Canadian Solar - Earnings Call - Q3 2024

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. Welcome to Canadian Solar's third quarter 2024 earnings conference call. My name is Melissa, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a Q&A session. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Wina Huang, Head of Investor Relations at Canadian Solar. Please go ahead.

Wina Huang (Head of Investor Relations)

Thank you, Operator, and welcome everyone to Canadian Solar's third 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 Presentations section. Joining us today are Dr. Shawn Qu, Chairman and CEO; Yan Zhuang, President of Canadian Solar Subsidiary CSI Solar; Ismael Guerrero, Corporate VP and President of Canadian Solar 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 will have time for questions.

Before we begin, I would like to remind listeners that management's prepared remarks today, as well as their answers to questions, will contain forward-looking statements that are subject to risks and uncertainties. The company claims protection under the Safe Harbor for Forward-Looking Statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from management's current expectations. Any projections of the company's future performance represent management's estimates as of today. Canadian Solar assumes no obligation to update these projections in the future unless otherwise required by applicable law. A more detailed discussion of risks and uncertainties can be found in the company's annual report on Form 20-F, filed with the Securities and Exchange Commission. Management's prepared remarks will be presented within the requirements of SEC Regulation G regarding Generally Accepted Accounting Principles, or GAAP.

Some financial information presented during the call will be provided on both a GAAP and non-GAAP basis. By disclosing certain non-GAAP information, management intends to provide investors with additional information to enable further analysis of the company's performance and underlying trends. Management uses non-GAAP measures to better assess operating performance and to establish operational goals. Non-GAAP information should not be viewed by investors as a substitute for data prepared in accordance with GAAP. And now, I would like to turn the call over to Canadian Solar's Chairman and CEO, Dr. Shawn Qu. Shawn, please go ahead.

Shawn Qu (CEO)

Thank you, Wina, and thank you to everyone for joining our third quarter earnings call today. Please turn to slide three. In the third quarter, we shipped 8.4 gigawatts of solar modules and 1.8 gigawatt-hours of battery energy storage solutions. Revenue totaled $1.5 billion, and gross margin surpassed guidance at 16.4%. Last November, we began experiencing the most intense involution in the history of solar. By involution, I mean the industry competes internally on cost with no significant outward market expansion. Nearly a year later, this intense competition remains. The solar market continues to face significant pressures, geopolitical challenges, trade barriers, fierce price competition, and ongoing patent disputes, to name a few. These combined factors have kept the industry in a cyclical low.

However, every downturn serves as a stress test, strengthening the company's resilience and competitiveness, thus in turn driving improvements in the economics of solar and energy storage solutions, further expanding their applications. Speaking of applications, let's discuss the growing role of solar and storage in broader energy applications on slide four. Two years ago, OpenAI launched ChatGPT, marking the beginning of a global AI revolution. As AI models and their applications expand, they will present both exciting opportunities and new challenges, particularly regarding high energy consumption and associated carbon emissions. According to McKinsey, in the United States, the largest data center market, power demand from data centers is projected to grow from 3%-4% of total energy consumption to around 12% by 2030 and higher beyond that. Data centers are not only growing in number but also in size.

Research from BCG shows that the average size of individual data centers is currently around 40 megawatts, but there's a growing pipeline of data center campuses sized at 250 megawatts or more. Solar and storage will be crucial in addressing the energy needs of AI infrastructure, providing reliable and sustainable power. A year ago, I also spoke about the potential of reaching the terawatt generation for both solar and energy storage. Today, global solar installations have cumulatively reached nearly 2 terawatts, but to achieve global carbon neutrality, we will need close to 20 terawatts of solar capacity. Similarly, storage capacity is projected to continue growing rapidly, with annual installations exceeding 300 gigawatt-hours by 2030. Solar and storage are still in their early stage, and Canadian Solar is well-positioned for these long-term growth opportunities. As we move into the new era of growth, differentiation will be the key.

Please turn to slide five. Being a market leader means more than just operational scale. It also requires innovation and leadership. Our recent partnership with SolarCycle is a prime example of our leadership in and commitment to advancing sustainability. Through this collaboration, Canadian Solar becomes one of the first crystalline silicon solar module manufacturers to offer comprehensive recycling services to U.S. customers. In a time when trust is in short supply, we are proud to be named the world's most trustworthy company in the energy and utility sector on Newsweek's 2024 World's Most Trustworthy Companies list. This recognition is a testament to our ongoing commitment to transparency, sustainability, and delivering high-quality service across our global operations. At the core of our business is our commitment to delivering high-quality, reliable products.

Our continuous investment in research and development ensures that we remain at the forefront of technological innovation in both the solar and energy storage sectors across our suite of products and solutions. Finally, let me update you on our American manufacturing plan. Please turn to page six. We are making long-term investments in the U.S. for both solar and energy storage. Our Texas solar module facility came online late last year. We have been adding more production lines and ramping up the volumes since then. We expect to reach full capacity by the middle of next year. For our solar cell facility in Indiana, we expect to be operational by the end of 2025. We are also excited to announce that through our subsidiary, e-STORAGE, we will build a state-of-the-art battery cell module and packaging manufacturing facility in Shelbyville, Kentucky.

This project will be built in two phases, with phase one kicking off this year. We will invest more than $300 million in the first phase to build a production capacity of 3 gigawatt-hours annually. Once the first phase is completed, we plan to invest in a second phase to double the capacity of our facility. With our in-house battery management system and U.S.-sourced thermal management system, we will be able to meet domestic content requirements. The products built in the Shelbyville factory will be ready to be installed into energy storage projects nationwide by the fall of 2025. While this is an ambitious timeline, we are confident in our ability to meet it thanks to the support of the Shelbyville community, the governor's office, and our talented workforce.

Following our storage manufacturing decision, Canadian Solar will have committed nearly $2 billion to American manufacturing, with plans to employ more than 4,000 people across Texas, Indiana, and Kentucky. These jobs will span manufacturing, engineering, and R&D, contributing to local economies and helping foster a strong manufacturing presence in the United States. Last month, Canadian Solar celebrated its 23rd anniversary. With more than 20 years of global manufacturing experience, we are proud to play a role in revitalizing American manufacturing. With that, I will now turn the call over to Yan, who will provide more details on our CSI Solar business. Yan, please go ahead.

Yan Zhuang (President)

Thank you, Shawn. Please turn to slide seven. In the third quarter of 2024, we shipped 8.4 gigawatts of modules. We generated revenue of $1.7 billion and achieved a gross margin of 18.6%. CSI Solar delivered an operating income of $111 million. This quarter, we continued to execute our profit-first strategy, prioritizing orders that meet our profitability criteria. Demand in the large China market softened in the second half of the year, while Europe faced minor disruptions due to logistics, which resulted in lower shipment volumes than initially guided. However, as evidenced by our strong performance in the generally loss-making industry, we are focused on achieving sustainable growth and recognize the natural trade-off between volume and profitability.

Shipments to the North American market continued to increase, accounting for over 30% of total shipments in the third quarter, while energy storage shipments reached 1.8 gigawatt-hours, marking new highs in both volume and profit contribution. These two drivers were key contributors to our third-quarter performance. Moving on to the market and Canadian Solar supply chain, please turn to slide eight. The solar market continues to face significant pressure. Upstream costs are stabilizing, while module ASPs continue to decline, albeit at a slower pace than seen in the first half of the year. With costs below those of PERC and increasingly strong power output performance, TOPCon technology has now become the industry standard. As Shawn mentioned earlier, we continue to actively invest in R&D, optimizing TOPCon and other emerging technologies. Today, we're seeing TOPCon cell efficiencies at mass production levels reaching as high as 26.7%.

The current market environment demands a more surgical rather than sledgehammer approach. We remain prudent not only in our go-to-market strategy but also in our manufacturing plans. In the near term, our capacity investments will focus on strategic areas, namely those in the United States. Now, to our e-STORAGE business. Please turn to slide nine. In the third quarter, we achieved record shipments of 1.8 gigawatt-hours globally. Despite the large quota of shipments and revenue recognition, we have now grown our backlog to a record $3.2 billion as of November the 30th. We continue to solidify our presence in established regions while also expanding into emerging markets, as demonstrated by our inaugural contract in Chile. For the Chile, Huatacondo and other global projects, we are delivering e-STORAGE's latest proprietary solution, the SolBank 3.0.

This system offers exceptional performance and safety, featuring high-density LFP battery cells and advanced battery management system and innovative liquid cooling thermal management system. Its compact design, with five megawatt-hours of capacity per 20-foot container, optimizes land use and reduces costs. The SolBank 3.0 also boasts an IP55 protection rating, making it an ideal solution for demanding environments. So, what is our competitive advantage? Please turn to slide 10. Despite only a few years of commercialization, E-Storage is already a consistent top-10 player in the global energy storage market. In key markets like the United States, the United Kingdom, and Canada, we hold very strong market shares. E-Storage is differentiated by our ability to deliver comprehensive integrated solutions and services. For DC systems, safety, reliability, and cost are the primary factors, with cost often being the most significant consideration.

For AC solutions, success depends on a more balanced set of factors, including system integration, local grid knowledge, effective risk management, long-term services, and more. In today's geopolitical environment, customers also need to be confident in the long-term consistency and reliability of the services they receive. We're one of the few players with expertise spanning both upstream and downstream. On the upstream side, we can leverage our experience across R&D, supply-side management, and cost control. Downstream, we offer complete implementation, differentiated parent company guarantees, and long-term service capabilities. We remain firmly committed to driving technological and operational differentiation while further strengthening our leadership in global channels to build long-term sustainable value. Finally, I would like to briefly address the ongoing anti-dumping and the countervailing duty proceedings. With over a decade of experience in the U.S.

market, we are well-versed in the legal process and continue to actively engage as both an importer and a domestic manufacturer. We remain committed to the U.S. market and will play our part in pursuing a fair and equitable outcome as the final determination is made. It is important to note that even once final, these rulings will serve as estimates of cash deposits. The definitive rates would still be determined on a company-by-company basis during the annual administrative review. Now, let me turn the call over to Ismael, who will provide an overview of Recurrent Energy, Canadian Solar's global project development business. Ismael, please go ahead.

Ismael Guerrero (President)

Thank you, Yan. Please turn to slide 11. Third-quarter financials were modest. A certain project sales have been delayed into the next quarter and next year. We reported $45 million in revenue, with a gross margin of 32% and an operating loss of $21 million. In the absence of significant project sales and with build-to-hold projects still under construction, P&L will experience near-term pressure. However, we remain disciplined in managing our operating expenses to optimize our financial performance. This quarter, we successfully closed the previously announced $500 million investment from BlackRock. This marks an important milestone, providing us with the capital needed to accelerate the transformation of our business toward a partial IPP model. We are currently managing execution of the largest number of projects in the history of our development business.

This includes approximately one gigawatt peak of solar capacity under construction in Spain and Italy, and an additional 127 megawatts peak of solar capacity, along with 1.4 gigawatt-hours of BESS capacity under construction in the U.S. This builds on the 300 megawatts of solar projects we successfully brought to commercial operation earlier this year. As part of our business model transformation, we are securing long-term competitive offtake agreements to establish recurrent, predictable revenue streams. Please turn to slide 12 for one such example. We have significantly expanded our partnership with Arizona Public Service, or APS. This includes three 20-year tolling agreements, collectively covering 1,800 megawatt-hours of energy storage and 150 megawatts of solar capacity, enough to power approximately 72,000 homes for four hours with energy storage and 24,000 homes annually with solar. These agreements cover the Desert Bloom Storage and Papago Solar and Storage projects in Maricopa County, Arizona.

Notably, Papago Storage, a 1,200 megawatt-hour standalone energy storage facility, is currently under construction and is scheduled to come online in 2025. Once operational, Papago Storage will be the largest standalone energy storage project in the entire state. Energy prices have been volatile across different markets. In Europe, we are observing a trend toward declining prices, reflecting broader market dynamics. Conversely, in the U.S., particularly in regions experiencing high demand, projects with interconnections have more favorable pricing. Notably, as Shawn mentioned earlier, AI is driving a surge in energy demand. Our key differentiator in this space is our extensive global footprint, which positions us to meet the growing demand for renewable energy solutions in any geography. To date, we have signed approximately 1.5 gigawatts with leading technology companies around the world, many of which we have contracted across several regions, including the U.S., Europe, Japan, and Australia.

Our ability to sign long-term contracts with strong counterparties is one of the factors that drives our long-term growth. Please turn to slide 13. We continue to build and maintain one of the largest and most mature solar and storage project development pipelines in the industry, now standing at more than 26 gigawatts of solar and 66 gigawatt-hours of battery energy storage capacity. The total cycle from early pipeline to in-construction is taking longer, and we are seeing significant delays due to bottlenecks during permitting and in the interconnection process, which now take 3 to 8 years, depending on the country and the project. It is one of our challenges, as we are dependent on government agencies that are clearly overwhelmed by the huge number of applications they receive.

The same applies to the grid operators when it comes to connecting the power plants, as grid operators were not planning according to the massive volume that is now coming online. Building a PV plant takes around a year. The permitting process takes two to five, depending on the country, mainly waiting on queues, and the same applies to interconnections. Projects in backlog are expected to start construction within the next six quarters, while projects under construction usually take six to 18 months to be operational, depending on size and permitting. Overall, while project delays are coming in our business, we are confident about our future growth, given the volume of interconnections we have secured, which includes approximately 10 gigawatts of solar projects and 16 gigawatt-hours for storage projects. For most projects in the U.S.

and Europe, our strategy is to build, own, and operate while selling portions of the operational fleet at the right time. For projects in non-IPP regions, we can sell at any time once they enter our backlog. Our extensive pipeline not only showcases a robust funnel of projects through which we can realize long-term value, but also highlights our ability to selectively monetize projects at the best time. Now, let me hand the call over to Xinbo, who will go through our financial results in more detail. Xinbo, please go ahead.

Xinbo Zhu (CFO)

Thank you, Ismael. Please turn to slide 14. For the third quarter, we reported revenue of $1.5 billion, with a gross margin of 16.4%. Gross margin contracted by 80 basis points quarter over quarter, primarily reflecting lower third-party battery energy storage volumes and reduced module margins. Operating expenses for the quarter totaled $247 million. The sequential increase was driven by modest rises in R&D expenses and shipping costs, which we expect to gradually decline in the coming quarters. Net interest expense remained stable, rising slightly to $20 million. Meanwhile, the Federal Reserve's rate cut in September, coupled with the announced economic stimulus in China, contributed to a weaker U.S. dollar and a stronger Chinese yuan, resulting in a net foreign exchange and derivative loss of $4 million.

We reported a total net loss of $6 million, while the net loss attributable to Canadian Solar was $14 million, or $0.31 per diluted share. This includes the impact of dividends payable in kind on the Recurrent Energy redeemable preferred shares associated with BlackRock's investment, which had a dilutive effect on earnings per share of $0.10. This quarter's financial results reflect the ongoing transformation of Recurrent Energy's business model, notably the absence of project sales by Recurrent and the significant intragroup transaction eliminations recorded for energy storage sales to projects in the U.S. and Asia contributed to the net loss at Canadian Solar level. In the near-term, Recurrent sells fewer projects but continues to build projects that have not yet reached commercial operation. This may result in pressure on Canadian Solar's P&L in certain periods.

However, it's important to emphasize that this doesn't imply a reduction in the value of the projects. Rather, the value will be realized in a more consistent and long-term manner. For example, during this quarter, CSI Solar delivered substantial volumes to Recurrent Papago Storage projects. As Ismael discussed, this is a landmark project for which we have already secured a long-term toll agreement with Arizona Public Service. Now, let's turn to our cash flow and balance sheet. Please turn to slide 15. Net cash used in operating activities for the third quarter was $231 million. This outflow was primarily driven by increased project assets and the lower short-term notes payable. Our net debt position stands at $3.3 billion, with gross debt total being $5.4 billion.

This increase in financing was primarily driven by new borrowings to support capacity expansion, working capital requirements, and the development of both projects and operating assets. In the third quarter, we invested approximately $237 million in manufacturing capital expenditures. Following the adjustments to our CapEx plan in the first half of the year, we remain on track to meet our lowered full-year target of $1.2 billion. Looking ahead, we expect next year's CapEx to be around the same level, as we prioritize strategic investment in the U.S. Now, let me hand the call back over to Shawn, who will provide our guidance and the business outlook. Shawn, please go ahead.

Shawn Qu (CEO)

Thank you, Xinbo. Please turn to slide 16. For the fourth quarter of 2024, we anticipate solar module shipment by CSI Solar to be in the range of 8-8.5 gigawatts, including approximately 500 megawatts to our own projects. In terms of battery energy storage, we expect total shipment to range between 2-2.4 gigawatt-hours, with around 1.2 gigawatt-hours allocated to our own projects. Even accounting for intragroup eliminations, this will mark our largest storage quarter to date. We forecast total revenue for the fourth quarter to fall between $1.5 and $1.7 billion, with gross margin expected to be in the range of 16%-18%. For the full year of 2025, we project total solar module shipment to be between 30-35 gigawatts. For battery energy storage, we expect shipment to be in the range of 11-13 gigawatt-hours in 2025.

These estimates include approximately one gigawatt of solar module and one gigawatt-hours of storage allocated to our own projects. As we move into next year, we anticipate continued challenges in the solar module market as supply and demand dynamics work toward rebalancing. On the storage, demand remains strong, costs are stabilizing, and pricing is also adjusting. We will continue to manage through these market uncertainties with a focus on sustainable growth and rigorous risk management. With that, I would now like to open the floor for questions. Operator.

Operator (participant)

Thank you. At this time, I'll be conducting a question-and-answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Colin Rusch with Oppenheimer & Company. Please proceed with your question.

Andre Adams (Analyst)

Hi there. This is Andre Adams at Oppenheimer. I was hoping you could speak to your plans for monetizing the project pipeline in light of the ongoing increases in wholesale electricity prices for data center supply.

Shawn Qu (CEO)

Hi. I would like Ismael to address this question. Ismael?

Ismael Guerrero (President)

Sure. Thank you, Shawn. Look, we are, I mean, basically, we are seeing a significant amount of customers looking for PPAs. That's how we see the high demand of data centers affecting us, and we are starting to explore how can we serve better our customers in case we can do something else for them, but that's what we see significantly. The strategy to monetize the projects, we are always open to whatever we believe is the best way to add the most value to our shareholders, so we will remain open all the time to see when is the best time. But initially, what we are thinking on doing is start to operate, and once we have enough volume, around two, three gigawatts in operation, start selling a chunk of it and keeping the majority ownership.

That's the initial intention, but it's open to whatever we believe is the best at the time.

Andre Adams (Analyst)

Thank you. And just on the battery supply side, how are you planning to navigate potential tariffs, and how mature are your conversations with new non-Chinese suppliers?

Shawn Qu (CEO)

Hi, Yan. Yan will address this question. Please, Yan.

Yan Zhuang (President)

Hey, thanks. Thanks, Shawn. Well, so I think on contract on sales side, we actually, for the volume that to be delivered after January 1st, 2026, we already—the contract price already accounted for the 25% of duty. And for earlier volume, we actually—it's accounting for the current duty rate, which is 7.5%. However, we always have a change of law protection. So for any possible change beyond—we know beyond 301. And we also—we have announced the Kentucky storage project, and we're also actively evaluating and looking for different supply options. So I hope this answers your question.

Andre Adams (Analyst)

Completely. Thank you so much.

Operator (participant)

Thank you. Our next question comes from the line of Praneeth Satish with Wells Fargo. Please proceed with your question.

Praneeth Satish (Analyst)

Thanks. Good morning. I guess first question, broadly, you have a 30% market share in the U.S. How do you think about maintaining that market share given the anti-dumping duties that were announced at 80%, recognizing that they're not finalized? But I guess just what's the strategy in the U.S. going forward? You said you're committed to it. Is the strategy kind of building out the manufacturing presence or raising ASPs? And then I guess how do you balance building out more manufacturing capacity with the potential for some of this foreign entity of concern language that's out there?

Shawn Qu (CEO)

Now, this is Shawn. Now, I will address this question, and then I'll ask Yan and Thomas to provide further comment. Now, as you mentioned, Canadian Solar has advantage. So we have a suite of weapons or options, and we are going to use a combined strategy. You mentioned the U.S. factory. Our U.S. module factory is up and running. We can ship cells from Thailand to the U.S. Now, the solar cell from Thailand also has tariffs, but solar cell has less value. So obviously, less tariffs if we ship it to the U.S. to make it into module in our factory in Texas. And we are also building a solar cell factory in Indiana, and we expect to see output from that factory in 2026. That's another solution. And also, even for Thailand and for Southeast Asia, we always maintain a relationship with a few good third-party suppliers.

So this will be another option. So as I said, we have a suite of different options and weapons, all weapons we can use to make sure we continue to deliver to our customers in the U.S. Now, you mentioned 30%. I'm not sure if we had that much market share. We shipped around eight or nine. We're going to ship around eight to nine gigawatts to the U.S. this year. And I believe the U.S. market should be like 40 to 50 gigawatts size. So no, we are not 30%, but probably 20-something%. So I guess that's my 30,000-foot overview. Now, I would like to introduce Thomas Koerner, our senior VP for sales and marketing. And he may have more insight to share with you for you. Thomas?

Thomas Koerner (SVP of Sales and Marketing)

Hi there. Good morning. How are you? So as Shawn outlined, first of all, we are using different channels and different strategies to continue serving the U.S. market. The U.S. factory and the U.S. capacity is further increasing coming along. But of course, for the Southeast Asian manufacturing, we can use different locations, different bill of materials, and different combinations. And all of that will help us to at least continue on the same level, if not potentially growing the volume into the U.S. market. And at the same time, we expect market prices starting to slightly increase. So we believe on the customer side, they're helping us, and this will help us in addition to the overall circumstances.

Praneeth Satish (Analyst)

Got it. No, that's very helpful comments. And I wanted to ask.

Yan Zhuang (President)

And let me add one more. Sorry.

Praneeth Satish (Analyst)

Okay. Yeah. Sure.

Yan Zhuang (President)

Regarding FEOC, actually, as you know, there's no FEOC items in the current IRA law for solar and energy storage. So for that, for any revision of that, it requires a process, a legal process of the Congress. So we don't feel anything that risky for us, given we're actually a Canadian-owned company. And so we actually are highly confident about our robust presence in the U.S.

Praneeth Satish (Analyst)

Okay. Makes sense. I wanted to ask on the 2025 module guidance of 30 to 35 gigawatts, maybe if you could provide any more details around how you came up with this forecast and the assumptions. It seems like it's kind of assuming a flat outlook for demand into next year. But did you basically size this level of shipments as kind of the amount that the market can take without impacting your gross margins? Just trying to understand high-level how you came up with it?

Shawn Qu (CEO)

Hi. This is Shawn again. You are correct. We put out this number, 30-35 gigawatts, so that we maintain our market share while do not sacrifice the gross margin too much. Even at this price, at this range, maybe we will see less gross margin next year. As Thomas mentioned, there's additional duty for Southeast Asia product. And we believe our customer will have to handle and shoulder part of the cost increase. But still, we are shouldering the cost increase together with our customer. So this will probably hit our gross margin a little bit. But see, DOC only announced the preliminary 80 ruling three days ago. So we are still analyzing. And also, we are still waiting for DOC to release more documents.

We understand exactly how they arrived at this number and what we can do to avoid such a high tariff in the final review and also the administrative review process a few years from today. To answer your question, yes, 30-35 gigawatts should allow us to more or less protect the same market share, but also to protect our gross margin.

Praneeth Satish (Analyst)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Philip Shen with Roth Capital Partners. Please proceed with your question.

Philip Shen (Analyst)

Hi everyone. Thank you for taking my questions. I think Thomas just talked about how pricing is already going higher following the anti-dumping preliminary determination. Our checks suggest pricing is already up at least 2-3 cents. And then when we get the final determination, we could get another 3-4 cents of price going higher. Does that sound reasonable? What are your price expectations? So that's the first question. Second question as it relates to anti-dumping and the Southeast Asia tariffs. Have you guys had to cancel any of your contracts because of how high the Southeast Asia AD/CVD country rates have been? Are you exposed to any of the critical circumstances? Thanks.

Shawn Qu (CEO)

Hi. You mentioned Thomas. So I will ask Thomas to share his view with you. Thomas?

Thomas Koerner (SVP of Sales and Marketing)

Sure. So at this point, as you mentioned, yes, prices have started to come up. I cannot talk about the specifics. That's very individual customer by customer. But the demand and the customer's feedback towards Canadian Solar products and our supply remains actually very strong. We did not have any cancellations or anybody too concerned. And as Shawn said, we're currently shouldering the need to adjust together with customers. And this can vary in different cases and different strategies and channels. As you know, we have different cost-plus activities. We have other activities. And this is a pretty broad spread, which helps us significantly to both sides to move forward and actually having further demand for 25.

Yan Zhuang (President)

Okay. Thank you, Thomas. And then are you guys impacted by critical?

Philip Shen (Analyst)

Yeah.

Sorry, Shawn. Go ahead.

Shawn Qu (CEO)

Yeah. Yeah. I just want to add my comment now, second part of your question. As far as I know, we haven't had to cancel any of the existing contracts. And also, we have been producing and shipping to the U.S. evenly throughout the year. So for us, we don't have any critical circumstances. And our shipment shouldn't show any critical circumstances. Now, whether critical circumstances apply to the total shipment, we'll have to wait until I think we'll have to wait until the final ITC ruling.

Philip Shen (Analyst)

Got it. Okay. Thank you. So in terms of exposure to the cash deposits, is it fair to say that you don't have any now, or you have some, but you want to wait for what the final determination looks like?

Shawn Qu (CEO)

That's a good question. Well, I mean, we have been producing. And some of the product that we already produced. So maybe I would say we're exposed to some of this AD/CVD preliminary ruling. But how much we still have to calculate? If the exposure is too high, we will divert the product to somewhere else.

Philip Shen (Analyst)

Great. Okay. Got it. Thank you for the color.

Shawn Qu (CEO)

Yeah. If some customer is willing to pay, and we might just eat the bullet and ship clean import and deliver if we can break even. But if no customer wants to pay this kind of duty, then for some of the product we already produced or already on the water, we may have to divert product. But it's not a big amount compared with eight to nine gigawatt annual shipment from Canadian Solar and annual sales from Canadian Solar in the U.S. Whatever we have to divert at this moment is a small amount.

Philip Shen (Analyst)

Okay. Thank you. Shifting to the other topic on AI and data center, these hyperscalers are very hungry for power. You guys have your recurring business. There's a lot of uncertainty, as you highlighted in your release and remarks, in the U.S. market. And so power demand is going higher. But it doesn't seem like the hyperscalers are willing to pay a premium on power thus far. When do you think they might be willing to pay higher prices that can support economics in the development of solar in the U.S.? There's so much uncertainty in the higher price with the ITC risk of it being compressed or going away. It won't go away, but we think it might get compressed. What are your thoughts as to the timing as to when hyperscalers are willing to pay higher prices to offset some of this uncertainty in the potential weaker economics?

Thanks.

Shawn Qu (CEO)

Hi, Philip. I would like to take this question because I just released a short video of my public speech in a forum that I was talking about how the solar and energy storage can help the hyperscalers to be built, and our calculation actually see, my calculation. I will say my calculation, not just our calculation. I put on my Ph.D. hat and did some of this modeling together with our team, all right? And our modeling says, even for California, where you can't install wind, and also where the seasonal difference of solar from winter to summer is really big, in California, the winter output of a solar system is only 43% of the summer, and Philip, you see, I know this number by heart now, and so it's not a very convenient place to have solar provide 12 months 24/7 continuous power.

But even in that situation, our calculation shows that we will be able to provide 72% of the power from onsite solar plus energy storage to a California hyperscaler at the same price, more or less the same price as the grid price. So they don't have to pay a higher price. They just have to pay whatever they have to give to the grid. And as you know, these days, sometimes it's not a price, but whether you can get a permit and clearance to build a data center. So I believe that people will see this, and we are going to build, I mean, I would like to build a few demo case in different parts of the world. Certainly, U.S. is the biggest data center market. So we would like to do that in the U.S.

I think with one demo, people will see how wonderful the solar-class storage can provide onsite power to data centers. And of course, with some help from the grid. But grid only have to supply 20%-30% power. And that's it. So I would say build a demo. The first demo always takes some time. So I will say maybe in two years, people will see how solar-class storage can handily provide onsite power to data centers.

Philip Shen (Analyst)

Great. Thank you, Shawn. I'll pass it on.

Operator (participant)

Thank you. Our next question comes from the line of Vikram Bagri with Citi. Please proceed with your question.

Vikram Bagri (Analyst)

Hi. Good morning, everyone. I wanted to talk about CapEx and liquidity requirements. In presentation, you highlighted $800 million for PV cells, $700 million for battery cells. I would imagine some maintenance CapEx on legacy assets over the next 12 months, also, and combine that with cash deposits at CBP and buybacks planned at CSI Solar, on all the uses. I was wondering how do you look to fund these? What will be the strategy? Could you transfer the CSI Solar cash, which is in China, to the U.S. to fund some of these expenses? How much is the minimum cash balance required on the balance sheet, and what leverage are you comfortable with? If you can just help us understand the sources and uses of cash over the next 12 to 18 months.

Shawn Qu (CEO)

Yeah. That's a good question. Now, Canadian Solar always pay attention to the cash flow, always maintain a good cash level to be healthy, protect the balance sheet. Now, I have Xinbo Zhu, the CFO of CSIQ, and also Steven Ma, the Chief Accounting Officer for CSI Solar. So I would like these two gentlemen to provide some additional color.

Vikram Bagri (Analyst)

Yeah. Okay.

Xinbo Zhu (CFO)

This is Xinbo Zhu speaking. Sorry, your question is about how we are managing the cash at CSIQ and CSI Solar side, right?

Vikram Bagri (Analyst)

Yeah. Just trying to understand, given the capital intensity at CSI Solar, how will you fund that capital intensity, the PV cells, the battery cells, the upgrading and keeping the legacy assets up to date, the CBP deposits, and the buybacks at CSI Solar? How will you fund that? And what's the appropriate leverage level you're comfortable with?

Xinbo Zhu (CFO)

Yeah. It's a big question. I will break it down into some smaller categories. For project development, the majority of the CapEx is financed with non-recourse debt. The project financing, normally, it covers 17% of the total CapEx of the projects, and we finance the project equity.

Vikram Bagri (Analyst)

Oh, it's small. Yeah.

Xinbo Zhu (CFO)

Okay. Then about the manufacturing site, we finance the factory partially from the bank payments from our customers and also partially with the facility we are raising in the U.S. We are closing a $450 million debt in the U.S. to support our manufacturing expansion in the U.S. Of course, we also invest some of our own equity into the factories. Have I covered all your questions? Or about the working capital, right? About the deposit or?

Vikram Bagri (Analyst)

Yeah. Just a leverage question.

Shawn Qu (CEO)

It's a part of the working capital. We have been closely monitoring our working capital. And we have more than $1.5 billion cash to support CSI Solar, the manufacturing and solution business. Yeah. We are confident that we have enough working capital to support our business volume.

Wina Huang (Head of Investor Relations)

Vic, also I just wanted to remind you that $2 billion is a total number. So it would be invested over the course of a few years.

Vikram Bagri (Analyst)

Got it. Thank you, and then quickly wanted to clarify, if you could provide some color on what the geographical mix of PV shipments will be next year. Should we expect the U.S. will still be around eight to nine gigawatts, or that mix is going to change? And you mentioned CSI Solar will maintain the margins. You've seen a very strong increase in battery sales, which has higher margins. Are you expecting the geographical mix to shift and offset some of the margin accretion from battery sales next year? Just trying to understand what are the percentages for margin next year?

Shawn Qu (CEO)

Yeah. For the margin, well, first of all, for the geographic distribution of the solar module sales next year, now I would like to ask Thomas to give you some color. But I want to clarify that we are still early. We are still in December. We're not in 2025 yet. So whatever we say will be based on our current view. Now, Thomas, you want to share your view?

Thomas Koerner (SVP of Sales and Marketing)

Yes. So for the U.S. module shipment, as you mentioned, we should be able to at least have the same volume as this year. But we're also slightly positive to increase it slightly further into 2025. We'll see how the year goes and how our diversified strategy, ramping up U.S. capacities, other manufacturing activities, and other BOMs help us to potentially further grow. The demand is definitely there in the market, and we're trying to capture that demand.

Vikram Bagri (Analyst)

All right. Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to management for any final comments.

Shawn Qu (CEO)

All right. Thank you. And thanks everyone for joining us today and for your continued support. If you have any questions or would like to set up a call, please contact our investor relations team. Take care and have a great day.

Operator (participant)

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