Earnings Call Transcript - CSIQ Q4 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to Canadian Solar's Fourth Quarter 2021 Earnings Conference Call. My name is Dilem, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Isabel Zhang, IR Director at Canadian Solar. Please go ahead.

Isabel Zhang, IR Director

Thank you, operator, and welcome, everyone, to Canadian Solar's Fourth Quarter 2021 Conference Call. Please note that we have provided slides to accompany today's conference call, which 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 President of Canadian Solar's wholly-owned subsidiary 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 respectively review the highlights of the CSI Solar and Global Energy businesses, followed by Huifeng, who 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, may I 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 the protection of the Safe Harbor for forward-looking statements 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 the 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 a non-GAAP basis. By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the Company's performance and underlying trends. Management uses non-GAAP measures to better assess operating performance and to establish operational goals. Non-GAAP information should not be viewed by investors as a substitute for data prepared in accordance with GAAP. And now I would like to turn the call over to Canadian Solar's Chairman and CEO, Dr. Shawn Qu. Shawn, please go ahead.

Dr. Shawn Qu, Chairman and CEO

Thank you, Isabel, and thank you everyone for joining us on our call today. Now please turn to Slide number 3. I'm very pleased to report that Canadian Solar grew revenue over 50% for the full year 2021 to a record $5.3 billion. The improved gross margin through the year to 17.2% for the full year and achieved diluted earnings per share of $1.46. When I think back to where the Company has come from, it is humbling. Over the past decade, we have been consistently one of the top module companies and our brand stands for excellence worldwide. Importantly, we continue to work on creating sustainable value for our shareholders, both in up and down markets. In addition to our record revenue in 2021, we delivered 14.5 gigawatts in solar module shipments, nearly 900-megawatt hour of battery storage shipments, and 2.1 gigawatts in project sales. It is important to note that as we grow, we continue to diversify and strengthen Canadian Solar. The fact that we have gone from zero to nearly 900-megawatt hours of battery storage shipments over such a short period showcases the strength and determination of our company. This success is just one of the many opportunities that make us so excited about Canadian Solar's long-term business prospects. Now please turn to Slide 4. I'm also pleased to report that we remain on track with the carve-out IPO of CSI Solar. In December, CSI Solar received approval from the STAR Market of the Shanghai Stock Exchange for its proposed IPO. We are currently going through the registration process with the China Securities Regulatory Commission in line with usual procedures. In the meantime, we have started roadshows with strategic investors and the feedback has been encouraging. We believe the listing will be another important development as it will help us capture additional profitable growth opportunities and further unlock value for our shareholders. Please turn to Slide 5. One of our missions is to build a better and more sustainable future, as we explained in our last ESG report. As a renewable energy company, we help our customers transition to clean energy and reduce their reliance on carbon. Internally, we are leading the way as we reduce our energy and water intensity, increase our use of recyclable materials, and minimize our impact on the environment. Our culture has always been to support people first and treat everyone with dignity. This extends beyond our company to everyone we interact with in the supply chain, customers, and partners. I have said this before, but I would like to reiterate that Canadian Solar does not tolerate forced labor or any form of modern slavery and is committed to ensuring that modern slavery does not take place anywhere in our business, including our supply chain. We achieved this through establishing policies and procedures. We have also established implementation measures and verification mechanisms to ensure that our policies and procedures are effective. I encourage you to review these policies, which are publicly available on the governance section of our investor relations website. I will welcome your feedback. Our suppliers have signed on to our supplier code of conduct, which is also available on our website. And we have been carrying out supplier audits. These are just a few examples of the initiatives we have taken to ensure we stay true to our culture of respect and dignity. This is a priority for us at all levels of the Company. Please turn to Slide 6. Before turning the call over to Yan, I would like to comment on the increased awareness of energy security. Energy demand is all slipping worldwide at a critical time when COVID is still lingering and supply constraints occur across almost all industries. There's no way of getting around it. But with the cost of oil and gas and many other materials reaching new highs and with an ongoing war, solar is once again at the forefront of solutions. We must move and move faster to install more solar systems. Renewable energy is the only choice given climate change and the need for energy security. Technology advances like our high-efficiency panels and our state-of-the-art battery storage system will lead the way to a brighter future. This is the right thing to do for our company and for future generations. We remain committed as global citizens. I will continue to invest in R&D to support our vision of increased energy access and energy security. Let me now turn over the call to Yan. And Yan, please go ahead.

Yan Zhuang, President, CSI Solar

Thank you, Shawn. Please turn to Slide 7. I would like to start by thanking our team for their focus and execution, which allowed us to deliver on our planned revenue growth and profitability in 2021. CSI Solar revenue was $4.4 billion, representing over 40% growth for the full year and $1.3 billion in Q4. Gross margin improved sequentially by over 600 basis points to 21.3%, driven by further price increases, efficiency improvements in manufacturing costs, and lower raw material costs. Gross margin was also helped by the AD/CVD reversal benefit. But even excluding it, gross margin improved over 500 basis points sequentially to 19.4% as Q3 also had an AD/CVD reversal benefit. Slide 8, please. That said, the operating environment remains challenging with higher transportation and material costs. There was some improvement on the material side in Q4, but that was short-lived. So, we are factoring in higher transportation costs, longer shipping schedules, and higher material costs. Long-term shipping contracts have helped us reduce some of the impact. So, this remains a challenge for the industry. On the material side, given the supply and demand backdrop, there's little incentive for polysilicon pricing to come down significantly, particularly in the first half of this year. Huifeng will give more details on the financial impact, but overall, this is as we talked about last quarter. Next slide, please. We do expect an improvement later in 2022. As silicon capacity ramps up throughout the year, resulting in lower material costs, although it is likely to decline at a gradual pace. At the same time, the downstream operating environment is improving meaningfully as PPA prices are increasing across most geographies. When you put the upstream and downstream pictures together, we are in a very strong position as one of the top global solar brands with a very strong track record. We're gaining share in the growing global clean energy market. We have been growing our global market share from below 6% in 2018 to approximately 9% in 2021, and we think we can reach 15% over the next three to five years. We expect to expand market share evenly across the globe and especially in important markets such as the U.S., Europe, and China as we grow capacity to support our customer needs. Of course, our goal is to grow profitably, and the carve-out IPO should help us achieve this goal. Please turn to Slide 10. We're also making significant progress on our battery storage business. We completed nearly 900-megawatt hours of battery storage shipments last year and expect further growth in 2022. In fact, this year, we believe we can double our volume to 1.8 gigawatt hours. These shipments are mostly to the U.S., where the market is more mature, but we also plan to deliver projects in China, and we plan to be active in the U.K. battery storage market as well. To help accelerate our product innovation, we established a state-of-the-art battery storage R&D workshop in Suzhou in 2021. Interest in this area is high, and we have been working with several strategic partners, leveraging their expertise and insight. Over the next few months, we will formally introduce Canadian Solar's own energy storage product for utility-scale applications, using our own proprietary design and technology. Our product has been designed to be incredibly competitive and will be one of the safest in the market with a long service life. Currently, we use lithium-ion technology. But we are technology agnostic, giving us significant flexibility to work with different types of battery technologies. We plan to make a formal announcement as we get closer to the product launch in the coming months, so stay tuned. With that, let me turn over to Ismael for an overview of the global energy business. Ismael, please go ahead.

Ismael Guerrero, Corporate VP and President, Global Energy

Thank you, Yan. Please turn to Slide 11. I'm proud to report that we achieved 2.1 gigawatts in project sales in 2021, up 50% compared to 2020. We achieved 55% revenue growth to $1.1 billion and grew our operating profit by over 80% to $97 million. We successfully monetized both solar and battery storage projects across the U.S., Brazil, Mexico, Japan, Korea, India, and Australia. Crucially, we continue to grow our global pipeline of projects, which now stands at 24 gigawatts of solar and 27 gigawatt hours of battery storage. This gives us added confidence in future monetization and growth opportunities. This slide provides a summary of our global pipeline as of January 2022. In Q4, Global Energy achieved $232 million in revenue and $8 million in gross profit. This was driven by lower margin project sales in certain regions, such as in Brazil, combined with partial sales of projects where we recognized the full cost due to the transfer of controlling ownership of these projects, but only a portion of the profits. Next slide, please, 12. As you are all aware, power prices have increased meaningfully. Last year, we increased our development activities in markets where solar is competitive without incentives, such as in European markets, including Spain and Italy, where we now have a dominant position. Power prices have materially shifted upwards in most markets, and likewise, solar PPAs have also adjusted in the same direction. In addition to economic and environmental considerations, recent geopolitical events are also making solar energy more attractive from an energy security standpoint. We expect a meaningful acceleration in growth in the European market in the coming years and are well positioned to contribute to this growth. For example, last year in Italy, we established the CSFS Fund I, a closed-ended alternative investment fund, partnering with patient capital investors to retain ownership of projects over the longer term. We have been building up our pipeline of projects in the region for this fund, and we are now the largest developer in the country based on contracted volume. Likewise, we expect to maintain and enhance our leadership position in the U.S. market through our recurrent subsidiary. On the other hand, we are managing the geographic exposure of our project portfolio as we proactively manage risk. As an example, Latin American markets have been volatile from an FX and policy risk viewpoint. We've been one of the largest and most successful developers in Brazil, where we currently have over 2 gigawatts of projects under execution. However, the Brazilian utility market has been impacted by inflation and hikes in interest rates. While we have hedged our position with inflation-linked PPAs, the inflation adjustment occurs only once a year, limiting our options to realize the true value of these projects. As part of our broader global strategy, we continue to make progress with our Brazilian infrastructure fund. This is on track but has been slowed since Brazilian government bond yields are trading well into the double digits. Please turn to Slide 13. Longer term, our strategy remains to retain greater asset ownership in select markets to increase the revenues generated through recurring income such as power sales, operations and maintenance, and asset management income. Our business is difficult to forecast on a quarterly basis, given the lumpiness of our project sales and the difficulty to accurately time deal closings. With that in mind, we expect to increase our share of stable recurring income relative to our project monetization. We plan to hold on to certain assets for longer where it makes sense from a risk and value creation standpoint. In these cases, we believe we can create more value by owning the assets over the long term and operating them ourselves. This is reflected in how we have adjusted certain project sales and retained assets targets to 2025. We are moderating project sales growth as we will be holding a significant portion of some of them like we already did with the Crimson storage project, where we retained 20% ownership. We have similar intentions in Europe, as I mentioned earlier. This way, we will be gradually moving from a spot sales business to a recurring revenue business, accounting for value creation and cash flow considerations. Now let me pass it to Huifeng, who will go through the financial results in greater detail. Huifeng, please go ahead.

Dr. Huifeng Chang, Senior VP and CFO

Thank you, Ismael. Please turn to Slide 14. In Q4, we delivered $1.53 billion in revenue, up 24% over the last quarter and 47% year-over-year. Gross margin in Q4 was 19.7%, well above our guidance of 14% to 16%. Gross margin benefited from higher ASPs, lower cost, and the AD/CVD reversal true-up. Without the true-up benefit, the gross margin would stand at 18%, still ahead of guidance. As Yan noted, the trend of cost improvement was short-lived and resumed higher in Q1. Selling and distribution expenses increased 28% quarter-over-quarter and doubled relative to last year. Here, I'd like to highlight the impact of higher transportation costs, which are included in selling and distribution expenses, not in gross profit. This number has been heading up from around $0.01 to $0.015 per watt to currently approaching $0.03 per watt. Please note that transportation expenses are variable. The increase with higher shipment volume and the unit costs are increasing as well. Our transportation costs are still lower than spot prices, helped by our long-term contracts. But we are slowly moving up towards the spot level, and some of these contracts are up for renewal. We do pass on some of this cost to our customers, reflected in our higher ASP, but it is a higher cost burden nevertheless. General and administrative expenses increased 8% sequentially, driven by a small manufacturing asset impairment. Research and development expenses increased 43% sequentially, driven by higher spending on both our solar and battery storage R&D workshops. Total operating expenses were up 33% and accounted for 15% of revenues. Excluding transportation costs, our OpEx is closer to the 8% to 9% range, which is below our historical range of 10% to 12%. Q4 income tax expense was $27 million, reflecting higher revenue from higher tax jurisdictions. This compares to a $3 million income tax benefit in Q3 when we were able to use net operating losses. For the full year of 2021, the effective tax rate was 26%. We expect this to remain around 25% from an annualized standpoint going forward. Total net income was $40 million, and the net income attributable to Canadian Solar shareholders was $26 million. Please note that the variance between total and core net income will increase going forward. This is because Canadian Solar's ownership in CSI Solar is expected to decline from 80% to approximately 64% after completion of the carve-out IPO. Basic and diluted earnings per share were $0.41 and $0.39 respectively. You will notice that we increased the share count. This includes 3.6 million shares from our ATM or at-the-money equity offering, of which 1 million were in Q4 when the program concluded. In addition, our diluted EPS is adjusted for 6.3 million shares to account for the additional shares from our convertible bond being fully converted into equity. Now turning to cash flow and the balance sheet. Our working capital days increased moderately as turnover days were affected by longer logistical cycles. For the full year of 2021, CapEx was around $430 million, below our previous guidance as we adjusted the capacity expansion plans in light of market conditions. This year's CapEx is likely to be higher, currently budgeting over $700 million. We ended the period with a healthy cash balance at $1.4 billion, giving us continued financial flexibility to support our long-term growth opportunities. Total debt increased moderately to $2.4 billion, although leverage measured as net debt to EBITDA, excluding the cash, declined to 3.3x from 3.7x in the prior quarter. Before turning the call back to Shawn, I want to highlight that in November 2021, we completed the transfer of the China Energy Asset from CSI Solar to the Global Energy segment. This was done to avoid any potential competition between the Company and its CSI Solar subsidiary as part of the CSI Solar carve-out listing process. As a result, Global Energy now has all of Canadian Solar's product development business, including China, and CSI Solar contains all of Canadian Solar's solar and battery storage manufacturing and system solutions business, including EPC. The asset transfer has no impact on the consolidated results, and it was immaterial from a business segment standpoint. Also, as part of the IPO, we may incur a one-time IPO-related stock incentive expense in 2022, contingent upon the successful completion of the IPO. This is expected to be in the magnitude of approximately $50 million or approximately $40 million after tax. Around 80% of this cost is expected to be incurred in Q2, with the remaining expected to be incurred in the second half of the year. Now let me pass it back to Shawn, who will conclude with our guidance and the business outlook. Shawn?

Dr. Shawn Qu, Chairman and CEO

Thanks, Huifeng. And let's turn to Slide 16. For the first quarter of 2022, we expect solar module shipments to be in the range of 3.6 gigawatts to 3.8 gigawatts, including approximately 210-megawatt of module shipments to our own projects. Total revenues are expected to be in the range of $1.25 billion to $1.35 billion, as Q1 tends to be a seasonally smaller quarter. Gross margin is expected to be between 14.5% to 15.5%, reflecting higher manufacturing costs. For the full year of 2022, we reiterate total module shipment guidance to be in the range of 20 gigawatts to 22 gigawatts. We raised our total battery storage shipment guidance to 1.8 gigawatts to 1.9 gigawatt hours from previously 1.4 gigawatts to 1.5 gigawatt hours. Total project sales guidance is trimmed a little bit to 2.1 gigawatts to 2.6 gigawatts from 2.4 gigawatts to 2.9 gigawatts previously, as we expect to retain more projects and optimize our monetization strategy. Revenue for the full year of 2022 is raised to $7 billion to $7.5 billion, from $6.5 billion to $7 billion. We faced many market uncertainties, including the war in Ukraine and recent COVID-related lockdowns in China, which may impact our operations, especially logistics. These are the same challenges facing the global industry. We have been proactive in risk management. All that said, our focus is to increase our business with resilience, building on our long-term position through strong sales channels and customer relationships and business and technology innovation. With that, I would now like to open the call to your questions. Operator?

Operator, Operator

Our first question comes from Colin Rusch from Oppenheimer. Please go ahead.

Colin Rusch, Analyst

This may be a question for Shawn. With the guidance for the first quarter relative to the full year, this looks like a return to a normal seasonal pattern that we've seen disrupted in the last couple of years in the solar industry. So, I'm curious what you can say about what you're seeing in terms of initial indications on demand on a geographic basis relative to that seasonal pattern?

Dr. Shawn Qu, Chairman and CEO

Yes. Colin, we do see some seasonal pattern, as you said, and Q1 used to be a smaller quarter or slower quarter. But now we have more gigawatt-sized markets around the world. So sometimes, one market can offset another. For example, for this Q1, the Indian market has been very strong. That's because of the new import duty policy effective on April 1. So, there was a lot of shipment rush into India before April 1. So that somehow made the Q1 better. Now, on the other hand, meanwhile, we also see a lot of inquiries from the China market, for example. And as you know, China has released its action plan in order to reach the end target and also the 2060 carbon neutral target. So, they released the plan to build large-scale data-based solar and wind power bases. Now the power companies in China are very active and ask for supply plans. Now, if it weren't for the polysilicon price increase in Q1, I would expect that we could have already taken in quite a significant order from China. But somehow, the polysilicon price turned up again since January. So, I guess some customers are still waiting and want to better judge the trend. But in Q2, we should see some good demand coming from China.

Colin Rusch, Analyst

That's super helpful. The second question is really around the project business, and it's a two-part question. One, you've talked a little bit in the past on trajectory on PPA pricing. I'm just wondering if you can give us an update on kind of year-over-year PPA pricing trajectory both in Europe and North America. And then the second question is about the size of the batteries that are attaching to these systems. Are you looking at a kind of a 4:1 energy ratio? Or are you looking at larger batteries potentially H6 or H1 energy to power ratios on these systems?

Dr. Shawn Qu, Chairman and CEO

Ismael. Do you want to take on this question?

Ismael Guerrero, Corporate VP and President, Global Energy

Sure, I appreciate the question, Colin. The Power Purchase Agreement market has experienced significant changes over the past couple of years due to various factors. Initially, during the pandemic, there was a notable decline in power markets due to reduced activity. However, as activity resumed, we observed a substantial rise in prices compared to earlier levels. In Europe, for example, prices have escalated dramatically, which is currently a major concern for policymakers who are contemplating regulatory changes. Overall, we've seen a growth of about 40% to 50% in Europe compared to pre-COVID PPAs. In the U.S., merchant curves are being revised upwards by consultants, but at a more modest rate of approximately 15% to 20%. Similar trends are emerging in Australia as well. It's important to note that the market dynamics are still evolving, especially in Europe, where we anticipate continued strength. We expect a similar trend in the U.S., although we need to monitor the situation closely. Regarding storage, it varies from project to project, as does the definition of degradation. Currently, energy trading remains the primary business driver. This trend is becoming more prevalent in high-volatility markets, particularly on islands and in regions like the U.K. and Europe. We're also seeing changes in regulation in places like Spain, where new capacity requirements must include storage components. The U.S. market, particularly Texas, is heating up as well, but we need to await further regulatory developments since policies are still being debated. I hope that answers your question.

Colin Rusch, Analyst

Yes, that's helpful.

Dr. Shawn Qu, Chairman and CEO

Colin, I'd like to add a comment. We also see the trend of the requirement to attach storage to solar in China. And these days, for most of our provinces in China, the regulatory agency is requiring, for example, 20% of two hours, something like that for the storage attached to the solar. And so yes, indeed, we are seeing that. But meanwhile, we also see a lot of independent storage projects. For example, we are working on a few third-party storage projects in the U.K.; those are independent projects. And for example, working on a few like one hour storage projects in the size of 25-megawatt each. And in the U.K., those are all independent power storage only.

Operator, Operator

I show our next question comes from the line of Philip Shen from ROTH Capital Partners. Please go ahead.

Philip Shen, Analyst

First one is on the '22 guide. I was wondering if you might be able to share the revenue mix between the project business and the module business? And then also, in terms of the margin outlook for 2022, I know you gave Q1, but I was wondering if you could talk through the cadence of those margins for the rest of the year by quarter? And if you can give a split between the module business and the project business, that would be great.

Dr. Shawn Qu, Chairman and CEO

Isabel, do you want to take on this question?

Isabel Zhang, IR Director

Sure. Philip, this is Isabel. So in terms of the split between CSI Solar and Global Energy for the revenue guidance for this year, we're talking about probably around four, six, or even more of that revenue coming from CSI Solar. And then in terms of guidance or margin guidance, I think we're looking at Q1 being a little bit softer than in Q4, but we do expect margins to improve throughout the year.

Philip Shen, Analyst

Great. Can you talk about the margins expected by segment between the project business and the module business?

Dr. Shawn Qu, Chairman and CEO

Isabel? Yes, I guess.

Isabel Zhang, IR Director

Sorry?

Dr. Shawn Qu, Chairman and CEO

I said, I guess the question is also for 2022, right, Philip?

Philip Shen, Analyst

That's right.

Isabel Zhang, IR Director

Yes, that's right. So obviously, we haven't given full-year margin guidance yet at this point. But overall, I would say that the margin outlook for the two businesses shouldn't vary too much for the full year.

Philip Shen, Analyst

Okay. Great. Thanks for that. As it relates to the demand outlook in Europe, I was wondering if you guys have seen a material change yet. And if you could quantify that or talk through how you're seeing that play out in your business and in your conversations with distributors and customers? Thanks.

Dr. Shawn Qu, Chairman and CEO

Yan, do you want to take on this question regarding demand change in Europe?

Yan Zhuang, President, CSI Solar

Yes. So for now, short term, actually, we don't have much exposure directly related to the war. We have almost no business in Russia and almost no business in Ukraine. But logistic-wise, we see some impact, a minor impact for now. Long term, we actually see some positive movements, which looks like the demand for renewable energy in Europe is actually going up. And the increasing power price in Europe can also benefit renewable energy. So, we see, potentially, in the mid to long term, this actually suggests increasing demand.

Philip Shen, Analyst

Okay. Thanks, Yan. And then as it relates to the U.S. ADR delisting risk, I was wondering if you might be able to talk through that a bit. This has been a theme over the past couple of weeks and a key reason cited for weakness in your stock and other stocks. What do you expect to happen ahead with the SEC? And do you expect to be in compliance with the relevant regulations, etc.? Thanks.

Dr. Shawn Qu, Chairman and CEO

Philip, yes, we are implying. So that's a short answer.

Operator, Operator

I show our next question comes from the line of Brian Lee from Goldman Sachs. Please go ahead.

Brian Lee, Analyst

Maybe just a quick follow-up to Phil's question around margins by segment. I know there were some lower-margin project sales in Q4 that depressed the margin to that low single-digit level. It sounds like you're inferring that margins will bounce back to sort of the mid-teens-ish level for projects and then for modules or for CSI Solar. It's going to come off the kind of 19% level, I suppose, into the mid-teens. Is that what you're inferring here for Q1 as well as for 2022?

Dr. Shawn Qu, Chairman and CEO

Brian, as Isabel said that we are not giving, first of all, we're not giving the 2022 margin guidance yet. We only provide the Q1 margin guidance. For Q1, the CSI Solar margin and the project margin are similar or in the same range. Moving down the quarter, although we are not giving margin guidance yet, but we expect the solar module or the CSI Solar gross margin to go up and hopefully to reach an 18% to 19% level, which matches 2021's annual level. However, you should know that we're now facing another challenge, which is still logistics-related. Logistics used to be just over $0.01 per watt when the module price was at $0.30 per watt. But now the module price has dropped, and the logistics price went up. So, the 18% to 19% gross margin in U.S. GAAP doesn't translate to a very high margin after you take out the selling expenses that include logistics.

Brian Lee, Analyst

Okay. Fair enough. I appreciate that color. I guess maybe to follow up on that then, two questions. Just I know last quarter, Huifeng had talked about pricing panels. Obviously, last year was up, but it sounds like they're starting to soften a bit here. Can you kind of speak to what you're quoting generally over the next couple of quarters? Are you anticipating modest, low single-digit, or mid-single-digit declines in module pricing? And then secondly, on the logistics cost, shipping costs you're talking about, Shawn, do you have any mitigation strategies or contracts or any arrangements where you can sort of offset these shipping cost headwinds? Or are you just purely exposed to whatever spot freight and shipping rates are doing in the market?

Dr. Shawn Qu, Chairman and CEO

Yes, I would let Yan take on this question first. And then I'll add my comment. Yan?

Yan Zhuang, President, CSI Solar

On the pricing front, we are seeing that Power Purchase Agreements are increasing alongside rising power prices. As a result, project investors are gradually adjusting their cost tolerance levels. Although this change is not happening rapidly, it is steadily progressing. Regarding the price trend over the year, we are currently in a very elastic market. In the past, our total installed capacity was largely driven by policy, but now it is more influenced by market dynamics, particularly in relation to material supply and pricing. On the supply side, we anticipate a rapid increase in silicon capacity throughout the year, which we believe will lead to a decline in silicon prices in the second half of the year. This should positively affect our gross margins. Concerning shipping costs, we have secured some of our shipping plans at fixed rates, but we are not fully locked in due to currently high prices. Additionally, if global conditions improve, we may experience a decrease in shipping costs. We are already noticing improvements in logistics, particularly in the U.S., with significant progress in reducing port congestion on both the East and West coasts. We remain optimistic as we move into the second half of the year.

Dr. Shawn Qu, Chairman and CEO

Yes. This is Shawn. In terms of the shipping arrangement, in the past two years, we typically locked about 40% to 50% with the shipping company for the annual contracts. Last year, we benefited from those annual shipping contracts, so that our mixed average shipping cost was lower than the spot cost. However, those are annual shipping contracts. As those contracts expire, we have to sign new shipping contracts. The shipping contract for 2022 is higher, the prices are higher than in 2021. That's why we're seeing more shipping cost impact this quarter in Q1. That said, we also observed that the logistic situation started to improve in some areas, for example, in the lines to South America and the ocean cargo price has significantly reduced. Additionally, for the U.S., I think the East Coast shipping cost has already started to go down. Now the West Coast shipping and ocean cargo prices are still high; however, the port congestion situation is improving. So, we do see hope that logistics is getting better from Q2 on.

Brian Lee, Analyst

Okay. That's great to hear. I appreciate that additional color, Shawn and Yan. Maybe one last question for me; I'll pass it on. On the battery storage business, I appreciate you breaking out the $500 million revenue target here for 2022. Can you speak to what's happening in that business from a margin perspective, just given all the different inflationary trends that are happening in certain raw materials for batteries? Kind of what's your supply situation? What's your cost situation? And maybe just level set us as to the type of cells you're using and what sort of exposure you have in general. But I really wanted to understand the margin situation there. Thank you, guys.

Dr. Shawn Qu, Chairman and CEO

Yes. I will let Yan take on this question.

Yan Zhuang, President, CSI Solar

Thank you, Shawn. Well, that's a good question. First of all, I want to say that the planned volume for 2022, we have already secured the sales supply. So that is already building. Secondly, in terms of margin, it is about 10%, low teens around 10% on gross margin. However, in terms of net profit, you could say that the contribution margin is actually much better than that of solar modules. This business does not have the heavy OpEx nor heavy CapEx. So it translates into net profit better. In terms of the business model, I want to point out that Canadian Solar's business model on utility-scale storage is quite different from our competitors. Some module manufacturers in China also do a storage business. However, our business model is we are not just shipping the equipment to the project; we are the system integrator ourselves. So we do the EPC ourselves. We provide the solution, the equipment. Aside from the turnkey side of the project, which is the first contract we fund on any project, we have a second contract, which is a long-term service agreement. So, we also enjoy lifelong service fees on O&M and on the augmentation and on any possible storage expansion projects. So this is something that makes us unique and more robust in terms of volume and revenue and profit sustainability. Cell-wise, as I said, it's lithium-ion. And we are working with both BYD and CATL as well as the EVE and some other Tier 2 battery cell manufacturers. We’re taking control of the manufacturing process, and we’re also going upstream on other technologies. For example, we invested in a leading BMS company, a leading storage BMS company in China. We were investors in another company in London, right? So we discussed that before, Habitat on AI. This is our strategy. We start from system integration and long-term service agreements, and then from there, we're taking control of our manufacturing process and trying to take ownership of technologies upstream. Thank you.

Operator, Operator

I show our next question comes from the line of J.B. Lowe from Citi. Please go ahead.

J.B. Lowe, Analyst

We're running out of time here. I just wanted to throw a couple of quick ones if I could. Number one, have you seen any impacts from COVID lockdowns in China on your business?

Dr. Shawn Qu, Chairman and CEO

Yan, you want to handle this question?

Yan Zhuang, President, CSI Solar

Yes. It has a first minor impact on logistics right now, mainly for the month of March. I would say, more like after mid of March.

J.B. Lowe, Analyst

Okay. Great. Could you describe what the logistics cost on a per watt basis was in Q4? Also, what are your expectations for that cost in Q1? Considering that you are renegotiating some of your shipping volumes throughout 2022, how do you anticipate the logistics costs on a per watt basis will trend during the year?

Dr. Shawn Qu, Chairman and CEO

Isabel, do you want to handle this question?

Isabel Zhang, IR Director

Yes. Hi, JB. This is Isabel. So the cost in Q4 was between $0.025 to $0.03, and for most of this year, we are expecting it to be around this level.

J.B. Lowe, Analyst

Sorry, around what?

Isabel Zhang, IR Director

$0.025 to $0.03.

J.B. Lowe, Analyst

Okay. So same level in 2022 versus 4Q. Okay. Perfect. And then last one for me is. Can you just tell me what your exposure is to Europe? Or what was your exposure to Europe in 2021 in the CSI Solar business on a percentage of revenue basis? And do you expect that to be higher in 2022?

Dr. Shawn Qu, Chairman and CEO

Isabel, you want to handle this question?

Isabel Zhang, IR Director

It's about 20%. We expect this weighting to be roughly the same year-over-year.

Operator, Operator

Thank you. I show our last question comes from the line of Praneeth Satish from Wells Fargo. Please go ahead.

Praneeth Satish, Analyst

I was wondering if you could just elaborate on the new battery product that you plan to launch. I guess what are the key benefits versus competitors? And then do you expect a material margin improvement from launching your own product?

Dr. Shawn Qu, Chairman and CEO

Yan, this is your favored question. Why don't you handle it?

Yan Zhuang, President, CSI Solar

Well, so short answer, sure. By manufacturing our own products with our own technology, we will significantly improve our margin. Comparing just buying ODM products from suppliers, in terms of our technology, our product, we have compared it with the currently available products in the market. We're very confident about our product in terms of different dimensions. First of all, is the cost. When we're talking about the cost, it's not just Street CapEx, but also stock cost. Whatever solution that includes different designs, you have different shipping costs, you have different installation costs. On that, we're confident that we have the advantage. Also on the safety side, it's a liquid cooling system, and we have studied all the products in the market, and we're confident that the safety standards we have are clear advantages. It's not just the temporary management but also the poisonous gas management and also, of course, energy density as well. We've been into this area for a long time. Starting from many years ago, we had the first project in Canada; then four years ago, we had our own R&D team in the U.S. and then spread that into Canada, into China, and into England. We spent quite a number of years in those areas already. We also start to do R&D on energy storage tailor-made battery cell technology. We understand that we have to think about technology differentiation against the EV industry. This is something that's important. In the short to mid-term, we are also spending a lot of effort working with our suppliers on the battery cell side. We've established quite a few strategic partnerships with the suppliers. We see battery cell suppliers starting to increase their attention to energy storage because all the newcomers in this industry have to think about their fast entries into the industry with volume, and energy storage is obviously easier access to them. But we also see differentiation already in terms of battery cell design, such as the size of the battery cell being larger than the EV industry. So I hope this answers your questions.

Operator, Operator

Thank you, and that concludes our Q&A session. At this time, I'd like to turn the call back over to management for closing remarks.

Dr. Shawn Qu, Chairman and CEO

Thank you, and thank you everyone for joining us today for your continued support. If you have any questions, I 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. Thank you for participating. You may now disconnect.