Ladies and gentlemen, thank you for standing by. Welcome to Canadian Solar's Fourth Quarter 2022 Earnings Conference Call. My name is Rob, and I'll be your operator for today. [Operator Instructions]

I would now like to turn the call over to Isabel Zhang, Investor Relations Director at Canadian Solar. Please go ahead.

Isabel Zhang - Investor Relations Director

Thank you, operator, and welcome everyone to Canadian Solar's fourth quarter 2022 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 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 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.

Shawn Qu - President, Chairman and Chief Executive Officer

Thank you, Isabel, and hi everyone. Welcome and thanks for joining us on our call today. Please turn to Page 3. 2022 was a record year for Canadian Solar in terms of revenue and profit. We grew revenue by 42% for a record $7.5 billion, and we grew net income attributable to shareholders by 152% to a record $240 million. Diluted earnings per share for 2022 was $3.44. I would like to thank both our CSI Solar and Global Energy team for their focus and outstanding work in achieving these results. Before turning the call over to Yan, Ismael and Huifeng, I would like to give you a higher level view of what we are seeing.

Please turn to Page 4. If you look at our key financials between 2015 to 2020, we reported limited revenue and earnings growth, as the massive increase in volume was offset by the huge decline in costs and ASP in solar modules. During that period, we put in place strict cost control efforts and invested in R&D to reduce our manufacturing costs, while improving our products' efficiency and output. This financial discipline and technology focus helped us achieve the critical goal of grid parity and helped make clean energy investments attractive without government subsidies.

Today, solar energy is a good investment, both economically and from a sustainability standpoint. This has unlocked a much greater pool of global demand and attracted significant amount of capital into this space. As an integrated manufacturer and developer, the closer we reach the bottom of the cost curve, the closer we are to translating volume growth into both revenue and earnings growth. If you look at the past two years, raw material costs increased meaningfully due to COVID-related reasons. Recently, some of the raw materials costs have started to decline, such as that of polysilicon, as the new capacities ramp up, but we are not quite at the bottom of the cost curve yet, given the technological innovation in the pipeline that will help us achieve further efficiency gains and cost declines.

The key point is that we are getting very close to the bottom of the cost curve, at which point value and technology differentiation will become the predominant drivers of profitability, not cost. With that, we expect to see greater pricing power and operating leverage as our cost structure stabilizes further and the world continues to invest in cleaner energy infrastructure and secure universal access to energy. I think our Company and our industry are at a critical turning point and is worth watching very closely.

Please turn to the next slide. Before turning the call over to Yan, I want to update you on CSI Solar's carve-out IPO in China. This morning, we received the approval for the registration with the China Securities Regulatory Commission. Our auditors are in the process of fully auditing CSI Solar's 2022 financials, and we will update our prospectus once the 2022 financial auditing is completed. Given today's update, we think we are on track to complete the IPO in Q2 of this year.

With that, let me now turn over to Yan, who will provide more details on our CSI Solar business. Yan, please go ahead.

Yan Zhuang - President of CSI Solar

Thanks, Shawn. Please turn to Slide 6. As Shawn noted, 2022 was a record year for us. We grew solar module shipment 45% year-over-year to 21 gigawatt, and battery storage shipments doubled to 1.8 gigawatt hour. Full year revenue grew 60%. Gross margin was up 69% year-over-year and operating profit increased by over four times. Despite the challenging macro backdrop, this record year underscores the long-term strength of our business and multi-year growth opportunities ahead.

If you turn to the next slide, you can see the extent of the market volatility. Trends are generally moving in our favor, but we continue to take actions wherever possible. For example, polysilicon prices collapsed in December and January, driven by a sudden reopening of China's COVID policies and timing of Lunar New Year. This gave us an opportunistic chance to acquire some quantity of raw materials as we expected polysilicon prices to rebound quite quickly. However, fundamentally, the views we shared over the past several quarters are unchanged. We believe polysilicon prices will come down gradually as opposed to drastically, given that demand is still very strong, and we continue to see very large customer pipelines across our markets. And also, we believe the market today is very price elastic.

The other big driver of the profitability improvement was the decline of shipping costs to more normal levels, as you can see on the chart. So while shipping costs will go up with volumes, we will be able to see a bit more operating leverage on our operating expenses, which includes shipping costs will not grow as fast as our topline.

Please turn to Slide 8. So while we are monitoring market trends very closely, our focus remains on the factors that we can control. In other words, strengthening our competitive advantage in technology and products, positioning our brand in high-priced premium markets, building on strong customer and channel relationships, and increasing control over our costs through vertical integration of manufacturing capabilities.

The charts on the left show our channel and regional distribution, which are over-indexed in premium markets. On the right hand side is our capacity distribution. We'll continue to grow our capacity to keep up with strong demand and increase the level of vertical integration to gain more control over our costs across the value chain. And we are flexible in this strategy. As we previously announced, we slowed our ingot capacity expansion this year [Phonetic], but accelerated our cell expansion plans. This reflects our views on the relative balance of supply and demand across the value chain.

Please turn to Slide 9. Moving onto our battery storage business. First, I wanted to highlight the credible - the incredible achievements of our CSI Energy Storage team, which delivered 1.8 gigawatt hour of utility-scale battery storage shipments over the past year. The team was formed right at the beginning of the global pandemic and grew from zero to over $400 million in revenue between 2020 and 2022. What's more? Our team delivered some of the largest utility-scale battery storage projects in the middle of the pandemic and was one of the very few players in the market that executed with almost no delays. And every project we have delivered has been profitable, despite steep increases in key raw material prices. In fact, lithium carbonate prices went up by more than 10 times over this period, although prices have recently started to come down.

Battery storage is one of our long-term key strategic growth areas. Over the past several quarters, we've been investing in R&D and have successfully launched one of the most competitive utility-scale battery storage products, the SolBank. As we transition from previously delivering a white label product to our own manufactured SolBank, 2023 is going to be a transition year for our battery storage shipments, especially considering the longer order fulfillment lead times for battery storage compared to solar. This is why we expect flat deliveries year-over-year in 2023. However, we have very strong visibility over our long-term growth. As of January the 31st, SolBank had over $1 billion in contracted revenue and a total pipeline of 23 gigawatt hour in our turnkey utility-scale storage business. We expect this to continue to grow over the long-term, as we further expand our commercial capabilities in this space.

Please turn to the next slide. On the residentials battery storage side, we have now officially launched our EP Cube products in the U.S., Europe and Japan. Shawn, and I just came back from World Smart Energy Week in Tokyo after a very successful launch event last week. Last year, the Solar Power World editorial team picked the EP Cube as their favorite residential battery storage product. This has been echoed by our customers, given the EP Cube's customizable and modular designs, ability to be both DC and AC coupled, easy installation and incredibly beautiful design. Since the launch, we've been working closely with our distributors and installer network, which we were able to leverage directly from our existing solar module channels.

We started shipping in Q4 2022, and are targeting to achieve at least 100 megawatt hour in 2023 in total. We're building a strong brand and believe that the EP Cube is one of the best consumer battery storage products in the market, which will help us strengthen our competitive advantage and market positioning in the business that has significant barriers to entry.

The global energy system is undergoing significant channel - change that impacts how we think strategically about our market positioning, how value creation is defined. With a growing awareness of energy security and global efforts to decarbonize our economies through tools such as carbon pricing and other carbon neutrality initiatives, the value proposition of our Company and the industry will not look the same in the future. Our focus is always on value creation. In the past, it may have been the PV systems only, but increasingly it will be PV plus storage, even to PV plus storage plus a much more efficient and intelligent integration systems to facilitate energy treaty. We seek to differentiate our business model, so that we are always creating value for our customers.

Now, let me pass it on to Ismael. Ismael, please go ahead.

Ismael Guerrero Arias - Corporate Vice President and President of the Energy business

Thank you, Yan. Please turn to Slide 11. We achieved 2 gigawatts in project sales in 2022, $822 million in revenue and $161 million in gross profit. Our gross margin improved by 230 basis points year-over-year to 19.6%. As expected, Q4 was a smaller quarter from a project monetization standpoint, due to the timing of project sales. Additionally, in Q4, we decided to hold on to more projects longer term in certain markets such as Europe, where we believe we can capture more value by being the long-term asset owner and operator.

Next slide, please. During Q4 2022, we continued to focus on originating and developing the largest and most valuable projects in global pipeline of solar and batteries energy storage assets. As of January 31st, our total pipeline stood at 25 gigawatts of solar and 47 gigawatt hours of battery storage projects. Of this, we have 14 gigawatts of solar and 12 gigawatt hours of battery storage interconnections. We believe that clean energy assets' ability to interconnect at low cost and at a reasonable time frame will be one of the most important determinants of the value.

This is a shift from the past, where the focus was mainly on projects contracted revenues or environmental permitting, both of which are still important, but interconnections will be absolutely critical. And this value will only increase over time, as the world continues to decarbonize and grids become more congested as they continue to absorb more solar and wind energy. The fact that we already have 14 gigawatts of solar and 12 gigawatt hours of storage interconnections means that we are in a very strong position to deliver high-quality assets over the next few years.

Please turn to Slide 13. The other factor that differentiates Canadian Solar is that we are one of the few companies that can capture significantly - significant value through the entire project development cycle. We develop the vast majority of our pipeline from greenfield. Our capabilities span all the way from initial site selection to permitting, finance and execution, operations and maintenance and asset management. And with us, we have had 14 years experience delivering nearly 9 gigawatts of solar power plants and 3 gigawatt hours of battery storage projects across six continents. These are literally hundreds of projects and the expertise we have amassed across all our major regions is truly unparalleled.

Next slide, please. Longer term, as we have discussed on prior calls, our strategy is 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. We understand that our Global Energy business in its current form is difficult to forecast on a quarterly basis, given the lumpiness of our project sales and the difficulty to accurately time deal closings. And the way we develop some of the most valuable solar and battery storage assets, the constant pressure to recycle capital quickly, means that we may not sufficiently capture the value we create. So, our plan is to hold on to certain assets for longer, where it makes sense from a risk and value creation standpoint.

For example, we recently closed the first 30% sale of our Italian alternative investment fund. This vehicle will allow us to retain and operate assets over the longer term by partnering with lower cost of capital investment partners. The strategic decision to keep more projects in Europe over the longer term was a factor in Q4's slightly lower project sales. This way, we will be gradually moving from a spot sales business to a recurring revenue one, accounting for value creation and cash flow considerations.

Now, let me pass it on to Huifeng, who will go through the financial results in greater detail. Huifeng, please go ahead.

Huifeng Chang - Senior Vice President and Chief Financial Officer

Thank you, Ismael. Please turn to Slide 15. In Q4, we achieved 29% revenue growth year-over-year with $1.97 billion in revenue. Gross margin in Q4 was 17.7%, at the higher end of our guidance of 16% to 18%. CSI Solar gross margins expanded by 10 basis points to 17.4%, while Global Energy gross margins were at a healthy 21.7%.

Selling and distribution expenses declined by 24% sequentially, even with our continued increase in shipping volumes. As Yan mentioned, shipping costs are finally back to a more normalized level. On the other hand, we are starting to see the ground transportation costs from different parts of the world are picking up slightly due to limited labor availability, but this is more than offset by the decline in shipping costs. General and administrative expenses declined 13% sequentially due to opex efficiencies and the lower impairment costs. Research and development expenses increased 15% sequentially, driven by higher investments in our solar and battery storage R&D workshops. Put together, total operating expenses were down 22% in Q4 sequentially. This is 10.8% of total revenue, which is the lowest level since 2018, as the dynamics, as Shawn mentioned in his introductory remarks, are starting to play out.

Net foreign exchange and the derivative loss in the fourth quarter was $15 million, partially reversing the $39 million gains we achieved in the third quarter. The loss was mainly driven by the strengthening of the euro and the Japanese yen against the U.S. dollar. Total net income was $99 million, with net income attributable to Canadian Solar shareholders at $78 million, or diluted EPS of $1.11.

Now turning to the cash flow and the balance sheet. Next slide, please. For the full year of 2022, we generated approximately $920 million in operating cash and spent around $600 million in capex. We ended the period with a healthy cash balance of $2 billion and a total net debt [Phonetic] of $2.6 billion. We further improved our leverage measured as net debt to EBITDA, excluding restricted cash to 2.5 times from 2.7 times the prior quarter and the 3.4 times in Q4 of last year.

For 2023, we expect capex to be approximately $1.5 billion, as we support our capacity for this year and prepare for next year's growth plans. This is significantly higher compared to our historical capex spending, but it reflects the much larger global scale of our business and the favorable demand outlook, especially the U.S. market. Over 25% of the capex will be financed by customer down payments as we establish manufacturing capacity in the U.S. and expand our capacity in Southeast Asia. Another 40% was internal cash generation and the remaining from debt financing.

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 - President, Chairman and Chief Executive Officer

Thanks, Huifeng. Let's turn to Slide 17. For the first quarter of 2023, we expect solar module shipment by CSI Solar to be in the range of 5.9 gigawatts to 6.2 gigawatts, including approximately 130 megawatts of solar module shipment to our Global Energy projects. Total revenues are expected to be in the range of $1.6 billion to $1.8 billion, as Q1 tends to be a seasonally smaller quarter. Gross margin is expected to be between 18% to 20%, reflecting the margin improvement from lower manufacturing costs.

For the full year of 2023, we reiterate CSI Solar's total solar module shipment guidance to be in the range of 30 gigawatts to 35 gigawatts. CSI Solar's battery storage shipments are expected to be between 1.8 gigawatt hour to 2 gigawatt hour, reflecting this year's transition from white label to our own manufactured products, as explained by Yan earlier. Global Energy's project sales are expected to be around 3 gigawatts, although we are currently revisiting some of our project sales forecast, as we may want to hold on to more projects longer term.

We also introduced revenue guidance for the full year 2023, which we expect to be in the range of $8.5 billion to $9.5 billion. We remain focused on profitable growth and investing in our long-term areas of competitive advantage. We believe this differentiates us as we build lasting value for our shareholders.

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

Question & Answers

Operator

[Operator Instructions] Thank you. And our first question is from the line of Colin Rusch with Oppenheimer. Please proceed with your questions.

Colin Rusch - Oppenheimer - Analyst

Thanks so much guys. Shawn, if you look at this business, you talked about the value creation and the value capture changing as well as the vertical integration that the Company is planning. Can you talk a little bit about where you think gross margins end up over a multi-year period? Is this something where you guys can get to 28% [Phonetic] to 30% gross margins, or should we be thinking about kind of 25%, 26%?

Shawn Qu - President, Chairman and Chief Executive Officer

That's a very good question. Well, in the past, Canadian Solar's gross margin had been in the 20% to 30% range. For example, from 2018 to 2020, our gross margin has pretty much every quarter above 20%. And then, we had COVID and also the raw material cost increase not only happened to solar, but basically raw material for everything and the raw material inflation. So, as I said in my part of this presentation, we think the costs start to decline - some of the raw material cost already started to decline and eventually will reach the bottom of the cost curve and also the competition in the solar industry, just like for every industry, should somehow stabilize. Now once it stabilize, I do think that 20% to 30% is something we can hope for in mid to long-term.

Colin Rusch - Oppenheimer - Analyst

That's super helpful. And then as you look at retaining these projects, can you talk about the actual cash contribution once you've built the projects and refinanced them? Is there going to be like an actual cash contribution here, or are you going to be able to refi all of your hard costs out and really just hold these equity positions?

Shawn Qu - President, Chairman and Chief Executive Officer

Yes. I would like to ask Ismael to answer this question. Ismael?

Ismael Guerrero Arias - Corporate Vice President and President of the Energy business

Thank you, Shawn. We are still working on it on the long run, but initially, the intention is to start to move into recurrent revenues as quick as we can. That's the initial idea.

Colin Rusch - Oppenheimer - Analyst

Okay. Maybe I'll just take that offline and pass it on, then. But the idea is that you guys are going to be able to hold a minimal part of the cash equity and actually does capture a significant amount of value down the road, but I'll take that offline. Okay, thanks guys.

Shawn Qu - President, Chairman and Chief Executive Officer

Thank you.

Operator

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

Vikram Bagri - Citigroup - Analyst

Hey, guys. Good morning. Can you talk about how the capex is spent - being spent, where it is being spent, split between expansions, whether vertical integration with the poly's facilities in the spend, how much is being spent on expanding your capacity for TOPCon modules? I'm just trying to understand like where the capital will be spent and what the trajectory will be beyond '23 and '24. And also, if you can comment on how do you look at capital allocation internally, sort of following up on the last question, when you look at the spending on vertical integration and expanding manufacturing capacity versus retaining higher portion of equity in existing projects, how does the ROIC compare? What do you think the ROIC will be in these investments longer term? Thank you.

Shawn Qu - President, Chairman and Chief Executive Officer

Yes. See, we now run the two business, the CSI Solar business and the project business we call Global Energy business group. We run these two groups independently, so they make their own decisions. So, I guess that's my answer to your second question. We don't really compare, therefore make decisions on where to allocate the capital. The two business groups spend their own money. They have their own equity base.

Now, with that, I would like to have Yan to answer your first question, which is about capex, manufacturing capex and whether we are spending that the capex money on TOPCon or vertical integration or upgrade, things like that.

Yan Zhuang - President of CSI Solar

Well, so the current expansion plan, excluding the silicon capacity expansion, is actually - it's covered by different sources. So, such as for Thailand and the U.S. manufacturer, the proposed - the - the U.S. manufactured projects are covered - mostly covered through the customer down payment and for other capex expansion plans, it's a combination of either the operating income or bank lending. So, for those capex expansions, we don't really depend on the China IPO and the silicon capacity is more longer term. So, we will decide after we listed here in China. So, a return on investment on different capex expenditures are depends ingot cell and the module, it's really very detailed breakdowns. And you can follow up with Isabel leader for details. But overall speaking, I think we're okay on our capex coverage and cash flow.

Vikram Bagri - Citigroup - Analyst

Thank you. Can I ask one follow-up on batteries and storage also? It seems like the volumes came in a little light relative to the guidance, relative to our expectations. What were the drivers? Was it - was there like a constraint in supply that drove the volumes down? And I see the backlog in North America has increased a lot, the early stage pipelines, if you can comment on what are the drivers of that increase? Are those new partnerships? If you can also comment on what part of North America you are seeing that increased demand from? What geography you're seeing that increased demand from? Thank you. That's all I had.

Yan Zhuang - President of CSI Solar

Okay. So, that's a good question, actually. As you know, the utility-scale storage projects we have, actually they have a much longer lead time on sales. So, whatever project that we need to execute, for example, right now in the first half of 2023, the contract actually was closed a year ago or even longer. So - and so by - as you remember, around beginning of 2022, we had a pretty dramatic change in the supply chain of storage. But that was the time that our sales level we decided to switch from white label product to our own developed SolBank product, so that was a transition. So, we need to overcome certification, bankability stuff. So, that's why the pipeline we have today is more towards second half of this year, not first half of this year.

So in terms of recognition and shipments, it's kind of very much skewed to the end of this year. And however, if you look at our signed contract, the signed contract carries about $1 billion U.S. deal already. And that number is increasing every quarter rapidly. So, we're expanding our total storage - SolBank capacity towards 10 gigawatt hour by [Indecipherable]. The reasons behind is, we know next year we're not going to have enough capacity. So, next year will be the real growth. This year is a transition. And we have total pipeline of 23 gigawatt hour for utility storage system integration projects. So, we know that next year, we're going to reach either 10 gigawatt hour or close to that number next year already. So this is the situation. Hopefully, this answers your question.

Operator

Thank you. [Operator Instructions] Our next question is from the line of Philip Shen with ROTH MKM. Please proceed with your questions.

Philip Shen - ROTH Capital Partners - Analyst

Hi, everyone. Congrats on the IPO approval. Can you remind everyone how much you plan on raising and what is the rough valuation you guys are targeting? I recall $600 million to $700 million at a $4 billion to $5 billion valuation for just CSI Solar. And can you remind us what the plan is for the use of proceeds? I know you addressed it a little bit earlier, Yan, but I was wondering if you could give a little more color. And then finally, can you talk through the next steps? I know you gave a little bit of color, Shawn, on that with the expectation of the IPO completion in Q2, but is there some more detail that you can share in terms of what to expect ahead such as the roadshow and timing and things like that? Thanks.

Shawn Qu - President, Chairman and Chief Executive Officer

Hi, Philip. Thanks. And we are also pleased that we received the approval for the registration [Phonetic]. We will talk to our bankers about the roadshow schedule, roadshow and pricing and list and schedules and hopefully update you. Now, in terms of the amount of proceeds to be raised and also the use of proceeds, Huifeng, do you want to address this question?

Huifeng Chang - Senior Vice President and Chief Financial Officer

Yes. Thank you, Shawn. Yes, Phil, what you said earlier is much our normal plan. However, it depends on the market conditions. We all know that a lot of things happening in the capital markets in the U.S., Europe and also we expect the high volatility in the Chinese capital market too. But however, as you know, we have been working on this for 2.5 years. So, obviously, we want to get that deal done as soon as possible. And then there's a process, such as further update our financial information and the roadshow is such a structure, but it will be very quickly and it's in process. No more regulatory approvals are needed. Going forward, it's our own marketing efforts with the bankers, etc., and the investors.

And then in terms of the use of proceeds, obviously, the good news only arrived this morning a couple of hours ago. And before that, we actually have prepared the cash for the $1.5 billion capex in the new year. So, now with this IPO proceeds, now in certainty, obviously, we'll be looking for speed up even more in vertical integration and capex - capacity expansion, especially the support to the U.S. market. Thank you.

Philip Shen - ROTH Capital Partners - Analyst

Great. Thanks for all that detail. Shifting gears to shipping costs. Was - can you comment on what the shipping cost was in Q4 in terms of cents per watt? And then, what do you expect the run rate to be ahead? Do you expect - can you quantify how much it might come down? I know you gave some color earlier, but I was also wondering if you could help us understand what your opex as a percentage of sales is expected to be as we get through the year? Thanks.

Yan Zhuang - President of CSI Solar

Okay. So, in terms of shipping cost, it came down to just little over $0.01, like $0.015 in Q4 and $0.013 in Q1. So, it was much lower than - the peak was like almost $0.03. So, more than $0.03 actually in the peak. So as you know, the total shipping cost will increase as volume goes up, but the unit cost is coming down. I'm not saying we will maintain this low level. It may bounce back a little bit, but overall, we see the situation stabilized, coming back to a normal stage and most importantly is the ports, worldwide are back to normal. So, we don't have that congestions anymore. The congestions can be very costly. So operating expense, we don't see any major change, because aside from the costs that are associated with volume growth and actually we do see some leverage scale - on scale. So, our profits should improve with volume going up.

Philip Shen - ROTH Capital Partners - Analyst

Great. Thanks, Yan. I'll ask one more. As it relates to the margins, you guys gave the official guidance for Q1. Just looking ahead for Q2 and Q3, can you talk through how you expect the margins to trend without giving official guidance? Do you see potential more strength - potentially more strength in Q2 and Q3, as poly potentially comes back down and shipping costs continue to support you? Thanks.

Yan Zhuang - President of CSI Solar

Yes. So, I think overall speaking, we still believe that polysilicon cost will continue to go down. It may not, it would not, we don't believe the cost will come down, will collapse, right. It will go down gradually, because we're in a market, that demand is still growing fast and also the market is price elastic. So, when costs going down, demand come back - going up even more so. So, however, we also understand there are complexities on the supply chain. It's not that everything move in a perfect pace. So, there are some material may have certain shortages in certain time, so that may create a certain complexity. But overall, I think our margin will - would be in a better situation. It works actually better for module manufacturers this year.

Philip Shen - ROTH Capital Partners - Analyst

Great. Thanks very much, Yan. I'll pass it on.

Operator

Our next question is from the line of Brian Lee with Goldman Sachs. Please proceed with your question.

Brian Lee - Goldman Sachs - Analyst

Hey, guys. Thanks for taking the questions. Maybe as a follow-up to Phil's question, just in the context of, it sounds like you're expecting gross margin to improve moving through the year. Can you kind of give us a sense for what is embedded in your pricing outlook? We are hearing in certain pockets, there's a bit of module supply building, even some double-digit pricing declines being quoted. So, any kind of update real-time on where you're seeing module pricing trends and where you see quoting activity as you look out through the year?

Yan Zhuang - President of CSI Solar

Okay. So, module pricing, actually being in the industry for 14 years, so actually I feel less price pressure compared to the old times. So, we do see module price will be coming down gradually. But we also realize that the market, the industry, the customers actually are now worried more than just pricing, the reliability of supply and bankability and quality of the products is all becoming important. So, even China used to be the low price market. But now, we see that the customers are much more rational on pricing. There is a less - little less speculation - speculative behavior today than before. So, customers are expecting index pricing, they respect your reasonable margin, so surprised why it's going down, but I still believe that our margin will continue to improve.

Brian Lee - Goldman Sachs - Analyst

Okay. Fair enough. Great. And then, I know you talked about some of the capex mix and having customer prepayments. Can you speak specifically to the U.S. manufacturing capacity strategy, sort of update us on where you stand there and if the prepayment commentary also applies to what you're planning to build in the U.S.?

Shawn Qu - President, Chairman and Chief Executive Officer

Well, hi, Brian. This is Shawn speaking. We are proceeding well on our U.S. manufacturing plant. We will start with a module plant. We haven't did any announcement yet. So, give us a few weeks or maybe months, one or two months and we will make announcement. And the U.S. manufacturing facility part of the capex will be covered by the customer down payment, but Canadian Solar also bringing equity capitals.

Brian Lee - Goldman Sachs - Analyst

Okay. Makes sense. Thanks. Thanks for the color, Shawn. Last one from me, and I'll pass it on. Maybe this is for Huifeng or Ismael. Just with capital markets volatility, we've also seen a lot of volatility specifically in the financing environment, the banking environment. What does that mean for you guys in the Global Energy segment? Are you seeing or anticipating any changes in cost of capital or capital availability, just kind of maybe level set us on the financing environment for the energy segment and what you see going forward there?

Shawn Qu - President, Chairman and Chief Executive Officer

Well, Ismael, why don't you comment first and then Huifeng may want to add some color?

Ismael Guerrero Arias - Corporate Vice President and President of the Energy business

Sure. Look, in general, when the interest rates move up, it puts pressure on projects ownership because at the end, you need to be given a differential from the interest rate. Now, you need to bear in mind that a project is an asset that lasts 40 to 45 years. So, it will have times where the interest rates are higher and times where the interest rates are lower. In terms of capital availability, we see tons of capital in the market. I think that people raised a lot of money in the past couple of years to be deployed on this sector. I have not seen any capital constrain right now. Actually the opposite. I think people are having pressure to allocate the capital on the sector. I think that there is, right now at least, the feeling I have is that there is way more money than projects ready to be invested on.

Huifeng Chang - Senior Vice President and Chief Financial Officer

Hi, Brain.

Shawn Qu - President, Chairman and Chief Executive Officer

Huifeng?

Huifeng Chang - Senior Vice President and Chief Financial Officer

Yes. Hi, Brian. For funding costs, there are actually two dimensions. You are correct, on one dimension, in the general capital markets, all costs are going up and we see that too. So, we are in a very unique space. The entire world are pushing for investments into the renewable space to fight climate change. So, we are taking advantage of that, a lot of ESG mission planning are coming to this space. We work with those investors through our projects in every part of the world. But on the other hand, a lot of projects in different markets, the government, the local financial institutions and also investors, they want to push into that direction. So, we also partner with them to lower our funding costs. Thank you.

Brian Lee - Goldman Sachs - Analyst

All right. Thanks, everyone. I'll pass it on.

Operator

Thank you. [Operator Instructions] We will now take our final question from Ms. Anne Zhang of [Indecipherable] Capital.

Unidentified Participant - - Analyst

Hi, guys. Thanks for taking my questions. So, my questions are basically focused on our battery storage business. The first question is pretty quick. So, do we have any guidance for the battery shipment for the first quarter?

Shawn Qu - President, Chairman and Chief Executive Officer

For the first quarter…

Yan Zhuang - President of CSI Solar

No. So, the guidance is for the year.

Unidentified Participant - - Analyst

Okay. I understand. So, my next question is related to the gross margin of battery business. Since we noticed that lithium price has dropped a lot lately, so how much will it help our battery gross margin for the first quarter of 2023 and for the whole year?

Yan Zhuang - President of CSI Solar

How much, sorry - how much what? Okay. So, it really depends on project by project. But overall speaking, we do have a mixed pricing mechanism on the battery cell supply agreement. So, it's partially indexed on the lithium pricing. So, we are benefiting for sure, and I believe the entire industry is also benefiting from this lithium price going down.

Unidentified Participant - - Analyst

Okay, I understand. And I noticed that along with our utility-scale storage products, so that we also released residential storage product EP Cube. As we see the competition in residential storage market is getting more and more intense, so what advantages does EP Cube have and which markets does EP Cube target?

Yan Zhuang - President of CSI Solar

Yes. So, first to answer the last question on the margin side. I think as you know, that it - on the utility storage side, we're actually targeting a mid-teen gross margin. And sorry, yes, starting from the SolBank, and for EP Cube, the margin is much higher. So, anything that ranging from 30% to 40% gross margin. That's pretty in line with the market. And we're actually launching a study in the U.S., and we will start to sell in Europe in Q2, and Japan. So very quickly around the similar time. So by year-end, we should have a global launch and we don't really - we provided some annual guidance on volume, which is 100 megawatt hour. However, the real growth and scale will be next year for EP Cube and the same with SolBank for next year.

Unidentified Participant - - Analyst

Okay, understood. And my last question. [Speech Overlap]

Yan Zhuang - President of CSI Solar

Go ahead.

Unidentified Participant - - Analyst

Okay. So, my last question is, what is our market share goal for EP Cube in the long term, say in three or five years?

Yan Zhuang - President of CSI Solar

Well, so we're targeting long-term like 10% market share. However, we want to get more market share in the more premium markets, because EP Cube is actually designed as a high-end product, with the ability to gain profit, more profit in the long run. So, well actually the reason we position EP Cube as a high-end product is we actually want to go beyond the current shortage of product to make our solution more sustainable for longer term.

Unidentified Participant - - Analyst

Okay. Thanks a lot. That's all my questions. Thank you.

Operator

Thank you. At this time, I will turn the floor back to Canadian Solar's CEO, Dr. Shawn Qu, for closing remarks.

Shawn Qu - President, Chairman and Chief Executive Officer

All right. So, thank you for joining us today and also 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

AI Assistant

CANADIAN SOLAR INC

Q4 2022

Earnings Transcript

Find Answers

Ask about any part of the document to get insights, explanations, or key details.