Canadian Solar Inc (CSIQ) Q1 2022 Earnings Call Transcript

Canadian Solar Inc (NASDAQ: CSIQ) Q1 2022 earnings call dated May. 24, 2022

Corporate Participants:

Isabel Zhang — Investor Relations Director

Dr. Shawn Qu — Chairman and Chief Executive Officer

Yan Zhuang — President of CSI Solar

Ismael Guerrero — Corporate VP and President of Global Energy

Dr. Huifeng Chang — Senior Vice President and Chief Financial Officer

Analysts:

Praneeth Satish — Wells Fargo — Analyst

Philip Shen — ROTH Capital — Analyst

Colin Rusch — Oppenheimer — Analyst

Brian Lee — Goldman Sachs — Analyst

Mark Strouse — JPMorgan — Analyst

Presentation:

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Canadian Solar’s First Quarter 2022 Earnings Conference Call. My name is Olivia, and I’ll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference is being recorded for replay purposes

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

Isabel Zhang — Investor Relations Director

Thank you, operator, and welcome everyone to Canadian Solar’s first 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 & 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; 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 and 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 sees 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 general 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’d like to turn the call over to Canadian Solar’s Chairman and CEO, Dr. Shawn Qu. Shawn, please go ahead.

Dr. Shawn Qu — Chairman and Chief Executive Officer

Thank you, Isabel. Hi, everyone. Welcome, and thank you for joining us today. Please turn to Slide 3. In the first quarter of 2022, we delivered 3.63 gigawatts of module shipments, $1.25 billion in revenue and 14.5% in gross margin. We also achieved a net income attributable to Canadian Solar shareholders of $9 million and diluted earnings per share of $0.14.

These results were in line with our guidance even though the operating environment was very challenging. I want to thank our global team for their focus and execution of our strategy, building Canadian Solar’s long-term competitive across all its businesses, including solar modules, battery storage, system solutions and global project development.

Please turn to Slide 4. One of the things I would like to highlight this quarter is our decision to accelerate upstream capacity expansion plan with the latest state-of-art technologies. Specifically, we expect our ingot, wafer and cell capacity to reach approximately 28 gigawatts by the end of 2022, which is meaningfully higher than what we previously communicated.

Our module capacity will be 32 gigawatt in line with our prior target. This will meaningfully increase the level of vertical integration of our manufacturing capacity, allowing us to better control our costs technology and product quality, thereby further improving our pricing power and margin.

Our plan is to strategically shift our capacity from the current pyramid structure to a trapezoid structure. So, we are pushing our vertical integration level to 32%, the highest in the Canadian Solar history. This trapezoid structure will allow us to strike a good balance between greater control over production cost while still being flexible and responsive to market change. This flexibility has given us a competitive advantage in the past and even more important today.

Please turn to Slide 5. Secondly, the registration process with China Securities Regulatory Commission, or CSRC, of our CSI Solar subsidiaries carve-out IPO remains on track. This is despite the slowdown due to the COVID lockdowns in China and especially in Shanghai. The listing will support our growth strategy and further unlock value for shareholders, and we will continue to update you on our progress as we move forward.

Please turn to Slide 6. Lastly, I would like to comment on a particular resolution passed by our Board of Directors this last week. This resolution mandates a third-party audit of Canadian Solar’s operations and supply chains with respect to the effectiveness of our anti-modern slavery policy, supplier code of conduct and human rights policy. The management team proposed the resolution to the board as a response to certain shareholder proposals and we fully support the resolution.

As we have clearly stated in our prior calls, Canadian Solar does not tolerate forced labor or any form of modern slavery and is committed to ensuring that more than slavery does not take place anywhere in our business, including our supply chain. We implemented policies and procedures addressing this. And with this board resolution, we expect to further increase IFRS at reasonable cost to conduct a third-party assessment and report to the Board of Directors.

On the extent to which our policy and procedures effectively protects against forced labor in our operations, supply chain and business relationships. This remains a top priority for our management and Board. And we look forward to engaging with our investors, customers and partners during this process.

With that, let me now turn over to Yan, who will go through our CSI Solar business in greater detail. Yan, please go ahead.

Yan Zhuang — President of CSI Solar

Thank you, Shawn. Please turn to Slide 7. In Q1, in the CSI Solar division, we delivered 3.63 gigawatts of solar module shipments, $1.21 billion in revenue and 14.5% in gross margin. Year-over-year, this represents 7% revenue growth and 161% gross profit growth. And while we are pleased with the strong performance, the operating environment remains challenging going into Q2.

Please turn to Slide 8. First, let me give you an update on the latest supply chain and market situation. As you know, polysilicon cost inflation came back in early Q1 due to the strong demand in China and India. While we already anticipated upstream costs to remain high in the first half of the year, the magnitude of the cost increase was greater than expected. And therefore, we had to react quickly.

We continued to raise prices where possible, optimize capacity utilization and further reduce our processing costs. As of now, we believe polysilicon pricing will come down gradually in the second half of the year. Once capacity maintenance activities are over and more supply is added to the market, we expect demand to remain strong, especially once pricing starts to come down.

Q1 was also affected by the COVID-related lockdowns in China, which were particularly severe in the greater Shanghai region. On the positive side, the reduced overall shipping activity in the region has triggered a decline in shipping costs, which finally seemed to have turned a corner. Unit transportation costs are still significantly higher than historical levels but have come down close to 20% from their peak.

We expect the trend to continue gradually through this year as the world recovers from COVID. Shipping congestion has also improved although certain ports are still more congested than the pre-COVID normal levels. Finally, currencies are starting to move into our favor after two years of headwinds. So with an operating landscape that is improving, but it’s still challenging. Our focus remains on our long-term strategy.

Please turn to Slide 9. At our core solar module business, our goal is to expand capacity, increase the level of vertical integration. As Shawn discussed, gain global market share and improve our long-term earning power. Vertical integration allows us to further internalize our supply chain, reduce market risk and drive innovation and product leadership, growing from a lean asset base with limited legacy assets, we have an advantage as we implement our growth plans to reach 15% market share in three to four [Indecipherable]

We’re also excited about the significant in our battery storage business. In Q1, we shipped 290-megawatt hour of storage systems, and we expect a significant ramp-up from Q2 onwards. We’re also expanding our market reach from mostly selling to the U.S. market — U.S. market to enter in new markets such as the U.K. and China. And we’re starting to provide a wider range of value-added services and solutions, including battery storage solutions for capacity services and shorter duration frequency regulation.

On the product side, we’re very close to launching two major battery storage products. Our utility scale product designed to be one of the safest and most competitive in the market and a beautiful sleek battery storage system for residential applications, which will enhance our distributed generation market offering. Both products are expected to launch shortly with plans to start selling them across all major markets in the second half of this year.

Now, let me pass it on to Ismael for an overview of the global energy business. Ismael, please go ahead.

Ismael Guerrero — Corporate VP and President of Global Energy

Thank you, Yan. Please turn to Slide 10. In Q1, we delivered $93 million in revenue and 19.2% in gross margin. We delivered approximately 350 megawatts of project sales in the U.S., which were all pre or early construction projects, hence, while the dollar per megawatt was relatively lower, but margin was healthy.

We took advantage of a strong budding interest that provided us high price offers for our projects, even though they were relatively early stage. This helped us avoid placing high amounts of interconnection bonds as it would be covered by the buyers, and we could recycle that capital for higher return investments. So revenue was softer this quarter due to project monetization cycles and seasonality, including certain projects that we accelerated into Q4 last year, but we expect Q2 to pick up.

This quarter, our global project pipeline remains stable with 24 gigawatts of solar and 27 gigawatt-hours of battery storage. The contracted pipeline was approximately 5 gigawatts and [Indecipherable] gigawatt-hours, respectively, which is all construction projects plus more than 90% of backlog projects on this slide. It is also important to note that the value of our pipeline is not only in its contracts, but also on the quantity and quality of interconnection agreements we have on hand, which currently has done at 12 gigawatts for solar and 11 gigawatt-hours for storage.

In most markets, interconnection is increasingly the greatest hurdle for developers and the fact that we have a global volume of this magnitude is a testament of our pipeline ability to capture value and sustain growth over the long term. And speaking of growth, I’d like to reiterate our growth strategy, which is consistent with what we’ve been communicating with the market over the past several quarters.

Please turn to Slide 11. First, we will continue to grow our development platform through project origination, development and sales, proactively managing risk and working with potential partners to leverage our different areas of expertise. We are taking a portfolio management approach where we are solidifying our market share in places where our position is very strong, and growing our market position in other places where it makes sense.

For example, we currently have a double-digit market share in places like Brazil and Italy, where we were one of the first movers in the market and have now amazed deep market knowledge and expertise.

On the other hand, we see significant share upside potential in markets such as Spain, the U.K., Chile, Australia and South Korea among others. The U.S. is also one of our key strategic markets, especially in the battery storage space. Second, we are aggressively growing our operations and maintenance platform both by contracting projects developed by us and by third parties.

By the end of last year, we had just over 2 gigawatts of operational assets under O and M agreement. We are now meaningfully increasing our targets. We expect to more than double this number by the end of this year to 4.5 gigawatts and grow it by 10x by 2026, reaching 20 gigawatts. These are ambitious goals, but we are building our capacity to achieve them so that the share of our recurring revenues will be much higher in a few years’ time.

And third, it’s retaining ownership of our project assets mainly through long-term investment vehicles, which will also allow us to increase the share of recurring income. Recurring earnings from long-term asset ownership will be above or below the line on our P&L, depending on whether we retain majority or minority ownership. This will be determined by our goal of maximizing the value of our pipeline, subject to risk and capital constraints. Retaining ownership of projects will also allow us to explore and accelerate the learning core of uncontracted storage development assets.

To summarize, we continue to execute on our strategy, that is to grow our development platform with quality assets and to increase the longer-term share of our recurring income as we work to create lasting value for our shareholders.

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

Dr. Huifeng Chang — Senior Vice President and Chief Financial Officer

Thanks, Ismael. And please turn to Slide 12. In Q1, we delivered $1.25 billion in revenue, up 15% year-over-year were, but down 18% from the previous quarter due to business seasonality. Gross margin was 14.5% as we navigated through higher material costs with tightening control on many other operating expenses and eventually deliver in the guidance range.

It is important to note that our operating expenses were lower by almost 30% sequentially. Within that 30% decrease, selling and the distribution expenses declined 16% quarter-over-quarter, mostly due to lower transportation costs. General and administrative expenses declined 30% quarter-over-quarter due to tightened control.

Our research and development expenses also declined somewhat this quarter due to the timing of our R&D activities. The foreign exchange positions in the $3 million compared to $1 million in Q4 2021. The benefit was mainly driven by the strong appreciation of the Brazilian real and currency fluctuations, such as the appreciation of the Australian dollar.

As Yan mentioned, currencies are starting to move in our favor after two years of hailing our reporting currency is in U.S. dollar, while costs are mostly in renminbi and revenues are in many currencies, including the U.S. dollar, euro, Brazilian real, Japanese yen, renminbi and more. Thus, we are currently benefiting from the recent sharp depreciation of the renminbi relative to the U.S. dollar, which is partially offset by other currencies, also depreciating against the U.S. dollar. Q1 income tax benefit was finally compared to $27 million tax expense in Q4 2021. The benefit was due to lower income before tax and the tax refund in Canada. On an annualized basis, the effective tax rate this year will be around 22%. Total net income and net income attributable to Canadian Solar shareholders was $9 million due to a few offsetting factors. This quarter, both numbers were very close. But please note that the variance between the total and the core net income will increase going forward once we complete the carve-out IPO of CSI Solar.

Canadian Solar’s ownership in CSI Solar will decline from 80% to approximately 64%. Basic and diluted earnings per share were both $0.14. And please note that the diluted share count did not include the adjustment for the outstanding convertible bond.

Now turning to cash flow and the balance sheet. Next slide, please. In Q1, we strategically increased our inventories in both, raw materials as well as finished goods, anticipating the inflationary environment to continue and higher demand. Q1 CapEx was $90 million. Given the accelerated capacity expansion plans, we expect 2022 full year CapEx to be approximately $850 million, up from our prior expectation of $700 million.

We ended the period with a healthy cash balance of $1.7 billion, giving us financial flexibility to manage unexpected risks. Total debt increased to $2.7 million, mainly driven by increases in landing debt as financing partners continued to support our growth opportunities despite the tightening financing environment. 12 months trailing net debt to EBITDA, excluding restricted cash increased to 4.1x from 3.3x the prior quarter.

Now let me pass it back to Shawn, who will conclude with our guidance and the business outlook. And please note that this quarter, we are slightly adjusting our shipment disclosure to ensure consistency in future Canadian Solar and CSI disclosures. Our shipment forecast will refer the total shipments recognized as revenues from the CSI Solar standpoint.

And this includes both shipping to third parties and to global image projects that fulfilled CSI Solar’s revenue recognition criteria. However, the CSI solar level, CSIQ level, internal global energy shipments should be eliminated as the profits from internal module shipments is only recognized once, which is at the time when the project is sold.

And Shawn, please go ahead.

Dr. Shawn Qu — Chairman and Chief Executive Officer

Thanks, Huifeng. Let’s turn to Page 14. For the second quarter of 2022, we expect total module shipments to be in the range of 4.9 gigawatts to 5.1 gigawatts, including approximately 150 megawatts to our own projects. As Huifeng just mentioned, from this quarter on, we will disclose shipment volumes based on what CSI Solar expects to recognize in revenues in the quarter.

Total revenue are expected to be in the range of US$2.2 billion to US$2.3 billion, driven by higher volume in total modules and battery storage shipments as well as project sales. Gross margin is expected to be between 14.5% to 15.5%, reflecting higher maturity. Our guidance remains unchanged for the full year of 2020, with total module shipments of 20 gigawatts to 22 gigawatts, battery storage shipments of 1.8 gigawatts to 1.9 gigawatt-hours and total project sales of 2.1 gigawatts to 2.6 gigawatts.

Total revenue guidance for 2022 also remains unchanged, expected to be in the range of US$7 billion to US$7.5 billion. Despite the continued market challenges, our business and outlook remain strong, led by robust demand for renewables and greenfield battery storage. We are in a strong market position and focus on building long-lasting shareholder value.

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

Questions and Answers:

Operator

[Operator Instructions] And our first question is coming from the line of Praneeth Satish with Wells Fargo. Your line is open.

Praneeth Satish — Wells Fargo — Analyst

I guess just first to start off on the capacity expansion. Can you maybe just give us a sense of how much CapEx you’ll spend this year to increase manufacturing capacity? And also on financing, would you need to use the at-the-market program to help fund the increase in CapEx?

Dr. Shawn Qu — Chairman and Chief Executive Officer

Yes. I believe Huifeng already addressed this question. And so I would like Huifeng to operate.

Dr. Huifeng Chang — Senior Vice President and Chief Financial Officer

Yes. The capex — earlier, we expect [Indecipherable] and then this increase, first of all, the capex is to meet the demand, we know, the global demand almost doubled from slightly about 100 gigawatt in 2019 pre-pandemic to now more than 200 gigawatt a year. So, we are investing mainly to meet the additional demand not merely take pay for the sake of taking market share.

And the second, the capex is for scale, that is for us to remain cost-competitive. And we aim to remain in Tier 1, not really to be the largest one. And the third, we believe the timing to ramp up capacity is now relative to our peers, who expanded earlier, our cost for new capacity is cheaper, and we are taking the second-mover advantage because all the equipment have become cheaper in the last couple of years.

And more importantly, our capex plan is dovetailed with our IPO in China. And IPO proceeds will give us the financial firepower to do so. And of course, on the global energy business side, the financing need will all go with the product development. And for example, we are doing a lot of projects in Brazil. And as the product takes off, we’ll take financing, but that’s at the project level.

Praneeth Satish — Wells Fargo — Analyst

Okay. That makes sense. And then just broadly, I was wondering if you could give an update on the solar development market in Europe, whether you’re seeing any acceleration there? And whether the governments are accelerating permitting of new projects, just given everything that’s going on in Russia and Ukraine.

Dr. Shawn Qu — Chairman and Chief Executive Officer

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

Ismael Guerrero — Corporate VP and President of Global Energy

Thank you for the question. Look, as you know, energy is weapon when everything comes into geopolitical movements, right? So, Europe in general is taking the approach of being independent from the energy point of view. And there are no resources in Europe beyond renewables. So, what we see is an aggressive shift on all the governments trying to push harder to have renewables played in much bigger volume and also quicker. This is what we are seeing. And of course, the immediate result is also the spike in the electricity pricing. So, those are the main two things that we are seeing, and we believe they are going to last for quite some time. It’s not going to be something that will go away easily. I don’t know if this answers your question.

Praneeth Satish — Wells Fargo — Analyst

Okay. It did.

Operator

Our next question is coming from the line of Philip Shen with ROTH Capital. Your line is open.

Philip Shen — ROTH Capital — Analyst

Everyone, thanks for taking my questions. I wanted to check in with you on the U.S. market. In Q1, you had 29% of your shipments to North America. And it sounds like based on our checks that you’re still shipping into the U.S. meaningfully despite the anti-circumvention risk as the importer of record. I was wondering, if you could talk through for some of us around the details of the contracting. For example, are you the important record? How much risk are you taking on here? And ultimately, how are you structuring these deals? And how much of it is for serving the DG market versus the utility scale market?

Yan Zhuang — President of CSI Solar

Okay. Philip, this is Yan. To answer your question, first of all, we’re actually were well aware of all the risks. So we had a thorough analysis and we actually — first of all, we’re shipping to the U.S. continuously and with a different bucket. So customers with some customers were taking the risk, but with conditions. So we sell actually at a premium to cover the risks. And we also retain our rights to terminate shipment in case the policy goes out of certain lines. So we have conditions in the contracts.

And some customers are willing to take that risk themselves by a clear customer themselves. And in some cases, we share the risk. And for distribution channel, we’re obviously selling at a higher premium, so that can well protect us from the risks. On top of that, so we actually also diverted some volume we from U.S. to other markets like Taiwan and we’re exploring different possibilities. And we also have some of the product actually made from Hemlock silicon. So, overseas silicon that can also mediate the risk, so a combination of many different measures, and we’re confident that the risk is well hedged.

Philip Shen — ROTH Capital — Analyst

Great. That’s very…

Yan Zhuang — President of CSI Solar

Sorry, let me correct. The silicon is Wacker. It’s not Hemlock, sorry.

Philip Shen — ROTH Capital — Analyst

Okay. Got it. That’s important. Yan, so can you talk about the profitability of this opportunity in the U.S. So as you balance all the different risks, I guess, two questions here. How many gigawatts of product do you think you send to the U.S. in 2022? And what kind of profitability could the U.S. or North America sales have for you?

Yan Zhuang — President of CSI Solar

Well, so, I will not — I think the volume is shipping to the U.S. is not the entire capacity in Thailand. So, it’s less because we’re having — undergoing some upgrading and we diverted some volume. The exact number actually not 100% sure. It’s — so it’s around 3 gigawatts more or less. I’m not sure I’m not — I don’t have the exact number. It is more profitable than some other markets. It depends on the channel. The DG market is actually a higher pricing. So, I hope, I answered your question.

Dr. Shawn Qu — Chairman and Chief Executive Officer

I won’t call it higher — more profitable. It’s just that we have to add a risk premium.

Yan Zhuang — President of CSI Solar

Yes.

Philip Shen — ROTH Capital — Analyst

Okay. One last one for me. In terms of capacity expansion — actually, I missed the CapEx. I think it was a little unclear on my side at least. Huifeng, could you remind us again how much you plan on spending this year? But then bigger picture, I was wondering if you guys could talk through the timing of making this decision to become a trapezoid structure from your historic pyramid structure after being public for close to maybe 15 years? What are — you guys have historically always kept this pyramid structure. So, what are the conditions in the market today that are driving you to make this trapezoid decision? Historically, you’re evaluating and I’m imagining every year, maybe multiple times a year. And so, what is it about today’s environment that makes the shift necessary from the pyramid structure to the trapezoid structure?

Dr. Shawn Qu — Chairman and Chief Executive Officer

It’s the — go ahead, Yan.

Yan Zhuang — President of CSI Solar

The total investment is $850 million. So, the decision is made, and we’re going ahead. So, there’s no conditions. So we talked about around 20 gigawatt level for ingot, wafer and cell that’s going to happen. So it started already. It just takes time to complete.

Philip Shen — ROTH Capital — Analyst

Right. So, Yan, this year, you’ll spend $850 million. I guess my question is — go ahead, Yan.

Yan Zhuang — President of CSI Solar

$850 million covers everything. So, that includes what we’ve done last year and also the upgrade we’re going to do this year and new capacity expansion this year. And the part of the spending is for the project that’s going to be realized next year. So, it’s a combination of everything.

Philip Shen — ROTH Capital — Analyst

Can you share how much will be spent in ’22?

Yan Zhuang — President of CSI Solar

Well, the total budget is $850 million. So that’s what we’re going to pay.

Philip Shen — ROTH Capital — Analyst

Okay. And then, I guess, my question, Yan, was around why make the — I know you mentioned the decision is made, I get that. My question is, what is special or different about the conditions in the market today or now? Will shift from pyramid to trapezoid despite the history of 15 years of being…

Yan Zhuang — President of CSI Solar

We believe the industry has come to the stage that we are experiencing a very sustainable growth and solar cost is not conditioning for growth anymore. So we already reached a scale that we need the stability and need more control on cost side. And so, we can plan our growth. So the stability is becoming instrumentally important for our business. And also for us to compete against our peers because now the industry is so big, and for our business, you cannot speculate anymore because the margin is getting thinner as well with the game is more on the vertical integration and the scale side. So this is the game that — this is now becoming very clear. That’s why we’re making this decision.

Operator

[Operator Instructions] Our next question is coming from the line of Colin from Oppenheimer. Your line is open.

Colin Rusch — Oppenheimer — Analyst

Could you talk a little bit about the geographic mix and as well as the kind of project size mix that you’re seeing with the business right now? I know you’ve got the direct-to-installer channel that has been a good margin driver for you historically. But I’m wondering if you’re able to push more volume through that on an overall basis from a percentage perspective? And how much of your volume is starting to move into Europe and other geographies, given what’s going on from a brand perspective.

Dr. Shawn Qu — Chairman and Chief Executive Officer

You’re talking about shipment volume into different geographies, right?

Colin Rusch — Oppenheimer — Analyst

Yes and the mix of utility-scale versus rooftop?

Yan Zhuang — President of CSI Solar

Okay. So we — first of all, we continue to ship more and more into nine in the residential market. So, well, there’s certain volatilities on the utility side due to the impact of multiple factors, such as control inflation and utility school project has a lower tolerance on cost increase. So that’s why recently, actually, the DG market is getting more and more volume. But I think — so in terms of a stable pattern for us, I would say, we will probably continue to maintain more than 50% into the utility — into DG market, that includes C&I and residential, the rest is into utility-scale.

And in terms of geographical shipment, so for Q1, we’re actually shipping — the European market is growing, and this will continue into Q2. Europe will maintain — will continue to be strong. And for Q3, Europe may slow down a little bit because of the vacation time, but Q4 will come back strong. And Japan and Korea and the APAC, was high in Q1 because the Indian number was high. So, as I think for Q2 and rest of the year, Asia Pacific, excluding China, will come back to like a 20% level. And North America right now is slow due to the circumvention investigation. However, we believe that in August, if we actually receive more friendly findings preliminary findings, I think the market will come back.

So, we expect the U.S. — the uncertainties there for sure, but likely to go up after August. Latin America is recovering. So China remains to be strong, but right now due to the COVID control and also the high-cost manufacturing side, so that comprises so high. China projects actually showing the sign of slowing down temporarily. But we believe that I think moving to September, October, China demand will come back strong because by then, we believe telecom price should come down before that.

Colin Rusch — Oppenheimer — Analyst

That’s super helpful. And then on the energy storage side of things, can you talk a little bit about the technology development that you’re engaged in an evaluation of other technologies? Obviously, there’s a very tight market for chemical storage and looking at iron batteries here. Are you looking at additional conversions to chemistries or things like flow batteries, other configurations that could supplement the portfolio and derisk some of the cost structure?

Yan Zhuang — President of CSI Solar

So for battery, well, we do have a lag, and we’re actually researching two different directions. And, however, for the next couple of years, we’re still relying on LFP technology. So however, we’re actually moving pretty quickly on other parts of this value chain. For example, our integrated containers for storage, for utility storage, we have around 20 different patents that are some already we received the brands, some of them are still under application. So, we have a lot of innovations in that product.

So we’re launching the product. We start to ship the product starting from Q3, I believe, in June and July time frame. And we have confidence that the product is actually one of the best in the industry. And on the residential side, our product is — also has a lot of innovations. It’s actually an upgrade based on today’s market offerings, have a lot of innovations from different angles. There is a lot of details, I don’t have time to really look talk into all the details, we can talk about that as product launch in July in the U.S. It’s really a lot of innovation since the upgrade based on today’s market offering.

Operator

And our next question is coming from the line Brian Lee with Goldman Sachs. Your line is open.

Brian Lee — Goldman Sachs — Analyst

I had a couple more, I guess, Monday modeling ones. First, maybe for Huifeng, the — you mentioned the OpEx was controlled pretty well here this quarter. If I look at it on a percent of sales basis, you haven’t really been this low in a while. How should we be thinking about trends, just given the environment, given higher cost on shipping, even though they’ve come off the peak, still elevated, just what’s the trend line here as we move into the next couple of quarters on OpEx, whether it’s on a percent of sales basis or how we should be thinking about maybe absolute dollar growth off the base in Q1 here?

Dr. Shawn Qu — Chairman and Chief Executive Officer

Huifeng? Hi, Brian, we’ve just lost Huifeng, maybe we address your second question.

Dr. Huifeng Chang — Senior Vice President and Chief Financial Officer

I’m back.

Dr. Shawn Qu — Chairman and Chief Executive Officer

Did you get the question?

Dr. Huifeng Chang — Senior Vice President and Chief Financial Officer

No, I didn’t get the question. What’s the question?

Brian Lee — Goldman Sachs — Analyst

Huifeng, it’s Brian. Just asking about OpEx Q1 was a good quarter for you guys in terms of OpEx control. A lot of other of your peers have not been able to control OpEx that well here in this environment. So wondering, what’s what should we be thinking about for Q2 in terms of OpEx? And then, I guess, moving through the rest of the year, just sort of as a percent of sales or what sort of cost mitigation efforts you have that will spill over from what you were able to achieve in Q1.

Dr. Huifeng Chang — Senior Vice President and Chief Financial Officer

OpEx, right? OpEx, you’re asking OpEx?

Brian Lee — Goldman Sachs — Analyst

Correct. Yes.

Dr. Huifeng Chang — Senior Vice President and Chief Financial Officer

Yes. So I mentioned in my call today on the call today that the biggest driver of OpEx decreased is the transportation cost. And now we are seeing this, especially on the international routes, everything is returning to normal. In the U.S., there is a decrease and other routes also they decreased. And so, we expect that to continue. So that was the largest effect. On the other hand, we are also tightening every side about booking personnel costs and all the expenses we are cutting every corner. So — and our business volume has almost doubled over the last three years. But our team, all these operating costs remains almost unchanged. So, we’ll continue to be very disciplined in terms of expenses, and that will help us to keep the price less change than the cost and remain competitive. And with the capacity expansion plan, we will make more profit for the Company.

Brian Lee — Goldman Sachs — Analyst

Okay. Fair enough. And just maybe one housekeeping item. I think, last quarter, you guys had talked about a onetime incentive plan related to the IPO here. IPO is still on track for Q1, Q2. So I would assume this is going to be a number that ends up in Q2. So will that be sort of $40 million showing up in OpEx in Q2? Is that the way we should be thinking about at least a one-time bump up in OpEx for this quarter?

Dr. Huifeng Chang — Senior Vice President and Chief Financial Officer

Yes. That will be determined by the exact timing of the China IPO because a lot of IPOs depending upon the success of IPO. Right now, we are in the last stage: registration of the CSRC, remain on track. Unfortunately, the ongoing shutdown in China slowed down of many things in China, whether we remain optimistic the listing will be done. We haven’t seen any rate lag in just waiting.

Yan Zhuang — President of CSI Solar

And also, it depends on the vesting schedule, I guess.

Brian Lee — Goldman Sachs — Analyst

Fair enough. Sure. Fair enough. But that will be basically cost, we’ll see flow through the model in the next couple of quarters, whether it’s all concentrated in Q2 or over the next few quarters. Is that fair?

Dr. Huifeng Chang — Senior Vice President and Chief Financial Officer

Yes, either — we hope we’ll happen in Q2, but very — also very possible it will be dragged into Q3.

Brian Lee — Goldman Sachs — Analyst

Okay. Great. And then maybe two last ones for me. One on revenue seasonality. If I take your full year guidance and I look at what you did in Q1 and what you’re guiding for in Q2, it does suggest a pretty sizable downtick implied for Q3 and Q4, if I just kind of flat-line it. I know this has to do with project timing, but anything else in sort of the revenue seasonality here. It looks like Q2 actually will be potentially the peak quarter for the year and then a little bit softer top line trends through Q3, Q4? Maybe speak to that a little bit.

Dr. Shawn Qu — Chairman and Chief Executive Officer

Yes. This is Shawn speaking. On the CSI Solar side, we actually expect the shipments to continue to grow in Q3 and Q4. Of course, that also depends on some other factors. For example, the COVID lockdown in China may affect the schedule of China project. But other than that, we expect CSI Solar volume will grow in Q3 over Q2 and then grow in Q4 over Q3. Now in terms of projects, indeed, it depends on the schedule on the project sales schedule.

Brian Lee — Goldman Sachs — Analyst

Okay. And then maybe last one for me just on the gross margins. whether this is for Shaw and away from the CSI Solar margins have been pretty consistent here, except for maybe one quarter out of the past four, five. You’ve been can you are on the mid-teens gross margin percentage range. You’re guiding for that again in Q2. And then you’ve got this increasing CapEx budget and increasing vertical integration. Should we be assuming that you get some gross margin expansion benefits from that vertical integration in 2022 or I guess what I’ve seen with some companies is as they go through a larger capacity ramp, sometimes they take a little bit of a step back in the early ramp-up on margins before they see the full margin benefits realized after the capacity ramp-up is more fully materialized. How should we be thinking about the impact on your gross margins as you or on this sort of integration and the capacity ramp over the next few quarters?

Yan Zhuang — President of CSI Solar

Well, we believe our margin will continue to improve rest of the year and even moving to next year. There are multiple reasons for that. So first of all, our improved vertical integration and capacity expansion we actually improve our cost structure. So, we actually perceive that the upstream cost, although will go down over time with the increasing capacity of silicon it will go down, but will stay at a relatively higher level. It will go down gradually. It will not go down suddenly dramatically. So going upstream and improve vertical integration will help us on margin.

And secondly, as I said, the demand is very strong. With the current going situation on the power market and energy security concerns, we believe that we can actually — we can command premium pricing from the project side. The tolerance to cost increase on the project side has been high, has been improved significantly. So further contracts will go down, so upstream costs will go down. And on project side, the tolerance to cost increase is going up. And we see that shipping cost is going to go down. We’re also observing that the overall size of demand is also going up. So, that will help us to reduce the percentage pullback. So, overall speaking, I think the profit will continue to improve into second half of the year and even into next year.

Operator

And we have time for one last question coming from the line of Mark Strouse with JPMorgan. Your line is open.

Mark Strouse — JPMorgan — Analyst

Thank you very much for taking my question. I’m sorry if I missed this, but will be coming online this year. Are you able to say where that is located? And then just kind of a high-level follow-up to that would be with all of the focus lately on energy security, what are your thoughts over time of eventually expanding more significantly in European or U.S. manufacturing?

Yan Zhuang — President of CSI Solar

You’re talking about the growth, the main growth out of which geographical location, right?

Dr. Shawn Qu — Chairman and Chief Executive Officer

Can you repeat your first question?

Mark Strouse — JPMorgan — Analyst

Yes, I’m sorry, just on your — so the first part of the question was just more near term, the incremental capacity that you’re bringing on this year for ingots, wafers and cells, will that be located? Will that capacity in Asia? Or will that be some new market, new area? Not necessarily the customers, but just the manufacturing itself.

Yan Zhuang — President of CSI Solar

Yes. So we have sell and we have ingot and capacity buildup in [Indecipherable] and we have cell — [Indecipherable] and bottle, and we also have cell expansion in [Indecipherable] is for next year. So we also have some CapEx expansion in Thailand. So we’re also starting closely monitoring the situation and we have a lot of discussions on overseas manufacturing in other geographic locations such as U.S. and Europe, there’s a lot of discussions, but we’re actually monitoring the situation until it’s ready. So hope that answers your question.

Dr. Shawn Qu — Chairman and Chief Executive Officer

So, Mark, the capacity plan announced in this earnings call, all located in Asia.

Mark Strouse — JPMorgan — Analyst

Okay. Do you say — I mean maybe it’s hard to say, but do you think tariffs alone are enough to influence behavior? Or do you need to see some kind of a domestic manufacturing tax credit? [Indecipherable] the kind of incentives?

Dr. Shawn Qu — Chairman and Chief Executive Officer

Well, that’s a very good question. I believe that tariff alone. If you’re talking about manufacturing in the U.S. that I don’t think tariff alone can force manufacture into U.S. some good and long-lasting local incentive may be able to attract capacity into U.S. just tariff, it’s not enough.

Yan Zhuang — President of CSI Solar

Yes. So another topic is once we have a factory in the U.S., and it will take a long time for the U.S. to build a complete value chain. So during which we still have to import upstream components from China or other countries, we want to make sure that is secured, right? So, otherwise, we’re going to have a continuous problem even if we have factory in the U.S.

Mark Strouse — JPMorgan — Analyst

Yeah, that makes sense, thank you very much.

Yan Zhuang — President of CSI Solar

Alright, thank you, Mark.

Operator

And I’m showing no further questions. I turn it back to management.

Dr. Shawn Qu — Chairman and Chief Executive Officer

All right. Thank you, and thanks, everyone, for joining us today and for everyone’s continued support. And if you have any questions, I would like to set up a call please contact our Investor Relationship team.

Take care, and have a nice day.

Operator

[Operator Closing Remarks]