Earnings Call Transcript - CSIQ Q4 2023

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to Canadian Solar's Fourth Quarter 2023 Earnings Conference Call. My name is Melissa, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a Q&A session. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Wina Huang, Head of Investor Relations at Canadian Solar. Please go ahead.

Wina Huang, Head of Investor Relations

Thank you, operator, and welcome everyone to Canadian Solar's fourth quarter 2023 conference call. Please note that today's conference call is accompanied with slides which are available on Canadian Solar's Investor Relations website within the Events and Presentation section. Joining us today are Dr. Shawn Qu, Chairman and CEO; Yan Zhuang, President of Canadian Solar's subsidiary, CSI Solar; Dr. Huifeng Chang, Senior VP and CFO; and Ismael Guerrero, Corporate VP and President of Canadian Solar's subsidiary, Recurrent 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 the highlights of the CSI Solar and Recurrent Energy, respectively, and Huifeng will go through the financial results. Shawn will conclude with 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 under 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

Thank you, Wina. Thank you to everyone for joining our fourth quarter call today. Please turn to Slide 3. 2023 marked a record year for Canadian Solar. CSI Solar achieved solar module shipments of 30.7 gigawatts, a year-over-year increase of 45%. This milestone drove our revenue to an all-time high of $7.6 billion. Despite challenging conditions, our full year net income attributable to Canadian Solar shareholders was $274 million or $3.87 per diluted share, a historic high. Before we delve deeper, let's take a moment to reflect on our journey over the past two decades. Please turn to Slide 4. Canadian Solar has evolved into a full stack solar and battery energy storage business spanning both manufacturing and project development. Our strategic decision to carve out CSI Solar has established it as a vertically integrated powerhouse with 118 gigawatts of cumulative shipments. Our focus here remains on leading edge technology and strategic sustainable expansion. Within CSI Solar, our utility scale battery energy storage business, e-STORAGE is poised to deliver on a massive $2.6 billion backlog, which we continue to grow. Meanwhile, Recurrent Energy has become one of the world's largest and most geographically diverse project developers. With the recently announced $500 million BlackRock investment, it is equipped with the ammunition to execute on its business transformation. What does this all mean? We are prepared to navigate the next phase of the industry and our own evolution. Not only can we capitalize on the collaborative advantages across our businesses, but we also possess different levers for growth. This diversified nature, coupled with our world-class team, enables our steadfast commitment to long-term value accretive growth. Turning to Slide 5. We see the world is grappling with a surge in clean energy demand. From data centers to electric vehicles to cryptocurrency mining, these energy-hungry sectors are stressing aging power grids, in some cases even prompting businesses to construct their own power plants. According to BCG, data center share of U.S. electricity is set to triple from 2.5% in 2022 to 7.5% by 2030, reaching close to 400 terawatt hours. Moreover, the intensive requirements of these buildings that must operate day and night need a mix of power generation sources including solar and battery energy storage. Transportation is also fueling a significant increase in electricity needs. Light-duty vehicles are expected to consume north of 30 times more electricity by 2030 according to Princeton University data. This surge is further intensified by the energy demands of computationally heavy autonomous driving technologies. Bloomberg reports that, assuming energy efficiency continues to improve as it has in the past decade, the power usage by in-vehicle computers could hit 26 terawatt hours by 2040, comparable to the usage of approximately 60 million desktop computers. Moving on to the U.S., a key strategic market for us. Please turn to Slide 6. On the left, you can see our Texas factory, which began production at the end of last year, has been ramping smoothly, supporting local job creation. We continue to see strong interest in and demand for our locally made products. Furthermore, to support our growing market share, we have also prepared our Thailand resources from wafer production to cells to modules. Here, we note that over the past few months, certain litigation has created confusion within the industry. We reaffirm that the preliminary and final determination of the Department of Commerce set the new rules for country of origin and Canadian Solar has responsibly adjusted its supply chain to ensure compliance with the new rules, specifically both the wafer and four out of six rules. Our strength in the U.S. is founded on strong customer relationships and our trusted brand. For example, just last month, our solar PV modules powered the first-ever 100% renewable energy-powered Super Bowl. We also received the top brand PV USA 2024 award from EUPD, a globally renowned authority in market research. 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

Thank you, Shawn. Please turn to Slide 7. As noted, 2023 was a landmark year for CSI Solar. We achieved a 45% year-over-year growth in solar module shipments, reaching 30.7 gigawatts; our e-STORAGE segment grew the pipeline to a record 63 gigawatt hours with $2.6 billion in contracted backlog as of January 31, 2024. We reached record full year revenue of $7.2 billion. The module business tackled a challenging environment with steep declines in ASP, destocking of channel inventory in distributed generation markets, and policy uncertainty. However, we were able to mitigate impacts through structural manufacturing cost reductions. Moreover, our manufacturing and technology strategies have allowed us to differentiate ourselves in the industry. Let us take a deeper look at our transition to TOPCon on Slide 8. We observe increasing technological barriers in N-type technologies such as TOPCon and we're proud of the swift progress we have made. N-type TOPCon cell capacity now accounts for more than half of our total cell capacity and is expected to reach near 80% by the end of this year. Alongside our expansion of TOPCon manufacturing, we also continued to make inroads in our made in the U.S. modules, increased our vertical integration, and strengthened our Thailand supply chain. Shifting focus to battery energy storage. Let us turn to Slide 9. Storage plays a critical role in ensuring solar energy's dispatchability, stability, and security. The storage market is projected to grow massively, exceeding 1 terawatt hour in cumulative capacity by 2030. We are well-positioned to capture growth, especially in strategic markets like the U.S., where we have a strong track record in both solar and battery energy storage. Our differentiation lies in both product and execution. e-STORAGE is trusted by customers for its outstanding track record in delivering turnkey solutions. This trust spans operational execution and, most importantly, safety. Our strong local teams are ensuring best-in-class service, while our strong brand name and balance sheet from Canadian Solar makes our guarantees highly compelling. Customers feel at ease backed by our Canadian company with more than 20 years of history operating in global markets. Now, with the latest iteration of our utility scale energy storage system, SolBank 3.0, we're offering one of the market's highest density products at 5 megawatt hours, with even more advanced safety features. We continue to make global breakthroughs. Q4 revenues from e-STORAGE were more than 10 times what we did in Q3, while realizing meaningful revenue and profit from our backlog, we're also continued to grow. Just in between last November and January 2024, we signed significant volume, including Australia, which we entered for the first time, and the U.K., where we signed the largest national best project. In the U.S., we're set to deliver our second massive Arizona project following the signing of our first 1.2 gigawatt hour Papago project, which is developed by Recurrent Energy. We're proud to say that from the day e-STORAGE began operations, every project has contributed meaningfully to profitability. Following a softer year in 2023, when we transitioned to a fully self-manufactured product, we look forward to a blockbuster 2024. In the first quarter of 2024, e-STORAGE will deliver nearly as much as in the entirety of 2023. Over the rest of 2024, we expect e-STORAGE to gradually grow through the quarters, with Q4 seeing nearly double Q1. Ultimately, we expect storage to contribute significantly to both Canadian Solar's revenue and profitability. In addition, we continue to invest R&D resources into our battery energy storage business, both upstream and downstream. Gaining a stronger control on technology is crucial for both commercial and strategic purposes. 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, Corporate VP and President of Recurrent Energy

Thank you, Yan. Please turn to Slide 10. In January 2024, we proudly announced a $500 million capital commitment from BlackRock, one of the world's largest and most sophisticated renewable energy investors. The $500 million investment will represent 20% of the outstanding fully diluted shares of Recurrent Energy on an as-converted basis. Canadian Solar will continue to own the remaining majority shares of Recurrent Energy after the closing of the investment. With this investment, our goal is to have 4 gigawatts of solar and 2 gigawatt hours of battery energy storage projects in operation by 2026. The $500 million in equity capital not only equips us with dry powder to develop and own more projects but also bolsters our balance sheet and our debt-raising capacity. By owning this asset, we can retain more of the value we create during the development process, enjoying very stable cash flows since most of our revenues are contracted with top counterparties. In addition, we continue to recycle capital and drive growth organically. Hence, we have sufficient growth equity capital for the next two years. Beyond that, our capital needs will depend on how aggressively we want to expand, being able to do so above a 25% compound average growth rate without the need to raise more capital. This investment is instrumental to our transition from a pure development to a developer plus long-term owner and operator in select markets, enabling a more diversified portfolio and stable long-term earnings. With the support of BlackRock, Recurrent will concurrently push toward improving ESG standards, including across biodiversity, health and safety, community engagement and environmental justice. Recapping on 2023, please turn to Slide 11. For the full year 2023, Recurrent Energy's operating contribution footprint was light as previously guided. We achieved 280 megawatts in project sales, $498 million in revenue and $205 million in gross profit. Our gross margin more than doubled year-over-year to 41.1%, thanks to a significant sale in Japan through CSI. While certain projects meant to close in the fourth quarter have moved to the first half of this year. We have decided to hold other valuable assets over the long run. Please turn to Slide 12. During Q4 2023, we continue to focus on executing on one of the largest and most mature global solar and storage pipelines. As of January 31, our total pipeline stood at 27 gigawatts of solar and 55 gigawatt hours for battery storage projects. Of this, we have 12 gigawatts of solar and 14 gigawatt hours of battery storage interconnections secured. I want to highlight that today, we have in construction close to 2 gigawatts of solar projects. This is the largest undertaking in our history. However, because we will be selling fewer projects and are swiftly building projects that will not come online until next year, 2024 will serve as a key transition year. As Shawn mentioned, data centers will be driving massive energy demand. According to the International Energy Agency, data centers and transmission networks currently consume 1.5% of the world's energy. Combined, they emit roughly the same amount of carbon dioxide as Brazil does every year. The surge in artificial intelligence technology is significantly challenging climate targets, with energy needed to train a single AI model exceeding that of 100 households annually. Electrification across industry is similarly driving massive energy consumption needs. Of course, electrification can only serve as an effective solution for decarbonization when it goes hand in hand with a significant expansion of renewable energy sources. In addition to demand catalysts, we also expect balanced micro-drivers. Potentially decreasing interest rates over the course of this year will benefit financing for utility scale projects. While equipment costs and overall EPC CapEx have come down, benefiting returns, PPAs on aggregate remain stable and have even gone up in certain geographies while suffering a correction in others. In addition, as more solar products come online, so too rises the need for operations and maintenance or power services, a key segment of Recurrent Energy that we have been strategically growing both organically and through acquisitions in key markets. We now have 8.2 gigawatts of solar and battery energy storage under contracts across the world, and we expect to become a top-five global player over the next year. 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 Q4, we exceeded guidance on shipments reaching 8.2 gigawatts, a 26% increase year-over-year. We were in line with revenue at $1.7 billion and gross margin was 12.5%. The decline was driven by lower module ASPs and inventory write down. As the lion's share of perk inventory has cleared, and the TOPCon ramp-up costs will decrease over the course of 2024, we expect no further sizable impairments. Selling and distribution expenses declined 6% sequentially. The reduction was driven by lower shipping costs due to the ongoing global freight oversupply with the Red Sea shipping disruption largely contained until the end of December. We foresee a slight, but not meaningful increase over the course of 2024 due to the ongoing conflict. General and administrative expenses declined 5% sequentially with internal cost controls. Research and development expenses increased 9% sequentially, driven by high investments in new technologies. Net interest expense in the fourth quarter was $18 million, up from $11 million in the prior quarter. This was mainly driven by increased financing and comparatively lower interest income. Net foreign exchange gain in the fourth quarter was less than $1 million. Total net income was negative $3 million, with net income attributable to Canadian Solar shareholders at a negative $1 million or diluted EPS of negative $0.02. Now turning to cash flow and the balance sheet. Please turn to Slide 14. For the full year of 2023, we generated approximately $685 million in operating cash and spent over $1.1 billion in CapEx below expectation as we slow down the payment of certain capacity expansion plans. Hence, some CapEx for 2023 will be realized in 2024. We ended the period with a healthy cash balance of $3 billion and total net debt of $1.7 billion. Leverage measured as net debt to EBITDA excluding restricted cash increased slightly quarter-over-quarter to 2 times due to the incremental borrowing for working capital and additional vertical integration for CSI Solar and a new project development for Recurrent Energy. For 2024, we expect CapEx to be approximately $1.8 billion as we further vertical integration plans and invest in U.S. manufacturing. We know that this number is slightly higher also due to a timing effect whereby certain remaining payments from the end of 2023 will be carried over to 2024. Recall, in 2023, we guided to $1.5 billion, but only spent $1.1 billion. 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 first quarter of 2024, we expect solar module shipments by CSI Solar to be in the range of 6.1 gigawatts to 6.4 gigawatts, including approximately 235 megawatts of solar module shipment to our own project. Total revenue is expected to be in the range of $1.2 billion to $1.4 billion. As Yan mentioned, in this business, we are constantly balancing between margin and volume with our focus on profitable growth. Our conscious decision to control volume will generate an improved gross margin expectation between 17% and 19%. This improvement is further bolstered by e-STORAGE's more meaningful profit contribution. For the full year 2024, we reiterate CSI Solar's total solar module shipments guidance to be in the range of 42 gigawatts to 47 gigawatts. CSI Solar battery storage shipments are expected to be between 6 gigawatt hours to 6.5 gigawatt hours, reflecting significant contribution in revenue and profitability. We also reiterate revenue guidance for the full year 2024, which we expect to be in the range of $8.5 billion to $9.5 billion. Finally, let me speak to our view of the market growth trajectory. Coming out of a challenging 2023, we are optimistic about 2024. We expect to see a rebound in demand as the distributed generation market has cleared channel inventory and emerging markets are poised to unleash their potential. As supply and demand rebalance toward the second half of the year, we expect potential improvement in pricing, especially of TOPCon solar module products. We differentiate between industry overcapacity versus oversupply as not all capacity is truly effective. Possessing the technology bankability and reliability that our customers' projects need, as the market undergoes further normalization and consolidation, we see vertical integration, advanced technologies, and a robust go-to-market strategy as key to competitive edge. With its strong global track record, Canadian Solar has built unparalleled trust over the past two decades. Our steadfast commitment to profitable growth, combined with our long-term strategic investments, enables us to deliver enduring value to our shareholders. With that, I would now like to open the floor for questions. Operator?

Operator, Operator

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question comes from Colin Rusch with Oppenheimer. Please proceed with your question.

Colin Rusch, Analyst

Thanks so much, guys. And I guess the first question is really around the pricing dynamics and strategy for the energy storage business. Obviously, there's a lot that's been going on around the supply chain and there's an awful lot of demand. So I just want to understand how you guys are thinking about passing on some of the cost reduction on the cells relative to trying to take advantage of some of the intense demand that we're seeing out there.

Shawn Qu, Chairman and CEO

Yes, Colin. To answer your question simply, if the prices of battery materials like lithium carbonate decrease, we will pass those savings on to our customers. However, our e-STORAGE product typically has a long contracting period, and most of our contracts for this year were established at least 12 months ago. This means both us and our customers are taking risks. The pricing we offer enables our customers to meet their financial objectives, resulting in mutual satisfaction. Looking ahead, if there is a sustained decrease in lithium carbonate prices, we will continue to share those savings with our customers.

Colin Rusch, Analyst

That's very helpful. My second question is about interconnection queues and time frames, particularly regarding your technology portfolio. We've noticed that interconnection queues have been extending over the past few years. As you expand into different end markets for larger developments, are you identifying opportunities to integrate additional technology? Will you consider bringing that in-house? Is storage sufficient to manage this, and how do you anticipate the evolution of interconnection queues in the coming years?

Shawn Qu, Chairman and CEO

Ismael, this is a question about the interconnection queue. Do you want to answer this question?

Ismael Guerrero, Corporate VP and President of Recurrent Energy

Sure. Happy to take it. Thank you, Shawn. Look, we keep on seeing delays, Colin. Hi, by the way, thanks for the question. We keep on seeing delays. Things are getting worse and worse in PGM, for instance, you probably saw that they stopped taking more applications recently. That's why we believe that our 12 gigawatts of interconnection granted already has very strong value. And the 14 gigawatt hours we have of storage already granted interconnections have a huge value too. We don't think that it's going to ease. I think it's going to be getting more and more difficult. And the main things that we are starting to think about is, how can we start being less demanding on the network and start to use storage behind the meter more and even have plants that are serving directly applications, like, for instance, data centers or desalination platforms and all this kind of stuff, so that we can serve directly the load instead of having an agreed needed. Those are the things we are working on. I don't think it's going to get easier. I think it's going to get worse. That's my present.

Colin Rusch, Analyst

Okay. I'll take the rest of it offline. Thanks so much, guys.

Ismael Guerrero, Corporate VP and President of Recurrent Energy

Thank you, Colin.

Vikram Bagri, Analyst

Good morning, everyone. I was curious about the implied valuation of CSI Solar, especially considering that your investment from BlackRock is significantly higher than the current trading level of the stock. Do you have any thoughts on how to address this valuation gap? Is there a strategy in place to bridge this gap?

Shawn Qu, Chairman and CEO

That's a very good question. Actually, I don't know how to answer it. However, we will present this in all of our investor meetings and let the investment community see this gap, to highlight the discrepancy in value. I hope that over time, people will come to recognize the significant difference not just in the valuation that BlackRock places on our recurring business but also in the market cap of our CSI Solar business. When you combine those two components, the total is much higher than CSIQ's market cap. Yes, we all see it, and we have been continuously searching for ways to bridge this gap.

Vikram Bagri, Analyst

Thank you. And on the same topic, the storage business that you have is roughly now as large as one of the publicly traded peers and will be relatively large within CSI segment as well. Would you look to break out this business separately this year, both on the revenues and margins for storage? And if you can share what your margin outlook is for storage, that will be helpful as well.

Shawn Qu, Chairman and CEO

Well, again, another very good suggestion. As I said, we are always looking for ways to maximize shareholder value. However, carving out a business is not an easy task. So I don't think we can carve out e-STORAGE this year. However, as I said, moving forward, we'll always look at any method to maximize shareholder value.

Vikram Bagri, Analyst

Great. And then one final question before I pass it on. Impressive module shipments in the fourth quarter, I was wondering what surprised you on the upside leading to the above guidance volume, especially in such a challenged market. And on the same topic, can you share how much of the guided volumes for 2024 on the module side are already contracted versus what you need to still contract? Thank you.

Yan Zhuang, President of CSI Solar

2024 is shaping up to be a unique year. In the first quarter, the industry is experiencing margin pressure, with prices dropping rapidly since the fourth quarter of last year. However, we anticipate a rebound in the second half, with the second quarter likely serving as a transition period. Our goal will be to balance margin and volume effectively. We expect this year to show an upward trend, particularly in distributed generation, where we foresee price recovery and improved margins ahead. Contracts in this distribution channel are typically signed a few weeks before shipments, but we have a very loyal global distribution network, giving us strong confidence in volume from our distributors and leading sellers worldwide. In the U.S. market, which currently has the highest prices and margins, we have secured a significant portion of our capacity, especially from our more profitable U.S. factory volumes. For other markets, the situation varies. In Japan and some higher-priced markets, we have a greater percentage of signed orders. In lower-priced markets, we manage our pace accordingly. However, we are witnessing robust demand in certain markets, such as Pakistan, even as early as March, allowing us to secure volume at a healthy price.

Vikram Bagri, Analyst

Thanks for that.

Shawn Qu, Chairman and CEO

Right. So I'll add a few comments. I will add a few comments on Yan's comment. You asked us how much of our guided annual volume is contracted. As I mentioned in the guidance section, for Q1, we strategically decided to control the volume in order to protect the margin. Therefore, with this strategy, we are strategically trying not to contract too much of the 2024 annual volume into long-term contracts. Because we believe, as Yan said, the pricing will improve. We think the module pricing in some of the markets is too depressed, which will improve. It has to improve. So Yan would rather want our sales team to control the volume so that we can pick a better-priced contract later in the year. But we do believe that both the volume and the price, well, actually, the volume is there, but we want a better price before we commit to the volume.

Vikram Bagri, Analyst

Thanks, everyone.

Philip Shen, Analyst

Hi, everyone. Thanks for taking my questions. As a follow-up on the previous topic regarding pricing, it seems Shawn and Yan expect improvements in pricing, which must happen as Shawn mentioned. Can you provide any specifics on this? We have a rough estimate for your module average selling price in Q4 at about $0.15 a watt. What do you expect that actual module average selling price to be in Q1, Q2, and Q3? Thanks.

Shawn Qu, Chairman and CEO

We are not providing guidance for Q1 average selling price, but we can share that our gross margin guidance is between 17% and 19%. To achieve this gross margin, we have reduced our volume. As Yan mentioned, we are controlling our shipments, planning to deliver between 6.1 gigawatts and 6.4 gigawatts. In Q4, we shipped over 8 gigawatts, demonstrating our capacity to ship at least that much, if not more, but we chose to manage the volume. Looking ahead, we believe that module average selling prices in the upcoming quarters should be equal to or potentially higher than the prices in Q4. This is the perspective that Yan and I share, and we will see if we are correct.

Philip Shen, Analyst

Got it. Okay. What do you think are the factors contributing to the improved pricing? You mentioned it needs to get better, so what are the assumptions behind your conclusion? We've learned that the channel inventory in Europe has cleared for DG, and now if customers in Europe want to order modules, they have to secure a production slot. Can you discuss the utilization rates for manufacturers in Asia, specifically in China and Southeast Asia? Are they significantly lower right now to manage supply? Can you clarify, Shawn, why things are expected to improve? Thanks.

Yan Zhuang, President of CSI Solar

Okay. First of all, when we look at the China and overseas markets, we expect moderate growth in China this year after last year's significant increase. However, we still anticipate growth, albeit at a moderate pace. For overseas markets, we are expecting strong shipments into the distribution channel, which has been hindered since the third quarter of last year, but that destocking process is largely complete now. Demand is bouncing back, and we've seen pricing improvements in the U.S., Europe, and Australia. Additionally, new markets like Pakistan are experiencing rapid growth with strong demand already evident in the second quarter. The utility market will also see growth; while it may not be explosive, we expect an overall increase. We anticipate about 20% growth in total installations this year compared to last year. Assuming this holds true, we expect those with TOPCon capacity to benefit from better pricing in the second half of the year. Moreover, as previously mentioned, there is a balance to consider between capacity and oversupply, particularly as bankable capacity aligns with seasonal demand spikes in the second half. It's important to note that demand will be significantly higher than in the first half. In a few months, we expect to see a considerable demand surge relative to effective capacity, which means capacity that is viable in terms of cost, features, and that can navigate trade barriers and ESG concerns. Therefore, we believe that conditions will improve in the second half.

Philip Shen, Analyst

Thank you, Yan, that was very helpful. Regarding the UFLPA situation in the U.S., can you provide an update on whether your imports are still being detained? If they are, is the percentage very small, under 10%, or does it fall in a more moderate range of 10% to 30%? Additionally, if your imports are being detained, do you have any insight on the timeline for when those issues may be resolved? Thank you.

Shawn Qu, Chairman and CEO

Philip, I can only say to you that we get most of our volume released and imported into the U.S. Now, I can't predict, however, I can't predict how CBP respond or process every lot which they have questions. So this is not something I can predict, but the historical pattern from other suppliers. So I suggest you go, I mean, maybe you can draw reference from what you see from other importers.

Philip Shen, Analyst

Okay. Thank you, Shawn. One last one. In terms of storage, can you give a little bit more color on the outlook for growth and margins? Some of our checks suggest you guys may have recently cut your storage pricing meaningfully, maybe 10% to 20% cheaper versus peers. We're also hearing that you're telling customers that you may want to own all the data. Can you talk about the rationale for some of these actions? Thanks.

Shawn Qu, Chairman and CEO

I didn't quite get your question. Who said we are cutting prices 10%, 15%?

Philip Shen, Analyst

I've heard from a source in the storage ecosystem that your pricing has been significantly reduced recently, potentially making you 10% to 20% cheaper than your competitors. While I haven't verified this completely, I'm curious if you have indeed made a significant reduction in pricing.

Shawn Qu, Chairman and CEO

Well, if we are 10%, 15% below peers, I'm very happy because we are still getting a very good margin on the e-STORAGE product that probably shows our very strong cost control and competitiveness. As I said to Colin's question, when the battery cell prices go down and lithium carbonate prices go down, we do pass on some of those savings to our customers. So it's not surprising that if some of the prices we offer today are better, is lower than the price we offered a year ago or two years ago, so that wouldn't surprise me.

Yan Zhuang, President of CSI Solar

So, Philip, once again, we are not selling cheaper than our peers. If we're selling 10% lower, that's the market price.

Philip Shen, Analyst

Great. Really appreciate the color. Thank you, guys. I'll pass it on.

Brian Lee, Analyst

Hey, guys. Thanks for taking the questions. I had a couple sort of modeling/housekeeping ones. Huifeng, you mentioned a write-down in the quarter. How much did that impact gross margins for CSI Solar in 4Q, and it sounds like, I guess, no residual impact is expected going forward?

Huifeng Chang, Senior VP and CFO

About a couple of points, it's a combination of subtle one trade case and some write-down. And then when we ramp up the TOPCon cell manufacturing, in the process, there are expenses in ramping up the efficiency and getting know-how, so that process is also completed. So going forward, we should be okay.

Brian Lee, Analyst

Okay. So a couple of 100 bps. Understood. And then, for your Q1 margin guidance, had a couple of questions around that. I guess, first off, are you assuming either for Q1 guidance or maybe just give us your thought process around how you're guiding and embedding it in for the rest of the year? Any impacts from IRA credits?

Huifeng Chang, Senior VP and CFO

Yeah. The U.S. module manufacturing started at the end of last year and now quickly ramping up, so we'll pick up some manufacturing credits. But more importantly, our TOPCon ramp-up also completed in China, so that's very helpful. And then also battery storage will contribute significant profit margins to CSI Solar. So everything working together, I think we have seen the worst have passed.

Brian Lee, Analyst

Can you provide a rough estimate of the IRA impact on gross margin for Q1 guidance and what that might look like throughout 2024 as you increase volume in the U.S.?

Huifeng Chang, Senior VP and CFO

I can't disclose all these details, but I can share the framework with you later on.

Brian Lee, Analyst

Okay. Fair enough. We'll take that offline. I guess, on e-STORAGE, if you look at the revenue breakout you guys provide, obviously, it seems like battery storage revenue was pretty significant in Q4 and CSI Solar still only managed to do a 12% gross margin. You're obviously saying e-STORAGE margins are contributing going forward. So this question would be, what is presumably e-STORAGE gross margins are higher than solar module margins embedded in your Q1 guide. Is it fair to assume that for the balance of '24 e-STORAGE gross margins would remain above your gross margins for solar modules?

Huifeng Chang, Senior VP and CFO

I cannot confirm. Quantitatively, I think you are thinking in the right direction.

Yan Zhuang, President of CSI Solar

Well, it is, I can confirm.

Brian Lee, Analyst

Thank you, Yan. Okay. That's helpful.

Huifeng Chang, Senior VP and CFO

Thank you, again.

Brian Lee, Analyst

Is there any indication that storage gross margins are significantly higher than those of solar modules?

Yan Zhuang, President of CSI Solar

I can say that for 2024, the gross margin for e-STORAGE is around 20%.

Brian Lee, Analyst

That's helpful. Last question from me before I pass it on. All this information is very useful for modeling. When I review your storage volume targets alongside the current pricing for solar panels compared to the beginning of the year, it seems that you're at the midpoint, suggesting around $1 billion in additional revenue growth for 2024 compared to 2023. It appears that virtually all of this growth is coming from storage, with minimal revenue increase in modules. I’d like to confirm if this assumption is accurate. Additionally, how should we interpret the energy business which generated about $500 million in revenue in 2023? Should we expect that figure to remain flat or decrease since you're retaining some projects? What trends should we anticipate for revenue across the three segments: modules, batteries, and energy, particularly regarding year-on-year growth?

Shawn Qu, Chairman and CEO

This is Shawn speaking. We anticipate some revenue growth on the solar module side, although it won't be proportional to the volume growth due to the drop in average selling price from 2023 to 2024. However, the e-STORAGE revenue growth will be significant. In terms of volume, e-STORAGE is expected to increase from less than two gigawatt hours in 2023 to between 6 and 6.5 gigawatt hours in 2024. The average selling price for this storage has also decreased slightly compared to 2023, but not significantly. Therefore, we expect strong revenue growth from e-STORAGE. Regarding Recurrent, we plan to retain most of our projects in the U.S. and Europe, while we may sell some projects in Latin America and Japan. Overall, we are holding onto a lot more assets this year, meaning you won't see as much revenue contribution from Recurrent. However, by retaining these projects, we are building significant recurring revenue. By 2025 or 2026, you will begin to see a strong revenue contribution from Recurrent.

Brian Lee, Analyst

Okay. Thanks, everyone. Thank you, Shawn. I appreciate. I'll pass it on.

Operator, Operator

Thank you. Ladies and gentlemen, we've come to the end of our time allowed for questions. I'll turn the floor back to management for any final comments.

Shawn Qu, Chairman and CEO

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 nice day.

Operator, Operator

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