Canadian Solar Inc

NASDAQ:CSIQ

Ladies and gentlemen, thank you for standing by. Welcome to Canadian Solar's Fourth Quarter 2024 Earnings Conference Call. My name is Melissa, and I will be your operator for today. [Operator Instructions] 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.

Thank you, operator, and welcome, everyone, to Canadian Solar's Fourth Quarter 2024 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; Ismael Guerrero, Corporate VP and President of Canadian Solar's subsidiary, Recurrent Energy; and Xinbo Zhu, Senior VP and CFO.

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 Xinbo will go through the financial results. Shawn will conclude the prepared remarks with the business outlook, after which we'll 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 requirements of SEC Regulation G requiring -- 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.

Thank you, Wina, and thank you, all, for joining our fourth quarter earnings call. I am speaking to you today from Louisville, Kentucky, a city you will find me in often this year.

With construction progressing on our new energy storage facility nearby and also on our new solar cell facility in Jeffersonville, Indiana, just across the Ohio River, we welcome customers and partners to visit.

Now let's review the quarter and full year's performance. Please turn to Slide 3. In the fourth quarter, we shipped 8.2 gigawatts of solar modules, bringing our total volume for the year to 31.1 gigawatts. With the rapid decline in global module pricing and lighter project sales from Recurrent Energy, our total revenue in 2024 was USD 6 billion.

Inventory write-downs, freight related duties and tariffs and project asset impairments weighed on gross margin, while elevated freight cost and impairments to solar power and battery energy storage systems cost operating expenses to go up.

As a result of a difficult operating environment, we generated net income for Canadian Solar shareholders of $34 million, or $0.48 per diluted share. These results included the positive impact of hypothetical liquidation at book value, or HLBV, accounting of tax equity treatment for U.S. projects totaling $132 million, and/or $1.95 per diluted shares, respectively.

2024 was a challenging year for the solar industry. Competition intensified with major manufacturers [ reporting ] significant losses. Structural overcapacity across the supply chain has led to a prolonged market downturn, and we expect an extended period of consolidation ahead.

At the same time, key markets faced uncertainty, while China is seeing a surge in installation in the first half of 2025 due to 2 policy changes effective April 30th and May 31st respectively. The U.S. continues to grapple with policy and trade related challenges. Together, these factors are creating both operational and financial headwinds for the industry. Despite these challenges, Canadian Solar has demonstrated resilience. Demand for energy storage is growing and diversifying globally.

Please turn to Slide 4. Now at grid parity, Solar Plus Storage can provide reliable, around the clock clean energy to meet the growing need of data centers, electric vehicles and other energy intensive applications.

As a Tier 1 solar and energy storage provider, we are uniquely positioned to bundle our technology and services to address diverse use cases from colocated solar and storage to hybrid systems. Globally we are seeing a shift toward longer duration battery energy storage systems. Our advanced proprietary system solution, the SolBank 3.0, is designed to meet the customized and increasingly demanding needs of each market. SolBank 3.0 is already an industry leading solution offering superior performance and safety. We are also making rapid growth -- rapid progress on our next generation systems, which will include extended battery cycle performance, low degradation, modular design for flexible installation configurations and increased power density to 7 megawatt hours per container unit.

With the industry already -- with the industry also trending toward more distributed storage and smaller point of use systems, Canadian Solar is uniquely positioned to capitalize on this opportunity. As a technology leader, we not only drive continuous product innovation, but also offer a comprehensive portfolio of energy storage solutions. From our flagship SolBank to top tier solutions for residential, commercial and industry applications, we provide a complete product suite that addresses the full spectrum of energy storage needs.

Finally, let me provide an update on our 3 U.S. manufacturing facilities. Please turn to Slide 5. On the left, you will see our module factory, which is on track to fully ramp up in 2025 in Mesquite, Texas. It will provide -- it will contribute around 3 gigawatts of volume delivery this year, increasing the share of domestically made products in our total U.S. shipment. Our solar cell facility in the middle is fully contracted to our module factory and progressing smoothly.

Civil works are underway, as you can see, and when -- and we expect to install manufacturing equipment later this year with production set to begin by year end. The energy storage facility will produce battery cells, modules and complete systems. It is expected to start delivering U.S. made SolBank's by the beginning of next year. These facilities highlight our differentiations with our -- with over 20 years of global manufacturing experience across both solar and storage we have the ability to manufacture in closed markets.

For example, by leveraging our existing battery cell manufacturing expertise, we can quickly adapt to the U.S. market, where local production is a game changer. In short, we can export expertise gained from all the markets we have operated in and execute with local familiarity, both advantages that our competitors simply do not have.

With that, I will turn the call over to Yan, who will provide more details on our CSI Solar business. Yan, please go ahead.

Thank you, Shawn.

Please turn to Slide 6. Despite a challenging solar market in 2024, we maintained relatively strong profitability by adhering to a disciplined order taking strategy and achieving record energy storage volume. These 2 drivers led to full year revenue of $6.5 billion with a gross margin of 18.4%. Notably, our Module and Energy Storage segments were both profitable on a standalone basis.

Now let's examine the drivers for Solar and Energy Storage separately. Please turn to Slide 7. ASPs fell significantly throughout 2024. However, we maintained relatively higher blended prices by strategically controlling volumes to less profitable markets, while increasing shipments to the U.S., which accounted for approximately 25% of our global shipments. Polysilicon prices plunged over 40% during the year, triggering a cascade of price reductions along the supply chain.

However, in most markets, module pricing declined at around the same rate or faster than upstream cost savings. In addition to supply chain driven cost reductions, we continued to enhance efficiency across our vertically integrated capacities. For example, through innovations like half moon savings and thinner wafers, we expect to increase capacity across our ingot and wafer manufacturing.

In cell manufacturing, the industry's rapid transition to TOPCon technology resulted in impairments of PERC manufacturing assets during the fourth quarter. While some equipment will become obsolete, we have the flexibility to repurpose existing facilities for new initiatives, such as new materials manufacturing, which will further strengthen our integrated supply chain. Importantly, our exposure to legacy technology is significantly lower compared to our peers.

Next, onto Battery Energy Storage. Please turn to Slide 8. The fourth quarter and full year 2024 were record breaking for energy storage in terms of shipments, revenue and profitability. We delivered 2.2 gigawatt hours in Q4, bringing our annual total to 6.6 gigawatt hours, a more than 500% year-over-year increase.

We expect this growth to continue in 2025, while Q1 will be seasonally softer. Volumes will ramp up quarter-over-quarter with each subsequent quarter exceeding the same period last year. However, as upstream prices have stabilized, we anticipate margins will normalize. To address this, we will continue scaling our volumes, differentiating our manufacturing strategy and navigating market uncertainties.

In the U.S., recent trade policy changes have created turbulence in the market. However, we are effectively managing tariff exposure until our onshore capacity ramps up. Our $3.2 billion backlog provides strong visibility while our pipeline now at a record 79 gigawatt hours, reflects increasingly diversified global demand.

e-STORAGE is expanding coverage into new markets such as mainland Europe and Japan, where we are well positioned to capture growth. Additionally, we are exploring new opportunities in markets like Latin America and Australia where we have already established a presence. We continue to grow our energy storage manufacturing capabilities with strategically located geographic expansions in the U.S. and Asia. These facilities will produce battery cells, modules and complete modular battery systems. In the U.S., we are also on track with our supply chain strategy to take advantage of domestic content requirements.

Overall, we are winning on value. While new entrants may offer cost effective products, we deliver system integration. The difference between simply supplying a DC block and ensuring its safety, [ installed ] and tested, operated and supported with long-term service is massive.

Now let me hand the call over to Ismael who will provide an overview of Recurrent Energy, Canadian Solar's global product development business. Ismael, please go ahead.

Thank you, Yan.

Please turn to Slide 9. 2024 marked the largest execution year in the history of Recurrent Energy. We successfully brought 1.3 gigawatts of solar projects to commercial operation across the U.S., Italy, Brazil, Japan and Taiwan. We also started construction on 1.4 gigawatts of solar and 1.8 gigawatt hours of BESS projects. Specifically in the U.S. and Europe, our IPP markets, our operating portfolio reached 490 megawatts peak of PV and 310 megawatts hours of energy storage as of December 2024.

Last week, I attended the ribbon cutting event for our 1.2 gigawatt hour Papago Storage project in Arizona, a full toll storage project that will officially reach commercial operation in a few days. Overall, we have fully funded a total of 20 projects equivalent to 1.8 gigawatts peak of solar PV and 1.7 gigawatt hours of BESS projects. All these projects have either reached commercial operation or are in construction. In addition, we have partially funded 15 projects that are set to start construction this year, equivalent to 1.1 gigawatts peak of solar and 840 megawatt hours of BESS.

We are making significant progress in our transformation as an independent power producer. As discussed in the past, we expected our financials to take a short-term hit when we execute projects all the way to commercial operation instead of monetizing them upfront, which is what we saw in 2024. But as we scale our operating portfolio, the share of stable recurring income will grow. Thus, 2024 was not strong financial year, also impacted by certain project delays that were pushed into Q4 and 2025.

Please turn to Slide 10. In the fourth quarter we sold 540 megawatts of PV projects in U.K., Italy, Japan and Taiwan, making total full year 2024 sales 1.2 gigawatts. 480 megawatts peak of solar and 480 megawatt hours of storage sales in the APAC region were delayed to 2025. Combined with our recurring revenues generated from operating projects, electricity sales and our O&M business, we reported $188 million in revenue, a gross margin of 7.5%, and an operating loss of $40 million. We also advanced our growth by signing PPAs both bilateral and auction-based, covering 1.5 gigawatts of solar and 1.3 gigawatt hours of BESS.

Our global operations and maintenance, or O&M business, expanded significantly. We are now the seventh largest O&M provider globally, up from 15th in 2021. We currently manage 4.2 gigawatts of solar, 5.7 gigawatts of colocated solar plus storage and 3.2 gigawatt hours of standalone storage worldwide.

While the financial contribution from O&M may be modest today, its strategic value is significant. The operational insights we gain from this business enable us to enhance every stage of project development and operations, driving greater efficiency and ultimately improving project economics and returns.

Please turn to Slide 11 for an update on our pipeline. As of December 2024, we have secured interconnections for 9 gigawatts of solar and 17 gigawatt hours of storage globally, excluding projects already in operation. Our total project pipeline now stands at 25 gigawatts of solar and 75 gigawatt hours of energy storage.

Echoing Shawn's comments on energy storage growth, we see this momentum reflected in our BESS pipeline. With energy storage poised to expand in Europe, we can leverage our experience from U.S. storage projects. The more than 35 gigawatt hours of pipeline in EMEA underscores our strong market position.

Now let me hand the call over to Xinbo, who will go through our financial results in more detail. Xinbo, please go ahead.

Thank you, Ismael.

Please turn to Slide 12. In the fourth quarter, we shipped 8.2 gigawatts within our guidance. Revenue was $1.5 billion, sitting at the lower end of our range as some project sales were delayed into 2025. Gross margin was impacted by several factors including duty and tariff effects, and inventory write-down due to declining market prices, and project asset impairments. Together, these factors reduced gross margin by more than 950 basis points and were slightly offset by advanced manufacturing credits.

Selling and distribution expenses decreased by 3% sequentially, primarily due to lower shipping costs. General and administrative expenses increased 120% sequentially, driven by $65 million impairments to certain manufacturing assets and $21 million of impairments to solar power systems. Following ongoing curtailments in the Latin American region and reassessments of project fair values, we incurred $54 million of impairments on project assets and solar power systems. Collectively, these impairments impacted Q4 operating margin by approximately 350 basis points.

Research and development expenses remained stable quarter-over-quarter. Net interest expense in the fourth quarter was $9 million, down from $20 million in the prior quarter. This was mainly driven by higher interest income.

Net foreign exchange loss in the fourth quarter was $10 million, driven by a strong dollar following the U.S. presidential election. Total net loss before non-controlling interest was $135 million, while net income attributable to Canadian Solar shareholders was $34 million or diluted earnings per share of $0.48. This result included a significant $132 million positive impact from HLBV accounting related to tax equity arrangements of certain U.S. operating projects.

Now let's turn to cash flow and the balance sheet. Please turn to Slide 13. For the full year of 2024, net increase in cash was $682 million. Outflows in operating and investing cash were driven by funding of $698 million and $758 million deployed to projects assets and operating projects, respectively. Capital expenditures for the year totaled $1.1 billion, slightly below forecast. For 2025, we expect CapEx to be approximately $1.2 billion as we focus on our strategic manufacturing investments in the U.S.

Now let me turn the call back to Shawn, who will conclude with our guidance and business outlook. Shawn, please go ahead.

Thank you, Xinbo.

Please turn to Slide 14. For the first quarter of 2025, we expect CSI Solar's module shipment to be in the range of 6.4 to 6.7 gigawatts, including approximately 400 megawatts to our own project. We also anticipate delivering around 800 megawatt hours of energy storage with 150 megawatt hours allocated to our own projects.

We forecast total revenue for Q1 to be between $1 billion and $1.2 billion with gross margin expected to range from 9% to 11%. First quarter margin reflects lower than usual performance across both CSI Solar and Recurrent Energy. For CSI Solar, the primary drag on margins will be seasonally lower energy storage shipments, resulting in reduced margin contribution from that segment. While slightly higher ASP in the U.S. and manufacturing credit will partially offset total duties, tariffs and accelerated depreciation of manufacturing assets, these factors will still [ weight ] on gross margins.

For Recurrent, margins will be impacted by project sales with minimal margin contribution. However, we expect margins to improve in subsequent quarters as storage shipments increase significantly starting in Q2, and tariff and duty impacts on a per watt basis decline over the year. For the full year of 2025, we reiterate our volume guidance of 30 to 35 gigawatts of module shipments, including approximately 1 gigawatt to our own projects.

We also reiterate our guidance for energy storage shipment to be between 11 to 13 gigawatt hours, including approximately 1 gigawatt hour allocated to our own project. We expect full year revenue to range between $7.3 billion and $8.3 billion. Throughout the year, we anticipate continued consolidation in the solar market. Geopolitical uncertainties will impact all of our business lines, but we remain confident in our ability to navigate these challenges.

With that, I would like to open the floor for questions. Operator?

[Operator Instructions] Our first question comes from the line of Colin Rusch with Oppenheimer.

Given the changes that we're seeing in terms of chemistries on the battery side as well as price dynamics, can you talk a little bit about how you're seeing margins trending for your energy storage systems, and how you're passing on some of the benefits of the improving chemistry and cycle life?

This is Shawn. I will answer this question. Although there are some chemical changes, but the main chemical structure for the battery is still the same, still the LPF -- LFP type of solar cell chemical structure. But we are working, like implement some new technology. For example, the pre lithium Asian technologies will result in -- which will result in more cycle times and also less degradation, especially less degradation in the first 5 years.

Now we think most of those savings, the benefit we will pass to our customers and for Canadian Solar, however with those new technologies I think we'll be able to maintain a reasonable margin for ourselves, Colin.

All right. And then I guess the second one is for Ismael. Given some of the geopolitical shifts that we're seeing here, and potential for increased activity in Europe, can you talk a little bit about early indications around where some of the infrastructure support might end up filtering out, whether it's Germany or other countries, or what you're seeing in terms of the value of the pipeline of products that you have on the continent?

Thanks for the question, Colin. Yes, thanks for the question, Colin. Look, despite all the noise that is happening, we have not been suffering anything in particular in any of our U.S. projects yet. And small permit that we were missing on -- from the federal government was granted very quickly actually. And in Europe what we are seeing is very strong movement into installing storage, remain with installations of PV.

But PV penetration is starting to be very high. So there is a lot of storage to be deployed. There is almost [ nothing ] in Europe. So that's what we are seeing. But we have not seen, at least so far, any slowdown in the U.S. market.

Our next question comes from the line of Praneeth Satish with Wells Fargo.

Maybe turning to the guidance. So Q1 guidance for module shipments of 6.4 to 6.7 gigawatts versus the full year of 30 to 35 gigawatts. So basically implies meaningful kind of acceleration in the back half of the year. Maybe if you could provide any more clarity on the ramp over the course of the year, and the main factors that's driving it, given the continued pricing pressure and geopolitical tensions that we're seeing?

Yan, do you want to answer this question?

Yes. So actually you asked a pretty big question, because of the price trend is kind of complicated across different markets. And also first half and second half might be different. So overall, we're seeing price being stabilized in most of the world. Except in China we see price going up because of this surge of demand triggered by the policy shift and -- as Shawn mentioned.

And now for U.S. we're observing price starts to go down a little bit. And moving to the second half we anticipate -- we see some uncertainties for China market given the policy shift. Could be a period of slowing down. That's possible. However, on the other hand we are actually ramping up our own U.S. manufacturing volume. So that is going to help our margin.

And we also have growing storage shipment Q-to-Q. That also helps on the margin. Now on channel and sales side, in different markets we have a strategy of focusing on high priced channel, and also high priced business such as bundled sales. So we're focusing more and more on solution, and services that can give us a higher margin. So overall our margin situation I think Q-to-Q over the year is going to -- on the uptrend mode. So we're going to improve Q-to-Q.

Got it. That's helpful. And just quickly just 2 questions here on the slide showing the manufacturing capacity looking out to 2025. So just on the outlook for cell capacity, does that 36 gigawatts, does that include the 5 gigawatts from the Indiana facility that you're constructing? And then at this point, what percentage of that 36 gigawatts of cell capacity is TOPCon versus PERC?

Let me answer this question. You probably noticed that the cell capacity declined from the end of 2024 to the end of 2025. So we are taking the PERC capacities, [ elected ] PERC capacities offline throughout 2025. So that's why the number changes.

So the 36 gigawatt, well, yes, it's mainly the remaining TOPCon capacities. There's not much PERC assumed in this numbers. And the Indiana facility will start to move in equipment this year, but the facilities will only start to contribute in 2026. And at this moment, we expect to start commercial shipment from Indiana in Q2, 2026.

Our next question comes from the line of Maheep Mandloi with Mizuho Securities.

Maybe on the previous question on the gross margin improvement, you kind of talked about quarter-over-quarter margin improvement. Is that just for Q2, or is it like for the full year? The first question on that.

And second, on the slide that you kind of mentioned the few reasons which kind of impacted the gross margins over here in Q1. If you could like give us some insights into the gross margin reduction due to lower e-STORAGE shipments or trade duties or tariffs, that'll be really helpful?

Yan, can you answer this question?

Yes. So the -- okay. The -- I'm talking about throughout the year, we're on the upward trend in terms of margin. It doesn't mean every quarter we're going to have a significant jump. But overall -- throughout the year the overall trend is a margin improvement. So that comes from, as I said, the improvement -- the increase of storage shipment and also our improved channel structure and solution service offering volumes also on the upscale trend.

So the second question is about the Q1 margin disruption. That was your question? The factors in Q1?

Yes, yes, just the factors. I think you highlighted e-STORAGE, trade duties and tariffs. Just curious how to think about the impact of those 3 things in Q1?

So in Q1, I think Shawn has mentioned, we had different factors such as the impairment in Brazil, in South America, right, on the recurrent side. And also we have impairment on the PERC facility, and of course some impact on the duty freight. So that was the factors that are -- negatively affected our Q1 margin.

This is Xinbo speaking, in Q1 the lower margin is. I think it's more about mix. The solar products will continue to maintain a stable margin similar to the last quarters. And the lower margin is mainly because of lower seasonal volume from e-STORAGE, who has been contributing decent margin to the [ cost. ]

I thought you mentioned Q4. Yes, Q1 is -- it's a lower season for -- not just for e-STORAGE, but also for solar as well.

Yes. If you calculate our guidance, the battery system shipment volume in Q1 only accounts for about 7% of our annual volume. Yes, it's much lower than average. It's the main reason.

I appreciate that. And just one last one quickly just on the steel and aluminum tariffs on U.S. imports, I presume that's already baked into your Q1 guide. But for the rest of the year, how should we kind of think about that? Is that passed through to your customers, or is that something you'll be negotiating with the customers?

Sorry?

Were you asking about steel tariffs?

Yes, steel and aluminum tariffs, like for -- which goes into your module frames, and potentially into the battery containers also, right? So just curious if any of those are impacting your...?

So those tariffs are already taken into account on our cost structure. So I don't -- There's no -- I don't...

[indiscernible]

Sorry, go ahead.

No, no. Sorry, sorry, go ahead.

We don't observe significant impact likely if there's certain tariff is absorbed by our suppliers.

Got it. I'll take it offline.

Our next question comes from the line of Alan Lau with Jefferies.

This is Alan Lau from Jefferies. And my first question is about -- on ESS system, the first quarter I don't have the guidance, it's 800 megawatt. So it's 7% of annual volume. Would like to know how much of the remaining volume are contracted as in the price? Are the price fixed and the management is confident to deliver 11 to 30 gigawatt hour of ESS volume in 2025?

Yan, [indiscernible] do you want to answer this question?

Yes.. So you're talking about e-STORAGE or module, e-STORAGE okay. So for the whole year, we have -- we guided the 11 to 13 gigawatt hour. Actually most of the contract has been signed already.

So has the price been fixed already, or like...?

Now the price is actually decided. So as preset price of course we have some -- like a change of law protection as well. And so pretty -- our margin level is pretty high confidence.

Understood. So for change clause protection, I assume that includes protection on tariff as well, right?

Yes, majority of the volumes are protected.

And then my next question is about the mix on U.S. module shipment. I think last year is around 25% of the modules are shipped to U.S. market. Would like to know is there any idea on the amount of module shipment to the U.S. in first quarter and throughout the whole year in 2025?

It's a similar. Yes. Now this year the U.S. presented for the total -- in the total global module shipment is also around 25%. So it maintained roughly at the same level. You may notice that our volume guidance for 2025 is 30 to 35 gigawatts, which is more or less in line with 2024, and also in line with 2023, almost at the same level.

So in the current situation of the global oversupply of solar module, as I said in my comments, we expect this situation to continue this year. Therefore, under this circumstances we are not forecasting volume increase. We rather want to focus on protecting the margins and profitability. And then the percentage of U.S. shipment is around the same number -- no, around the same percentage, which also means more or less around the same number as 2024. Now for Q1, I think the overall percentage is almost -- also almost around the same level, like 20% to 30% of global shipment.

That's very clear. I have a last final question on the G&A expenses, because it appears that the general and admin expenses in 4Q seems to be higher than the previous quarter. Would like to know if it is it one-off, or why is that and is there any room for improvement in the next quarter?

Yes, it's one-off impairment. It's one-off...

And so impairment is included in G&A?

On some of the impairments for operating expenses.

Our next question comes from the line of Vikram Bagri with Citi.

Few quick questions. Apologize for asking one more question on first quarter margins. The gross margin in first quarter appears slightly lower than what we had been expecting, even accounting for lower storage shipments. Can you confirm if storage margins are intact in the 17% to 20% range that you've historically talked about? And if so, perhaps module margins have dropped into low single-digits or even lower. And then I have a follow-up.

Xinbo?

Yes, module margin will maintain at similar level. We are going to sell some of the solar projects also in Q1. And this -- some of the projects might be sold at lower margins, so it also contribute to the mix and overall lower average gross margin in Q1.

Got it. But the storage margins are still intact in the 17% range...?

Not impacted, battery storage systems are still sold at decent margin.

Got it. And then second, looking at the full year guidance, it appears there is some price rebound expected in back half of this year. Am I right in assuming so? And if so, can you talk about the drivers that would help pricing in back half of the year based on the revenue outlook you have?

Can you repeat your question?

I was [ ] the second half of the guidance appears to price in some improvement in module pricing, is that correct? Are you expecting a rebound in module pricing in back half of this year? And so, what would be the drivers that you see on the horizon that will help pricing?

Yes, as a matter of fact, the solar module pricing out of United States is rebounding right now. This rebound is helped by the installation increase in the first half of this year in China. As I mentioned in my prepared speech, there were 2 policy changes effective on April 30 and May 31st, effectively. So basically after these 2 days to date, the solar installation in China will not be subject to fixed price.

Rather pretty much all the solar projects will have to participate in the electricity market clearly. So because of that there has been an installation surge right now. We expect this installation surge will go on until May 31st, which is the effective date of the new policy for the solar installation. Therefore, the solar module price has rebounded already, and will keep on a relatively high level for the first half of this year.

Now, the second half of this year, as a matter of fact we -- I mean we think this surge in China will stop. And then the market will back to the normal situation. And actually we expect this deconsolidation, which means the module price pressure will continue in the second half of this year. So we are not forecasting any solar module price increase for the second half of this year. Instead we are experiencing a solar module price increase as we speak right now.

Our next question comes from the line of Philip Shen with ROTH Capital Partners.

Back to margins, I think you guys talked about margin improvement through the year, every quarter. Was wondering if you could share how much higher margins can be? And do you expect the margins to peak in Q3, or do you think will rise through the year? And Q4 is the highest margin level by quarter. So just wondering how high we can get back to and which quarter is the highest?

Yan, do you want to...?

Yes, we do not -- Yes, we do not guide Q-to-Q, quantified increase. We do not guide that. But what I said is we have a low Q1, but rest of the year we see the margin improve. So I can't tell you exactly what is the margin every quarter now. We cannot guide that.

But reason behind, as I said, is the ramping up storage shipment, and also the ramping out the U.S. module capacity. And as well as our overall innovation on our channel, and our services that will -- we've been working on very hard to improve margin.

Okay. I'll add a few comments. As I said in my prepared speech, this quarter Q1, our delivery for the energy storage system is 800 megawatt, which is seasonally low. We will see Q2 storage shipment to increase significantly. Although I'm not guiding Q2, but according look at the shipping schedule we expect the Q2 shipment in energy storage to go back to the Q4 last year's level, or even higher, and probably even higher than the level we reported for Q4 last year.

And any storage shipment have [indiscernible] -- have a decent growth margin. This is one reason we see, or we expect to see margin improvement in Q2, and throughout Q3 and Q4. And also then on the solar module side, this quarter again the solar module delivery is at a seasonally low. But we see this pattern every year. If you look at last year and look at 2023, Q1 shipment is always low, and then the shipment increase quarter-by-quarter after Q1.

And another reason is that the new AD/CVD -- preliminary ruling of AD/CVD on the solar module shipment to U.S. from some of the Southeastern Asian countries. Now we will -- we do see like high percentage of tariff in Q4, and also in Q1. But throughout the year the shipment from our Mesquite, Texas solar module factory is going up. And for the shipment from Mesquite, the duty -- the import tariff only apply on the solar cell, not on the module part.

That's another reason for us to see the solar margin -- the average margin for the solar module business also going up. Again, those are the forecast for Q2, Q3 and Q4 now, but it's not our official guidance yet.

Okay. Great. Thanks for the additional color, Shawn. You mentioned the tariff impacts for Q4 and Q1. I may have missed it, but can you help us understand specifically what tariffs they were? Was it the Southeast Asia AD/CVD, and then do you expect that to abate, to not be as heavily impactful for Q2, Q3 and Q4? Because it sounds like the impacts might be not as strong?

There are 2 set of tariffs, like main tariffs applied to the Southeast Asian country shipment. One is the AD/CVD, the new preliminary AD/CVD ruling on 4 Southeastern Asian countries which are Thailand, Malaysia and -- Thailand, Malaysia and Vietnam. And what's the fourth country Yan? [indiscernible]

Cambodia.

Right, right, yes Cambodia. So those 4 countries. Now our solar module is located in Thailand. So this -- the shipment from this factory to see the tariff increase from this AD/CVD. And there's another duty, which is called 3.0 -- No, called 201, right. The 201 duty. This duty also affect the solar module shipment originated from Thailand. So those are the 2 hit of the import tariffs.

Right. And so the tariff impacts for Q2, Q3 and Q4 of this year go lower because you ship more from the U.S., is that right?

Yes, that's my reason. We are using -- we have a combination of like different manufacturing strategies, and we will increase for example the domestic production of solar modules using the solar cell from Southeast Asia. This will allow us to reduce the effect effective percentage of -- No, the effective, like absolute duty impact on the solar modules.

Okay. Great. I'll pass it on.

Our final question this morning comes from the line of Brian Lee with Goldman Sachs.

Maybe just a couple follow-ups to Phil's margin questions. It seems like a pretty big driver. So can you -- I mean you said 900 basis points of different margin headwinds in Q4 including the tariffs. How much did it impact the Q4 gross margins? How much are the AD/CVD tariffs impacting the Q1 margin guidance? And then what's sort of the level at which you'll see impact going through the year? If it's ex basis points in Q4, down to ex basis points in Q1, what is it going to be by the end of the year? Because it seems like again, so pretty meaningful driver here?

Yes, Xinbo, do you want to share some color there?

Yes, I can take the question. The tariff was partially offset by the higher price in the U.S. So we don't observe significant change with gross margin. I think you are talking about the module products, right. And our sales in the U.S. accounts for about a quarter of our total volume, pretty stable. And the selling price in the U.S. has been about 3 times the rest of the world.

So it translates into about half of our revenue generated in the U.S. also pretty stable. So we don't observe, or don't forecast big differences moving into 2025, and likely the solar module products will maintain similar margin for the year.

Okay. Fair enough. I'll take my question offline. Maybe a separate question on margins. I think you guys have historically been talking about e-STORAGE margins in the 20% range. I know a previous caller asked you about 17% to 20% and you said that, that's the right range. But I think on a slide deck recently in December you put out mid-teens as sort of your target now. So it's a subtle shift, but what might be driving the 20% historical view now to mid-teens in storage? I know one of your peers had a margin issue this past quarter, and it seems like there's a lot more competition in the storage space. So can you kind of speak to some of the dynamics as to what's driving not just seasonality and volumes, but it seems like there's been a bit of a structural downtick a little bit in your margin outlook for storage? Can you speak to that?

Yes, I want to take this question. Now, the module -- No, the gross margin percentage for e-STORAGE was at 20% or higher level. Now even at the beginning of this year, we forecast the e-STORAGE product, the gross margin at 20% or higher. And although the price -- the absolute price indeed is trending down because of the like -- those technologies become mature, and also because increase the market competition.

However, the new U.S. administration announced some new tariffs, new import tariffs, in particular a 20% new tariff on the product imported from China. Now we do have some e-STORAGE shipment coming from China into U.S. So that will impact us, and therefore we know -- with that impact we think the margin will trend down, although we have the change of law protection with some customers.

But those change of law clauses allow us to renegotiate with the customer rather than to put the 20% burden just like directly and -- to -- on the customers. So typically, we negotiate some kind of sharing of the new 25% duty burden with our customers. So it will impact our margin. However, we are working on other strategies. For example, we are building a new energy storage factory in Shelbyville, Kentucky.

And we are also taking the solar cell supply from other countries outside of China. So throughout of the year, we do see -- be able to smooth out some of those duty impact assuming there's no new duty impact. So we are closely watching what will happen on April 2nd when U.S. started to implement the reciprocal global tax. We still don't know how much impact will that be, but we do expect uncertainties in terms of product flow and tariffs like for this year.

Okay. Understood. I appreciate the detailed response. Maybe last one for me and I'll pass it on. I know you don't want to breakout I guess, to the basis points the margin impact from AD/CVD and they're still preliminary, but I believe they're retroactive for the Thailand portion. So have you outlined, or can you give us a sense a range of what the cash deposits are, and have you already accrued those on the balance sheet, or is that something that we'll see next quarter? Just trying to understand what maybe the cash implications of the retroactivity may be for you guys?

This moment all the deposit for -- the import deposit related AD/CVD, we do book it as cost on our P&L, and now -- but those due dates will go through the -- typically go through the final review a couple of years after the year. For example the 2025 AD/CVD due date, the final determination will be a couple of years down the road, and depend on the result of that final ruling, final determination.

Either we want to see some of those deposits flow back to us, or maybe in a worst scenario we can see additional duty. But so far as of today, we only see the -- this deposit money -- part of the deposit money throw back to us. We are -- I don't think we are making -- we are doing any provision for the retroactive application of duties for that. We are waiting for the final ruling from the U.S. DOC and also from U.S. ITC.

Ladies and gentlemen, that concludes our time allowed for questions. I'll turn the floor back to management for any final comments.

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

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