Canadian Solar Inc. (NASDAQ:CSIQ) Q3 2022 Earnings Call Transcript

Canadian Solar Inc. (NASDAQ:CSIQ) Q3 2022 Earnings Call Transcript November 22, 2022

Canadian Solar Inc. beats earnings expectations. Reported EPS is $1.12, expectations were $0.49.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to Canadian Solar’s Third Quarter 2022 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 question-and-answer session. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Isabel Zhang, Investor Relations Director at Canadian Solar. Please go ahead.

Isabel Zhang: Thank you, Melissa, and welcome, everyone, to Canadian Solar’s third quarter 2022 conference call. 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 estimate as of today. Canadian Solar assumes no obligation to update these projections in the future unless otherwise required by applicable law.

Photo by Nuno Marques on Unsplash

A more detailed discussion of the risks and uncertainties can be found in the company’s annual report on Form 20-F as amended 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 views these 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 call over to Canadian Solar’s Chairman and CEO, Dr. Shawn Qu. Shawn, please go ahead.

Shawn Qu: Thank you, Isabel. Hi, everyone. Welcome, and thanks for joining us today. Please turn to slide 3. This slide provides a summary of our key performance metrics. We achieved strong results in the third quarter of 2022. The headline for ESG, 57% year-over-year revenue growth, 18.8% gross margin, and net income of $1.12 per diluted share. Profitability in both our CSI solar and Global Energy businesses improved meaningfully as we continued to focus on solidifying our leadership position and driving profitable growth. Our team executed across the board and made Q3 one of our strongest quarters since the beginning of COVID. As always, Yan, Ismael and Huifeng will go through our performance in more detail. Before that, let me highlight some key messages.

Please turn to Slide 4. First, we made significant progress in our battery storage business across all our verticals. This includes CSI Solar’s utility-scale and residential battery storage product teams and our Global Energy’s battery storage project development fees. Our CSI Solar side, we continue to be pleased with the level of engagement of our SolBank products for utility-scale storage applications, which we launched a few months ago. Yesterday, we announced a new 2.6 gigawatt hour multiyear supply agreement. This underscores the very healthy demand we are seeing and our favorable competitive position. We will continue to provide updates for our contracted pipeline as we move forward. I’m also very pleased with the positive customer response to CSI Solar’s residential energy storage product, the EPQ.

This was showcased during the RE+ conference in the US, and we expect this to be a multiyear contributor for our sales. Our global energy team, supported by our CSI energy storage team made significant progress in competing one of the largest battery storage project in the world with 1.4 gigawatt hour Crimson Project. I’m very pleased to report that the Global Energy team continued to expand the storage pipeline reaching 40 gigawatt hour at the end of Q3. When you take a step back, you can clearly see that battery storage has become a very strong growth driver for our business. Our customers are excited about the of battery storage solutions, and we are excited about the growth opportunity behind of us. Second, the US remains one of our core markets, and we are strongly committed to service our customers and the passengers there.

We believe the US will remain as one of the most important and attractive clean energy market in the world. Efforts in the US to decarbonize and the passing of the Inflation Reduction Act have provided important lessons for other countries in our common fight against climate change. With that in mind, we are planning on investing in US domestic manufacturing across the solar supply chain. We have expanded our US fleet in preparation and are now in the final stages of our site selection process. Well, there are many challenges we know the market well. We are proud of our 20 years of market leadership. We are confident in our ability to build upon our long-term track record and expand the level of support to our customers and partners in the US even further with the planned US domestic manufacturing activity.

Lastly, please turn to the next slide. After a short procedural path CSI Solar’s carve-out IPO is back on track and is awaiting the completion of the registration with the China Securities Regulatory Commission. While the process has taken longer than we initially expected, we are on track and working to complete the carve out within Q4 or in Q1 next year. With that, let me now turn over to Yan who will provide details on our CSI Solar business. Yan, please go ahead.

Yan Zhuang: Thank you, Shawn. Please turn to slide six. In Q3, the CSI Solar division delivered six gigawatts of solar module shipments and 570 megawatt-hour of battery storage shipments of which 300 megawatt-hour were to our own projects. Total revenue reached close to $2 billion and importantly, our gross margin continued to improve reaching 17.3% in Q3. This was up 140 basis points quarter-over-quarter and from an absolute standpoint, doubled year-over-year to $341 million. Several factors contributed to our improved performance. First, our manufacturing costs declined further in Q3 led by an increased contribution from the expanded upstream ingot, wafer, and cell capacity with a higher degree of vertical integration and greater control over our costs and supply chain.

We’ve been able to improve our cost structure and profitability. This is in line with the strategy we previously outlined. And while we did a great job controlling what is within our control, input costs remained a headwind in Q3. In fact, average polysilicon pricing remained at elevated levels and was flat or even slightly higher than the previous quarter, as you can see on Slide 7. So the improvement was mostly organic. We believe polysilicon prices have finally reached a peak, and we expect input costs may start to come down over the next few weeks. Although we won’t really see a benefit until probably next year. Given the strength in end market demand, we still believe input costs will only come down gradually. Second, our gross margin benefited from currency fluctuations led by the strong US dollar relative to the RMB.

With a large part of our costs being RMB relative to a large part of our revenues in US dollar, our costs depreciated relative to our revenues. However, this was partially offset by the weakness in most other currencies relative to the US dollar. Net-net, the ASPs of all our non-USD markets were lower sequentially, which had an impact on our aggregate revenue number. Third, unit shipping costs came down further in Q3. As we said before, there is significant room for logistic costs to come down, which we started to see in Q2. We believe there is further room for improvement given we’re still above historical normal levels. And there is no reason to believe that logistics costs are structurally higher than pre-COVID times. Please note that logistics costs do not impact gross margin and are recorded in selling and distribution expenses.

All of these factors combined helped drive a tripling of our operating profit year-over-year to $97 million. Q3 was a record quarter for CSI Solar, which showed the strength of our brand and resilience of our business despite the top market environment. Please turn to Slide 8. On the technology front, we’re making significant progress on our latest N-Type TOPCon cell technology. As you know, we’ve been working on several N-Type pilot lines, covering both Heterojunction and TOPCon technologies. We believe the time is right for mass production. And therefore, all of the new cell capacity we’re now adding will use our TOPCon technology. The first TOPCon products will be delivered early next year. We believe our product is best-in-class and will have approximately 1.5 percentage points of higher conversion efficiency than the average mainstream product in the market today.

TOPCon will also be margin accretive once we start production. It was developed to contribute positively to our pricing power due to its ability to lower our customers’ levelized cost of electricity. Meanwhile, our growth is for manufacturing costs for TOPCon to be similar to our current mainstream product, even though the power wattage will be much higher. We expect N-type TOPCon cell products to account for roughly 30% of our 2023 solar module shipments. Please turn to slide 9. In terms of battery storage, we’re on track to achieve our full year target of 1.8 to 1.9 gigawatt hours. Our new utility-scale SolBank product is gaining significant traction with customers. We recently signed a 2.6 gigawatt hour multiyear supply agreement with UBS for the US market with SolBank product.

This gives us significant visibility over our long-term growth beyond just one or two years. We’ve also been expanding our market offering across more geographies, expanding from the US into UK, Canada and China, with more markets currently under expansion. One of our key competitive advantages is our strong partnerships with upstream battery cell producers, which helps ensure long-term security of supply for our customers. With that, our CSI Solar’s battery storage turnkey pipeline more than doubled quarter-over-quarter, at nearly 25 gigawatt hour globally as of the end of Q3. While certain projects in this pipeline overlap with global energy storage development pipeline, the value creation and services provided by the two storage teams are distinct and separate.

And, therefore, the two storage pipelines should be viewed independently. On the residential EP Cube product reception from the customers during the RE+ conference was overwhelmingly positive, and the initial shipments to the US market are already underway. We’re confident that EP Cube is one of the best, easiest to install products in the market. We are excited about this product and believe it will be highly competitive residential solution. Now, let me pass it on to Ismael for an overview of the Global Energy business. Ismael, please go ahead.

Ismael Guerrero: Thanks, Yan. Please turn to slide 10. In Q3, we achieved $101 million in revenue with a 47% in gross margin, making this a highly profitable quarter for us. We sold around 890 megawatts of projects in Japan, the US and Brazil, which were mostly preconstruction and earlier stage projects, which meant relatively lower revenues at higher profitability. Recently, we had two major project completion milestones, which I’m incredibly proud of. Please turn to slide 11. The first one is the commercial operation of our landmark 1.4 gigawatt hours, standalone battery storage project in California, the Crimson project. We completed this project in a very challenging environment of a stringent COVID restrictions, which affected shipping schedules and led to project delays.

However, we cooperated closely with our CSI Solar energy storage colleagues to bring this project to fruition, which is a testament of the synergies created among our business divisions. The Crimson project will provide critical reliability services to the California grid and allow the local grid to absorb more clean energy. We monetized 80% of the project to a long-term investment partner and retained a 20% long-term ownership. Meanwhile, we will continue to provide the operations and maintenance of the battery storage power plant. We are also expanding our capability in energy trading through this project, which we believe will be a key area of growth in the future. Please turn to Slide 12. The other major project completion is the commercial operation of our other flagship project in Japan, the Azuma Kofuji 100-megawatt solar power plant.

The project is under JPY 36 FIT, roughly equivalent to US$0.24 per kilowatt hour based on current exchange rates, making it one of the world’s most valuable projects. However, what I’m most proud of is that the project will contribute meaningfully to reinvigorate the local community and economy, which was devastated by the earthquake in 2011. This project is still fully owned by Canadian Solar. I highlight these two projects, not to emphasize the uniqueness, but to show Canadian Solar’s unparalleled track record in executing complex solar and battery storage projects across the world. We have one of the world’s largest and strongest development platforms. And our goal is to develop more battery storage projects like Crimson and more solar projects like Azuma Kofuji.

Turning to Slide 13. As of September 30, 2022, we had a total solar project pipeline of 25 gigawatts and a total battery storage pipeline of 40 gigawatts hours. This is the largest solar and battery storage pipeline in the world. Importantly, around half of our total pipeline has interconnection secured, which gives us significant confidence of our future ability to create value and growth. That said, you’ll also notice that our solar pipeline declined slightly quarter-over-quarter. As you know, Canadian Solar is more than just size. We prioritize the quality and profitability of the pipeline we are building. We are selective on the projects that we decide to move ahead with and we are not afraid of walk away from projects with less attractive risk return profile.

Specifically, the combination of high inflation and high interest rates over the past few quarters related in adverse environment in some geographies. Thus, we invested of certain assets early and recovered our capital to set the stage to invest and grow in geographies with stronger fundamentals. It is important to note that we have delivered strong results through the challenging backdrop, which shows the residence and strong performance of Global Energy’s world-class platform. Please turn to Slide 14. Lastly, our strategy to increase the share of recurring income remains on track. On the operations and maintenance or O&M strategy, we now manage over 3.6 gigawatts of operational projects under long-term O&M agreements. We also have an additional 2.2 gigawatts of contracted projects expected to reach commercial operations soon.

This makes us one of the largest project operators in the world, in both solar and battery storage, and we will continue to grow this business. We will also continue to retain minority ownership in assets that we developed. Now, let me turn the call over to our CFO, who will go through the financial results in more detail. Huifeng, please go ahead.

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Huifeng Chang: Thank you, Ismael. Please turn to slide 15. In Q3, we delivered $1.93 billion in revenue, up 57% year-over-year. Gross margin was 18.8%, well ahead of our guidance of 15% to 16.5%. Q3 benefited from lower manufacturing costs, a net foreign exchange benefit from the strength of the US dollar relative to most other currencies and higher margin project sales. Selling and distribution expenses were up 5% sequentially, primarily due to higher shipping expenses from the increase in shipping volume. However, unit shipping costs decreased, and we expect further decreases in the coming quarters. General and administrative expenses increased primarily, due to a nonrecurring $30 million impairment of certain aged manufacturing assets.

Net interest income in the third quarter was $4 million, up from net interest expense of $15 million in the prior quarter. The change was mainly driven by a onetime interest benefit of $17 million, which we received as interest income, generated by antidumping and conveying duty deposit refunds. The net foreign exchange and a derivative gain was $39 million, compared to $6 million in Q2. The benefit was driven by the strong US dollar relative to most other currencies, but mainly related to R&D. Total net income was $102 million and a net income attributable to Canadian Solar shareholders was $78 million. This translates to base EPS of $1.22 and a diluted EPS of $1.12. The variance is primarily due to the adjustment for the dilutive effect of our outstanding convertible notes.

Now, turning to cash flow and the balance sheet. Next slide, please. In Q3, the net CapEx payment was approximately $110 million, making it approximately $320 million for the first nine months of 2022. Given the delay in the IPO process, we are reducing our full year 2022 CapEx expectations to $650 million from $850 million. Please note, that this does not imply any changes to our capacity expansion projects, but rather an adjustment in the time line and the pace of implementation of these projects. We ended Q3 with a total cash balance of nearly $2 billion and remain well positioned to capture future growth. Total debt was a large unchanged at $2.7 billion, but the share of our long-term debt increased to 45% from 40% this time last year. 12 months trailing net debt to EBITDA, excluding restrict cash continued to decline this quarter to 2.7 times from 2.9 times the prior quarter.

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: Thanks, Huifeng. Let’s turn to slide 17. For the fourth quarter of 2022, we expect total revenue to be in the range of $1.8 billion to $1.9 billion. Gross margin is expected to be between 16% to 18%. This reflects the elevated import costs in Q4, partially offset by benefit from manufacturing cost reductions. Continued foreign exchange volatility may affect pricing and margin. Also for Q4, solar module shipment recognized in revenue by CSI Solar are expected to be in a range of 6 to 6.3 gigawatts, including approximately 290 megawatt through our own projects. For the full year of 2022, we expect CSI Solar’s total battery storage shipment to be in the range of 1.8 to 1.9 gigawatt hours, including approximately 300-megawatt hour through the company’s own projects.

Global energy project sales are expected to be in the range of 2.2 to 2.3 gigawatt. We are also introducing solar module shipment guideline for next year. For 2023, we expect solar module shipments to be in the range of 30 to 35 gigawatts, which represents approximately 56% year-over-year growth at the midpoint. Canadian Solar’s strategy of profitable growth is one of our key differentiators or continue to prioritize investing in long-term growth, which is positioning our business in strategic areas, such as battery storage and leading in the deployment of technology innovation. This differentiates our products at value for our customers and partners and is a key driver for our brand equity worldwide. All in all, we’re continuing to focus on what we can control and on building our long-term competitive mode to create lasting value for our shareholders.

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

Q&A Session

Operator: Thank you. At this time we’ll be conducting a question-and-answer session. Our first question comes from the line of Brian Lee with Goldman Sachs. Please proceed with your question.

Brian Lee: Hey, guys. Thanks for taking the questions. I guess I had a couple just around the guidance. Shawn, Huifeng, you mentioned that gross margins, the guidance for Q4 implies a little bit of sequential decline. It sounded like input costs, logistics, polysilicon, all of that is sort of trending in the right direction. So could you kind of walk us through what specifically is changing quarter-on-quarter to drive a little bit of a margin decline into the fourth quarter? And then also how you’re thinking about that translating into sort of the early part of 2023, what trends we should expect on the gross margin line?

Shawn Qu: Brian, I would like to — first of all, I’d like to mention that our Q4 gross margin guidance is higher than our Q3 gross margin guidance. However, we did a wonderful, spectacular Q3, we achieved 18.8% and we now guided 16% to 18% gross margin for Q4. So in terms of guidance, our forecast, our Q4 actually is we are guiding higher than our Q3 guidance. I just wanted to mention that. Now I would like Yan to provide more color, right?

Yan Zhuang: Hey, Brian, it’s Yan. First of all, I want to say that in terms of net growth — I mean, gross margin, I’m talking about price minus manufacturing costs, and yes, Q4 is not anything less than Q3. So that is stable. It’s more like — we believe there’s — for example, we do not expect a similar level of currency gain for Q4. So that’s one of that. So Shawn, want to have more comments?

Brian Lee: Well, that’s helpful color. I can take that question offline and maybe we’ll dive more into the moving pieces. Maybe on that same topic, though, pricing is the first time, I think, in a while where module ASPs look like they have come down a little bit. And I think you mentioned that in your commentary as well. Can you kind of talk about your quoting activity? Are you starting to lower prices on modules? And what’s your sort of view on module ASPs through 4Q as well as into 2023?

Yan Zhuang: Yeah. So Brian, actually, for Q4, our ASP is quite stable comparing to Q4. We do not see any material price reduction from Q3 to Q4. There might be for some customers, some order in some markets, we see some minor reduction, but it’s not significant. In terms of 2023, we’re already signing a lot of orders for next year. We also see some price reduction on some long-term orders, but it’s not significant. It’s $0.01 or $0.02 lower than what it is today. So that’s the current price situation. But moving forward, we still believe the price production moving into 2023, it’s going to be more moderate and smooth in the longer transition period. So, the reason for that is as we do €“ we all know that, the end market is still growing rapidly.

So €“ and also the investors in the end market has a stronger affordability on high on cost combined with the fact that, the ingot capacity right now to add CSIQ more than the silicon capacity. So we believe, there’s certain resistance on the price reduction moving into next year. So, we do not anticipate any sudden death on pricing, so that’s not going to happen.

Shawn Qu: Brian, I want to add one more comment that, the ASP deploys measured by US dollar maybe become a little bit lesser by local currency, for example, Japanese yen and euro and even Chinese RMB are not really declining. In some cases the price actually is moving up. However, we are facing a situation that US dollar is very strong. So when you look at US dollar, it looks like prices going up, even if it is going down. Some of local cost €“ price is quite stable and even going up.

Yan Zhuang: Yeah. And Brian, on top of that, we’re quite confident that our margins can improve moving next year because we’re actually €“ we €“ as you know, we have been always stronger in more developed markets, high-priced markets, and particularly in the US market is going to be quite strong next year. And we’re still expanding our talent capacity. And channel-wise, we’ve been always strong. We’re shipping half of our volume into DG market. And given the electricity retail price has gone up so much, we’re experiencing strong demand from that channel. And obviously, the price tolerance in that channel is getting very strong. So, we’re quite confident that, it’s going to be a good year for us.

Brian Lee: Okay. That’s great. Super helpful. Last one for me, and I’ll pass it on. I appreciate the updated thoughts around the US manufacturing plans. I think you had talked about recently looking at just module capacity. So, maybe if you could give us a bit more detail. Are you still thinking of building just a module-only facility? What would be kind of the scale and time line? Would you have production on in 2023, or would it be more 2024? And then can you give us a sense of the CapEx dollars and funding strategy you would be putting behind it? Thank you.

Yan Zhuang: Okay. So capacity-wise, as you know, we have a guidance, volume guidance for 2023 of — sorry, 30 to 35 gigawatts — that’s our guidance for next year, shipment guidance. So, in terms of CapEx and capacity, we are actually — we’ll have to support that. And — so by year-end this year, we have 20 gigawatts of wafer internal ingot wafer and also 20 gigawatts of cell and 32 gigawatt of module to end of this year. Moving into next year, we’re going to add more of TOPCon capacity on cell. So, total cell production next year is going to be 26, 27-gigawatt. Sorry, in terms of cell capacity 26, 27 output. In terms of output, it’s 26, 27 gigawatts. So, we’re going to have more than 20-gigawatt of ingot and wafer. So, will be more — over the course of next year, we can get more module capacity.

And also that includes the expansion of Thailand capacity of 8-gigawatt of cell and 60-gigawatt module. So, we’re going to have enough capacity to support our volume guidance. We, of course, with some cell purchase like around 8, 9 gigawatt of cell purchasing. So, that’s the capacity plan. And CapEx-wise, we’re actually in the process of — we already started investment.

Brian Lee: So, — okay, sorry. I was wondering, just specifically in the US as well of–

Yan Zhuang: The US. US, we’re actually in the — we have set up our team and in the process of site selection. We plan to secure a site that long-term-wise can support 5-gigawatt of module capacity. But at the same time, we also strike actively assessing the economic viability, policy-wise as well on upper stream capacity such as ingot, wafer, and cell. But still, we’re in the process of clarifying a lot of details on IRA with the DOC. So, it’s running changing process. So, on module side on execution, we may execute in phases. So, this is the plan.

Brian Lee: Okay. Thank you. I’ll pass it on.

Yan Zhuang: And on CapEx-wise, we have a customer support. Yes, we have customer support, a lot of down payment also helps.

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

Philip Shen: Hi everyone. Thanks for taking my questions. First one is on the IPO in China. I was wondering if you could give a little bit more color on the timing of that. I know in the deck and you guys talked about maybe Q1 of 2023, but in addition to that, do you still expect to bring your poly plant online by mid-2024. What’s the update on how that development is going? And how the IPO might be tied to some of your capacity expansion plans? Thanks.

Shawn Qu: Huifeng, do you want to address this question?

Huifeng Chang: Sure. Hi, Phil. Let me first talk about what that short procedural pause in our IPO process. So on September 30, Shanghai Stock change on its website, they changed the status of our IPO application to pause awaiting update the financial information. And we submitted the request information to the stock exchange in early October. And as a result, on October 27, the stock exchange after reviewing our documents and also on its website, changed our IPO status back to in registration. And with the message CSI Solar has submitted updated financial information. So since then, we are not receiving any more requests. So our application is back on track. So that process is about like four weeks. Now yes, the process is slower than our expectation.

But at this point, I don’t have a clear answer to why because in general, it is hard to know behind the same details inside the government office. And in our case, it’s much harder due to the COVID restriction on travels. But for management, we focus on managing business and deliver the better results. Now the good news is that there is more deadline for our IPO. We just wait there. If there is question from CSRC, we answer that. Also, let me share with you some statistics. There are over 30 companies applying for starboard listing are in the same status with us called registration. And actually, one-third of that submitted application before us. And there are also 50 companies in the pause status. So we continue to wait for the completion of registration and meanwhile, many JV business and make the company better for the listed.

Thank you.

Philip Shen: Great. Thanks, Huifeng. And — hey, Shawn go ahead.

Shawn Qu: Hi, Phil, So you also asked about the schedule of our polysilicon project and whether that investment is tied to the IPO proceeds. The answer is yes. Polysilicon is a big project. And then as we answered the questions in the last earnings call. We will only proceed with the polysilicon project after we complete our IPO.

Philip Shen: Okay. Thanks, Shawn. In your

Shawn Qu: In other capacity, I will say that the other capacity projects not really tied to the IPO financing for other capacity project, the new module cells or even wafer, more and less secure. So not really tied to the IPO.

Philip Shen: Great. Thanks for that detail, Shawn. And a quick follow-up on that. I was wondering if you could share what your expectations for CapEx would be for 2023? We have the details of expansion of ingot and wafer to 25 gigawatts cell to 35 gigawatts module to 50. So if you could share that CapEx, that would be helpful? And then you also gave 2023 shipment guidance, I was wondering if you could give expectations for project sales and battery shipments for 2023 as well? Thanks.

Shawn Qu: Hi, Phil. We are still working on the CapEx plan. As I said, some of the projects will be tied to the cash flow in particular capital injection, such as IPO. So we’re planning to release the CapEx estimate in March 2023 earnings call. And — but at the same time, as I said, the module and cell CapEx and the capacity expansion is more or less secured. So we will — now also, as you know, Canadian Solar has always been conservative so that — and also, we have very strong like — and the diversified customer distributed around the world. So even without heavy polysilicon, capacity expansion, we are still confident to reach our volume cells target and also to expand the gross margin from today’s level.

Philip Shen: Great. Thanks. Another one for me here. In terms of freight, I was wondering if you could break out in Q3. How much your freight cost was in either absolute dollars or cents per watt? And then how do you — I know it’s expected to go lower. How much do you expect it to be in Q4 and maybe into Q1 of next year? Thanks.

Yan Zhuang: So Phil, it’s — in Q3, it’s about $0.023 and Q4 is coming down. It’s about less than $0.02. So that’s our estimate.

Philip Shen: Great. Thank you, Yan. One last one. Can you talk about the OpEx and EBITDA trajectory from here maybe over the next few years? To what degree — how much operating leverage do you think you have? And if you can speak to both OpEx and the EBITDA trajectory, that would be fantastic? Thanks.

Shawn Qu: Huifeng, do you want to address this question?

Huifeng Chang: The OpEx number changed. The big part is driven by the shipping cost, the selling and other cost. So — but other numbers, they increased slightly because of the size of our team become larger as we ramp up the capacity. But as well if we do the analysis, OpEx slashed by total revenue, I think going to the coming quarters, it will decline. It will be somewhere around the low teen.

Philip Shen: Great. Thank you very much. I’ll pass it on.

Operator: Thank you. Our next question comes from the line of Colin Rusch with Oppenheimer. Please proceed with your question.

Colin Rusch: Thanks, so much. Guys, can you talk a little bit about the pricing dynamics for the energy storage market in the utility scale side? Just curious how you’re seeing that trend, given the growth in the backlog?

Shawn Qu: Hi. Colin, can you repeat your question?

Colin Rusch: Sure. Given the strong growth — yes, given the strong growth in the utility scale storage pipeline, can you talk about the pricing dynamics and what you’re seeing in terms of moves in pricing, given what we’ve seen in the energy markets as well as the utility grade market?

Shawn Qu: Yes. Unfortunately, as you know, the storage pricing this is more or less determined by the cost and especially the carbon — the lithium carbonate price. And the lithium carbonate price is affected more by the EV rather than the storage, because this is — the EV still account for 90% of the lithium usage and the storage is only 10%. So if you talk about the pricing dynamics, the price is moving up, unfortunately, recently, but that’s more because of the lithium carbonate price and that more or less — even more determined by EV than by the activities of general storage.

Yan Zhuang: Yes. And Colin, one more comment is, for the project we’re signing, we actually secured — somehow secured the supply and have a control on pricing and with the back-to-back deposit arrangements. And our strength on those projects is because, we’re providing turnkey service and long-term service, which is now in the market not — it’s actually a shortage of capacity that’s in shortage — so it’s much demanded capability. So we have a better control on pricing. And it’s not just additional revenue and profit on the turnkey service on long-term service, but also, this service actually help us to have more bargaining power on the equipment pricing. So this is — we would be — we have achieved in the markets, especially in the US and the European markets.

Shawn Qu: I agree with Yan and also want to comment that, although, the pricing is growing higher with storage product, the customer demand is — customer demand continues to be strong, that’s because it’s more solar and wind, the market requires more and more solid and also the energy price itself is going up, as you all know.

Ismael Guerrero: Yes. And given our rapidly growing pipeline, our pipeline is actually probably one of the biggest in the world, and such a pipeline help us on the bargaining power on supply chain. So, we have successfully secured a multiyear supply agreement with our suppliers with our pipeline.

Colin Rusch: Thanks, so much guys. And can you talk a little bit about your position in the interconnection queue in the US? Obviously, those things move through those — those projects move through the queues at the rate that they need to. But can you talk about the order of magnitude of that interconnection position and the rate at which you’re seeing projects get approved at this point?

Shawn Qu: No. Ismael, do you get this question? Do you want to address that?

Ismael Guerrero: Sure, Shawn. Thanks for the question, Colin. Look, what we are experiencing in general, not only in the US, but in general, is the ration interconnections due to the longer lead times of equipment, especially high-voltage transformers. To give you an order of magnitude, in the past, a reasonable time frame was six to nine months. We are seeing now lead times of up to 20 months. So as a result, interconnections are getting delayed. And even though your position in the queue might be a good one to interconnection is getting delayed to. So look at around 2 gigawatts of what we have in the US have pretty good interconnection queue positions. Some projects that are far away on the connection queues when we see that the economics might be changing dramatically, we are selling and we sold some of those in the US this quarter. But that gives you an idea of where we are, I hope.

Colin Rusch: Yeah, that’s helpful guys. I’ll it there. Thanks, so much.

Operator: Thank you. At this time, I’d like to turn the floor back to Canadian Solar’s CEO, for closing comments.

Shawn Qu: Thank you for joining us today and for your continued support. As always, if you have any questions or would like to set up a call, please contact our Investor Relationship team. I hope you all have a great Thanksgiving holiday and take care.

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