which we announced earlier this year. The Mesquite facility is on track to start producing modules in a few weeks before the end of the year. In fact, I was there last week and was pleased to see the team fine-tuning and working on the final preparations for mass production. I'm very proud of everyone involved in executing these two important manufacturing plants. We also thank the officials in Indiana and Texas and the local officials in Jeffersonville and Mesquite for their unwavering, critical support. We look forward to continuing to work with them as we grow in these communities, create important new jobs, and expand our global platform. In addition, we also recently announced a 5 gigawatt solar wafer facility in Thailand, which will complement our investments in the US and allow us to responsibly meet the new requirements related to the latest and adjusted AD/CVD ruling by the US Department of Commerce. Concurrently, we are adjusting the procurement of our module bill of materials in accordance with the newest regulations. Overall, we are strongly positioning ourselves to deliver long-term profitable growth for our shareholders. Please turn to slide seven. Lastly, we continue to lead in our ESG efforts. Recently, our ESG working group held global internal ESG town halls to socialize our initial tests and seek greater participation from our employees across all our regions. In this process, we continue to gather ideas and feedback from our great talent tool. Over the next year, we plan to focus on setting our SBTi, our science-based initiative climate targets. We will also be expanding Recurrent Energy's ESG practices across OS development and construction activities. This includes standardizing ESG procedures to the strictest levels of biodiversity, archaeological surveying, community engagement and environmental justice policies, enhanced health and safety, and so on. Historically, we have mostly focused on the manufacturing side of the business, which naturally has the greatest environmental impact. But we are making sure that our efforts cover every inch of our company. We are committed to continual improvement. Reflecting on our leadership efforts in ESG, we recently received the Global Sustainability Reporting of the Year Award by Environmental Finance. Congratulations to the global teams for their hard work. Canadian Solar will continue to work on our ESG disclosures, enhance strategy and execution, and seek improvement every year. With that, let me turn the call over to Yan, who will provide more details on our CSI Solar business. Yan, please go ahead.

Yan Zhuang, President of CSI Solar

Thanks, Shawn. Please turn to slide eight. In Q3, as Shawn noted earlier, the CSI Solar division delivered 8.3 gigawatts in solar module shipments and $1.8 billion in net revenues. Gross margin was 16.6%, 230 basis points higher than last quarter, driven by lower manufacturing costs and a higher level of vertical integration. This was partially offset by lower solar module prices. It also included a $35 million inventory write-down, which was specifically for modules in warehouses intended for certain distributed generation markets. Without the write-down, CSI Solar's gross margin would have been 18.5%. Let me now give you an update on the key drivers and market dynamics we're seeing. Please turn to slide nine. First, in Q3, we added 13 gigawatts of TOPCon cell capacity. We expect to add another 11 gigawatts by the end of 2023. As we explained previously, this expansion will meaningfully help us improve our vertical integration and enhance our structural margins. As Shawn mentioned earlier, we are big believers in N-type technology and its ability to drive change in our industry. We also believe that TOPCon is the most competitive N-type technology for the next few years. In fact, TOPCon technology has pleasantly surprised us since we have been adding more lines over the past few months. For example, the conversion efficiency of our mass-produced TOPCon cells has now reached an average of 25.65%, which is nearly 3.5 percentage points higher than that of PERC. We're confident we'll exceed the 26% threshold next year. However, that is still well below the theoretical limit for TOPCon, which is currently 28.7%, and this number will likely increase over time as well. Second, let's look at our capacity by region. I want to highlight the implications of our capacity investments. We believe we will meaningfully increase our US market share with our capacity expansion in the US and Thailand, where we're investing across the supply chain from modules to cells to waivers. Over the past few years, we have been shipping on average around 3.5 gigawatts to the US, as we did not make any major investments due to the uncertain policy environment. The circumstances have obviously changed over the past 12 months and next year, we intend to deliver significant growth in the US market, supported by a combination of our new local capacity in the US, as well as in Thailand. We have also set up our own internal capacity for certain materials in Vietnam, and by March of next year, we expect to meet the new requirements on the four out of six rule in the newest Department of Commerce ruling on AD/CVD circumvention for 100% of our solar module production in Thailand. Let me also make a few comments about our shipments to the US as certain false information about Canadian Solar was recently brought to our attention. In the first three quarters of 2023, we imported approximately 3 gigawatts of solar modules manufactured in Thailand into the US. Over the past few weeks, a sampling of containers has been detained for inspection under the UFLPA. This is a small fraction of the total, only amounting to approximately 150 megawatts as of last Friday. More importantly, we believe the detained merchandise is outside the scope of the UFLPA and we are fully cooperating with CBP to provide detailed information to that effect, as we have strict traceability procedures in place. Moreover, Canadian Solar follows comprehensive ESG protocols and does not tolerate forced labor or any other form of modern slavery. In 2022, we conducted 122 supplier ESG audits. We believe this is one of the most rigorous ESG auditing programs in our industry. Lastly, turn to slide 10. I would like to highlight our continued progress in e-STORAGE, our utility-scale storage business. Since June 30 of this year, our team has signed approximately $520 million in new contracts, and our total contracted backlog has increased to $2.6 billion. Of these, around half are expected to be delivered next year, which is equivalent to approximately 6 gigawatt hours to 6.5 gigawatt hours of projects. As we speak, our teams are busy with customers closing more transactions, which we expect to announce over the next few weeks. I'm proud that we have built a very strong global team that is able to execute and deliver on some of the most differentiated storage technical solutions in the market. Their ability to solve complex problems for our customers has allowed us to sign contracts with multiple repeat customers. The profitability of e-STORAGE has also been improving as most of our contracts have fixed prices, whereas our costs have been declining alongside the decline in lithium carbonate prices. Hence, we expect e-STORAGE to be a much bigger contributor to CSI Solar revenues and, notably, profits in 2024. Now, let me hand over to Ismael to provide an overview of Recurrent Energy, Canadian Solar's global project development business. Ismael, please go ahead.

Ismael Guerrero, CEO of Recurrent Energy

Thank you, Yan. Please turn to slide 11. In Q3, we delivered $64 million in revenue with a 27.7% gross margin. Q3 was expected to be a sequentially lower but still profitable quarter for Recurrent Energy from a gross margin standpoint, as we only monetized an 18 megawatt project in Japan and a few smaller projects in Taiwan. However, as I have started emphasizing recently, we are now shifting more of our resources towards executing projects as we intend to grow our base of operating assets that generate recurrent earnings. In Q3, nearly 300 megawatts of projects in the US closed financing, including both tax equity and project finance, and are now under construction. We expect to hold these projects longer term. We also expect to close financing on a third one soon, with construction then starting. Hence, we plan to have close to 500 megawatts under construction in the US by the end of 2023. In Europe, we have approximately 150 megawatts under construction with financing and lucrative PPAs in place. Over the course of the next year, we expect to COD around 500 megawatts of projects and start construction of approximately 1.7 gigawatts of solar and 800 megawatt hours of storage projects, which we intend to hold long-term. All of this means we are executing on our strategy. We are transitioning from mostly being a pure developer to a developer plus asset owner and operator. Over time, this will allow us to deliver more stable, forecastable growth, as over 70% of the revenues of the assets we intend to retain control of are fully contracted and diversified in low-risk areas only. We've also significantly expanded our operations and maintenance, or O&M capabilities. In Q3, we acquired a market-leading O&M team in the UK, significantly expanding our O&M contracted capacity from 6 gigawatts at the end of the last quarter to 8 gigawatts at the end of Q3. This brought us to the top three in the world by global O&M market share. Being one of the largest and most geographically diversified O&M operators and power services providers for both solar and storage assets enables us to better understand and optimize the performance of these assets in different locations around the world. Please turn to slide 12. As of September 30th, our total development pipeline grew to 26 gigawatts of solar and 55 gigawatt hours of battery storage projects. While we are focusing our resources on executing late-stage projects, we are also proactively developing new origination opportunities. The persistently high interest rate environment has made generating high returns more challenging. However, the decrease in system costs has also helped offset these effects, including the significant decline in solar module and lithium prices, as well as the lower cost of steel that has reduced the cost of trackers and other pieces of equipment. Technology improvements such as TOPCon have also improved our project economics through higher efficiency and lower degradation, and the interest from offtakers for renewable assets remains as strong as ever, helping us sign lucrative PPAs. Securing interconnections and interconnection delays continue to be the main constraints for our business today, but having approximately 13 gigawatts of solar and 12 gigawatt hours of storage interconnections secured give us very good long-term growth visibility. One of the key advantages of being a global project developer is our ability to apply lessons learned and best practices from one region to others. For example, we are one of the market leaders in energy storage development in the US, where we developed and completed 3 gigawatt hours of projects. We are now applying that valuable experience as we pursue significant storage opportunities across Europe, Japan, and areas in Latin America. In these markets, we are the only player with a significant track record in storage development. This lends us significant credibility and competitive advantages to take advantage of the earliest and most profitable opportunities that will create long-term value. Similarly, being one of the few developers that can provide PPAs in different parts of the world gives us a significant advantage with global offtakers who are seeking a streamlined process when signing renewable projects in different countries. We have been very successful in signing contracts in different jurisdictions with the same global customers thanks to this advantage. Now, let me hand over to Huifeng, who will go through our financial results in more detail. Huifeng, please go ahead.

Huifeng Chang, Senior VP and CFO

Thank you, Ismael. Please turn to slide 13. In Q3, we delivered $1.85 billion in net revenues, down 22% sequentially and 4% year-over-year. The sequential decrease was driven by lower project sales in Q3 relative to Q2, and a decline in module average selling price. Gross margin was 16.7%, a sequential decrease from 18.6% in the prior quarter. This was mainly driven by a lower contribution from the Recurrent Energy segment, which monetized a large high-margin project in the second quarter of 2023. On the CSI Solar side, margins improved due to a faster decline in costs relative to ASPs. In addition, CSI Solar incurred a $35 million inventory write-down specifically for modules in warehouses intended for certain distributed generation markets. Without the write-down, the Q3 total gross margin would have been 18.6%. Selling and distribution expenses were up 14% sequentially, driven by higher unit logistics costs. General and administrative expenses declined 18% sequentially, as share-based compensation expense related to the CSI Solar IPO from Q2 did not reoccur in Q3. This was partially offset by other factors, including a TOPCon ramp-up cost. Research and development costs increased 25% sequentially due to higher spending in TOPCon and the storage R&D. Overall, operating expenses increased by 4%. Net interest expense in the quarter was $11 million, down from $21 million in the prior quarter. This was mainly driven by the higher interest income from a higher cash balance during the quarter from the proceeds of the CSI Solar IPO, which have not been spent yet. The net foreign exchange and the derivative loss in Q3 was $17 million, compared to a net gain of $34 million in the second quarter of 2023, mainly driven by a weaker euro relative to the US dollar and hedging losses on RMB. Total income was $62 million, with net income attributable to Canadian Solar shareholders at $22 million, or diluted EPS of $0.32. Now getting to the cash flow and the balance sheet, please turn to slide 14. In Q3, we generated approximately $158 million in operating cash and invested $305 million in CapEx. Our full year 2023 CapEx budget is reduced slightly to approximately $1.3 billion. This means that Q4 will have a significant increase in CapEx. While we firm up next year's CapEx plans, we expect the next year's number to be slightly higher, but not too off from this year's CapEx level. So, we ended the third quarter with a healthy total cash balance of $3 billion. Our leverage, as measured in net debt to EBITDA, excluding restricted cash, was at 1.6 times, slightly higher than last quarter. Our financing programs now include two green bonds, one issued in Europe and another in Japan, the latter which we closed around a month ago. So, now, let me turn the call back to Shawn, who will conclude with our guidance and the business outlook. Shawn, please go ahead.

Shawn Qu, Chairman and CEO

Thanks, Huifeng. Let's turn to slide 15. For the fourth quarter of 2023, we expect solar module shipment by CSI Solar to be in a range of 7.6 gigawatts to 8.1 gigawatts, including approximately 85 megawatts to Recurrent Energy projects. Total e-STORAGE utility scale battery storage shipment by CSI Solar are expected to be in a range of 1.4 gigawatt hours to 1.5 gigawatt hours, of which approximately 720 megawatt hours are expected to be recognized as revenue in early 2024. From a financial point of view, we expect total revenue to be in a range of $1.6 billion to $1.8 billion, and gross margin is expected to be between 14% to 16% in the fourth quarter. For the full year 2024, we expect total solar module shipments to grow to the range of 42 gigawatts to 47 gigawatts. We expect total battery energy storage shipments to grow to the range of 6 gigawatt hours to 6.5 gigawatt hours. These numbers include approximately 2 gigawatts of solar and 2.5 gigawatt hours of storage internal shipment to Recurrent Energy projects, respectively. While competition is always tough in this industry and probably more so today than in the time past, overall, Canadian Solar is well positioned to execute through the near-term challenges and drive long-term growth. The strong position we hold across our key markets, segments, and business units gives us a major competitive advantage. This includes the e-STORAGE, which is one of our fastest-growing businesses with improving profitability. We expect to further strengthen our leadership position as we expect to more than triple shipments of our utility-scale energy storage solution in 2024, gaining additional market share in the global energy storage market. With that, I would now like to open the floor for questions. Operator?

Operator, Operator

Thank you. We will now start the question-and-answer session. Our first question is from Colin Rusch with Oppenheimer. Please go ahead with your question.

Colin Rusch, Analyst

Thanks so much. You know, Shawn, you've been through a number of these cycles with the industry as it's grown and gone through some down cycles. And I know that folks are really, you know, trying to get some visibility into what's going on in the distribution channel with inventory. Can you talk a little bit about what you're seeing, both from an overall inventory level, but also a sell-through and expectation around cycle times, both in your own distributor business, as well as your customers, particularly in Europe?

Shawn Qu, Chairman and CEO

Thanks, Colin. As you mentioned, I have experienced many cycles like this over the past 27 years in the solar industry. Right now, I feel more optimistic this time compared to previous uncertain periods. This is largely because Canadian Solar is significantly larger and has ample cash reserves, so I am not concerned about liquidity at all. Regarding inventory sell-through, the distribution market represents about 30% to 35% of the total solar market. There are some inventories in the channel in certain markets, but not everywhere. For instance, in China, I don't see much inventory in the distribution channel, whereas there may be some in Europe. To address your question, I recently spoke with a customer who is our top distributor in Europe. I inquired about how these inventories might impact them and how long they expected it would take to sell through in Europe. He estimated it would be about one quarter, perhaps less. I mentioned that I had read reports suggesting an inventory of 80 to 90 gigawatts. He responded that he didn't know where that information originated and that he certainly did not observe such high inventory levels; instead, he indicated the scale is much smaller. This was the feedback I received from my customer just last week. Given that, Yan and I prefer to take a more cautious approach. We believe it would be wise to prepare for more than one quarter, possibly stretching into the first quarter, as it is typically a low season due to winter. Therefore, it might take up to two quarters to sell through. That's my perspective, Colin.

Colin Rusch, Analyst

Thank you, Shawn. That was very helpful. I have a question for Ismael. There's been a lot of talk about interconnection and grid capacity for new projects. Can you provide some insights on how quickly projects are progressing through interconnection queues? Also, can you discuss the possibility of accelerating the timeline for some energy storage projects to move into construction, potentially prioritizing these elements before solar as we move into 2024, and how you anticipate that evolving?

Ismael Guerrero, CEO of Recurrent Energy

Thank you, Colin. Thanks so much for the question. Look, it remains the main issue, not only the saturation of the grid, but also the delays on executing the expansions by the grid operators. The good thing in our case is that we have very good visibility for the next three to four years of what we are going to be deploying. But it's an issue to keep on alerting the pipeline in the relatively short term for whoever needs that. Look, transformers, you need to order way in advance, and you are taking a significant risk because sometimes you need to order them before fully finalizing your permitting process. Otherwise, you are going to be late. In the storage side, we start to see more acceleration than before. We are starting to have the first projects coming in Europe. We are starting to receive the first interconnections for storage in Japan. So, we believe it's going to accelerate; probably not as fast as we wish, but it's starting to happen. I hope I answered the question.

Colin Rusch, Analyst

Yep. Thanks so much, guys.

Philip Shen, Analyst

Hey, guys, thanks for taking my questions. As a follow-up to the question earlier around inventory and the outlook for Europe, Shawn, I was wondering if you could kind of speak a little bit bigger picture in terms of your guidance. Your Q4 guidance is declining 5% quarter-over-quarter in a seasonally strong quarter. But then you're looking at 2024, and it seems like you could grow shipments maybe 50% year-over-year. So if the slowdown for Europe is maybe Q4 and Q1, is the expectation that there is a tremendous recovery as we get through Q2 and Q4 of next year? Thanks.

Shawn Qu, Chairman and CEO

Hi, Philip. This is in Yan's territory, so I will ask Yan to answer the question.

Yan Zhuang, President of CSI Solar

Hey, Philip. As you know, destocking began in Europe towards the end of Q2, and it has already been two quarters. We expect it to conclude by Q1. With a significant price reduction over the past year, we anticipate a strong resurgence in demand as that channel recovers. We have a robust presence in that channel, so we expect a strong recovery in Europe and other markets as well. Given that we operate in a price-sensitive market, this price reduction should stimulate demand significantly. While the rebound may not be immediate, we foresee a return to utility demand over the next couple of quarters. This past year, we did experience a drop in utility demand due to various bottlenecks in EPC, interconnections, and equipment, as well as speculation from customers anticipating lower module prices, leading them to delay purchases. However, we expect utility demand to rebound strongly throughout the next year, and we anticipate a significant pickup in demand in the second half of next year.

Philip Shen, Analyst

Great. Thanks for all the color, Yan. Shifting to the US market, you mentioned in your remarks that a 150 megawatts product was detained. Looking ahead, do you expect risk for new shipments to be detained? And how many gigawatts do you think you could ship into the US from Southeast Asia in 2024? And as it relates to the detention, what type of bomb is in the module that has been detained? How long do you expect the detention to last, and do you expect it to spread? Thank you.

Yan Zhuang, President of CSI Solar

Well, so we're actively cooperating with CBP on submitting the documentation. And we're actually very confident with our traceability procedures and from our knowledge that both non-China and China silicon has passed through the customer. So we're working with them and we're confident that we can resolve this soon.

Philip Shen, Analyst

Okay. Yeah, thank you.

Yan Zhuang, President of CSI Solar

For next year, we should have strong growth, as Shawn mentioned, in the US.

Philip Shen, Analyst

Can you share how many gigawatts you think could be in the US next year?

Shawn Qu, Chairman and CEO

Well, Philip, as you know, we used to have about 4 gigawatt solar cell capacity in the US, and we are now building an 8 gigawatt TOPCon capacity. Not in the US, I'm sorry. 4 gigawatts of solar cell capacity in Thailand, and we are now ramping up another 8 gigawatts of TOPCon solar cell. Now, most of those capacities are built in order to serve the US customer. I guess that's the information I can provide to you at this moment.

Philip Shen, Analyst

Thank you, Shawn. I have another question. What are your assumptions about the overall size of the US market in 2024? I've heard estimates from other Chinese companies suggesting the US market could see 80 gigawatts of module shipments and possibly 50 gigawatts of installations, which seems quite high. I would like to know what you consider the 2024 baseline to be in your scenario. Thank you.

Shawn Qu, Chairman and CEO

Now, I want to check if our Senior Vice President, Thomas Koerner, is online. Thomas, are you online? Thomas? Okay, forget it. Next time. So, Yan?

Yan Zhuang, President of CSI Solar

We are seeing and expecting strong growth in US market demand for next year. While I'm not certain about 80 gigawatts, it should be significantly higher than this year according to our estimates.

Philip Shen, Analyst

I think Thomas might be available now. What is the basis for that strength? Utility scale may grow by 10% to 15%. I see residential down by 10% to 12%. Commercial might stay flat or increase, but it’s not a significant market. So, where do you expect that strong growth to come from? Thanks.

Operator, Operator

Thomas' line is now live.

Yan Zhuang, President of CSI Solar

Well?

Thomas Koerner, Senior Vice President

Hi. This is Thomas. Can you hear me?

Philip Shen, Analyst

Yes, thanks.

Operator, Operator

Yes.

Yan Zhuang, President of CSI Solar

Yeah, Thomas.

Thomas Koerner, Senior Vice President

We are seeing a significant revival and ramp-up of utility projects mid to the end of 2024. And as Shawn and Yan have already outlined, the deployment through the distribution channel should be finished by Q1, latest by Q2 next year. You're already seeing distribution companies begin to reorder and restart ordering for the beginning and Q2 next year. So once the inventory has been deployed in the residential channel and some rooftop markets, we are seeing customers coming back and reordering products in anticipation of a pretty strong 2024 US market.

Philip Shen, Analyst

Okay. Great. Thank you for the color, guys, and taking all the questions. I'll pass it on.

Operator, Operator

Our next question comes from Brian Lee with Goldman Sachs. Please proceed with your question.

Brian Lee, Analyst

Hey, guys, how's it going? Thanks for taking the questions. Maybe a few follow-ups to Phil's questions around guidance. Just trying to triangulate here some of the moving pieces for Q4. So maybe if you could help us out? Just the 14% to 16% gross margin guidance, what does that embed for CSI Solar? You know, is it up, flat, down? And is your base of reference reported 16.6% or is it the adjusted 18.5%? Like, are there other inventory write-downs you're anticipating for Q4 in CSI Solar? So, on maybe just, you know, what's the gross margin direction or, you know, range you'd expect for that segment in Q4?

Shawn Qu, Chairman and CEO

Hi, Brian. Good to hear you again. Now, actually, I would like to introduce a new person. Well, actually, he's not new. He has been with us for many years. Kah Locke, our financial controller. Now, Kah Locke, do you want to shed light?

Kah Locke, Financial Controller

Yeah. So, the outlook will be driven primarily by CSI Solar. So, that is the basis for our present outlook. In terms of the range of guidance, you know, that reflects the sensitivity we have towards the market right now in terms of price and our inventory level, etc.

Brian Lee, Analyst

It seems you are suggesting that Q4 will be largely influenced by CSI Solar. Recurrent had relatively low revenues in Q3. If we assume Recurrent doesn't see significant growth in Q4, it would indicate that the average selling prices, which were reported at around $0.20 per watt this quarter, might drop to about $0.17 or $0.18 per watt in Q4. Are we incorrect in thinking that Recurrent won’t grow much in Q4? I’m trying to clarify the pricing because I have a follow-up question regarding the implications for 2024 guidance.

Kah Locke, Financial Controller

Your estimation is in a ballpark. Recurrent is not growing much for this next quarter.

Shawn Qu, Chairman and CEO

Now, I want to explain in a different way. Recurrent is shifting from developing and flipping to developing and holding projects. So, Recurrent is growing, but they are not selling projects. We think we have been leaving too much money on the table by selling the project just after or before COD. We think our projects are very valuable, and connection points are also very valuable, and you're not going to see this kind of PPA or this kind of connection point anymore. So, we think that by holding those projects, the value will grow. So I just want to correct that Recurrent is growing, because the pipeline is growing.

Brian Lee, Analyst

Thank you, Shawn. That makes a lot of sense, and I have a follow-up question on that. To round out this line of questioning, if you're looking at high-teens ASP per watt as we exit 2023, what is your overall perspective for 2024, especially since we're still dealing with some destocking and it seems like meaningful shipment growth might not happen until the second half of the year? You seem to suggest this in response to an earlier question. So, with ASPs remaining flat or decreasing modestly, what is your broader outlook from these levels for the rest of 2024?

Shawn Qu, Chairman and CEO

Hi, Brian. As you know, we don't provide 2024 margin or ASP guidance yet. So, why don't we wait until March or May conference call, and let's see whether we can share some of the numbers at that time?

Brian Lee, Analyst

Okay, understood. Last one for me, Shawn, and I wanted to ask you a big picture strategy question. You know, as Recurrent is going to go into more of a quasi-IPP model. Wondering, can you give us a sense of what your average holding period, target holding period would sort of be like? And the reason I ask is you're not generating free cash flow this year, and if CapEx is up more next year, presumably, you may be in a tight free cash flow position next year as well. And you're not selling these assets for upfront margin. So, does it start to strain your cash flow or balance sheet picture in terms of holding these projects longer? Just kind of get a sense of the puts and takes and how you balance that? Thank you.

Shawn Qu, Chairman and CEO

Hi, Huifeng, can you answer this question?

Huifeng Chang, Senior VP and CFO

Yeah, sure. Hi, Brian. Our leverage on the Recurrent Energy side has increased over the year because we are transitioning into a build-and-hold model. But meanwhile, when we indicate our strategy of holding assets, we have been approached by many financial partners. So, we have options going forward, equity, partnerships, all kinds of forms to grow our assets and also be a manager for those assets. So the future cash flow will be predictable and stable. So we are really in the transitional period. And that explains why the revenue number over the past few quarters was lower for Recurrent Energy. But going forward, you will see the cadence will change, we'll accelerate the growth, owning more assets and owning more cash flows. Thank you.

Shawn Qu, Chairman and CEO

Hey, Ismael, do you want to add some color?

Ismael Guerrero, CEO of Recurrent Energy

Sure. Look, you've been asking a couple of things. The first one was for how long we intend to hold the assets. I think that's heavily dependent on when is the optimum point of selling. So, our intention is to retain for as long as we can and wait for opportunities, if there are opportunities in the market, to sell a portion of larger portfolios whenever market conditions are good for sale. But initially, we don't have a period for holding. We are signing PPAs for 15 years to 20 years. So, the intention is to prepare the assets to be held for the long run. And as for how to get equity I think you can reply perfectly. I mean, there are many ways to get the equity we need and we are perfectly aware of what it means cash wise, the shift. So everything is very well planned, I think.

Operator, Operator

And it looks like we have time for one more question. Our last question comes from the line of Praneeth Satish with Wells Fargo. Please proceed with your question.

Praneeth Satish, Analyst

Thanks. Good morning. So, I guess, when you look at your end markets, you know, we know DG demand, residential demand is weak. But I guess, focusing more on the utility side, have you seen signs of slowdown on utility-scale solar demand, given higher rates? And then on the Recurrent side, how are you seeing returns trending in the current market and what's the ability to pass on, you know, the higher rates with higher PPAs? How much room is there for that?

Shawn Qu, Chairman and CEO

So, I would invite Yan to provide colors from the module vendor side, and then Ismael can add more colors as a developer. Yan?

Yan Zhuang, President of CSI Solar

Hey. Well, so the answer is on the demand side. We're seeing strong potential demand next year because from our discussions with many of the big utility-scale customers, you know, a lot of those customers have a huge pipeline that is coming up and some of them are just delayed into next year. So, for various reasons, and the pricing downtrend is one reason and other reasons like delayed interconnection and some other permitting delays. But we know the pipeline's coming up next year. So, that's a good sign.

Shawn Qu, Chairman and CEO

Ismael?

Ismael Guerrero, CEO of Recurrent Energy

Sure. Look, on the interest rates and the ability to pass over the hit on the model, there are a couple of things that we need to understand. The interest rates are high right now, but we don't know for how long they are going to stay high. Everybody's assuming in their modeling that sooner or later they will refinance at a better rate. So, you are having a hit right now, but it's not a hit for the life of the asset, while we are having reductions on the CapEx of the projects that stay there for the life of the asset because it's a one-time investment. On the PPAs, we still see a very strong demand and the dynamic of that market is different from the interest rates. It's basically dominated by supply and demand. And because of the delays of interconnection, we still see that there is a significant shortage of good quality projects, and offtakers are generally struggling to secure all the PPAs they want to secure. So, we've been canceling a couple of PPAs ourselves to sign better ones, and right now, the market is strong. That's all I can tell you right now.

Operator, Operator

And we have reached the end of our question-and-answer session. I'll now turn the call back over to Chairman and CEO, Dr. Shawn Qu, for closing remarks.

Shawn Qu, Chairman and CEO

Thank you for joining us today and for your continuous support. If you have any questions or would like to set up a call, please contact our investor relations team. Hope you have a wonderful Thanksgiving holiday with your families and take good care.

Operator, Operator

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.