Canadian Solar Inc. (NASDAQ: CSIQ) Q4 2021 earnings call dated Mar. 17, 2022
Corporate Participants:
Isabel Zhang — Director, Investor Relations
Shawn Qu — President, Chairman and Chief Executive Officer
Yan Zhuang — President, CSI Solar
Ismael Guerrero Arias — Corporate Vice President, President of the Energy Group
Huifeng Chang — Senior Vice President and Chief Financial Officer
Analysts:
Colin Rusch — Oppenheimer — Analyst
Philip Shen — ROTH Capital Partners — Analyst
Brian Lee — Goldman Sachs — Analyst
J.B. Lowe — Citi — Analyst
Praneeth Satish — Wells Fargo — Analyst
Presentation:
Operator
Ladies and gentlemen, thank you for standing by. Welcome to Canadian Solar’s Fourth Quarter 2021 Earnings Conference Call. My name is Dilan and I’ll be your operator for today. [Operator Instructions].
I would now like to turn the call over to Isabel Zhang, IR Director at Canadian Solar. Please go ahead.
Isabel Zhang — Director, Investor Relations
Thank you, Operator. And welcome everyone to Canadian Solar’s fourth quarter 2021 conference call. Please note that we have provided slides to accompany today’s conference call, which are available on Canadian Solar’s Investor Relations website, within the Events and Presentation section.
Joining us today are Dr. Shawn Qu, Chairman and CEO; Yan Zhuang, President of Canadian Solar’s majority-owned subsidiary, CSI Solar; Dr. Huifeng Chang, Senior VP and CFO. And Ismael Guerrero, Corporate VP and President of Canadian Solar’s wholly-owned subsidiary Global Energy. All company executives will participate in the Q&A session after management’s formal remarks.
On this call, Shawn will go over some key messages for the quarter. Yan and Ismael will respectively review the highlights of the CSI Solar and Global Energy businesses, followed by Huifeng who will go through the financial results. Shawn will conclude the prepared remarks with the business outlook after which we will have time for questions.
Before we begin, may I remind listeners that management’s prepared remarks today, as well as their answers to questions, will contain forward-looking statements that are subject to risks and uncertainties. The company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from management’s current expectations. Any projections of the company’s future performance represent management’s estimates as of today. Canadian Solar assumes no obligation to update these projections in the future, unless otherwise required the applicable law. A more detailed discussion of the risks and uncertainties can be found in the company’s annual report on Form 20-F filed with the Securities and Exchange Commission.
Management’s prepared remarks will be presented within the requirements of SEC Regulation G, regarding Generally Accepted Accounting Principles or GAAP. Some financial information presented during the call will be provided on both a GAAP and a non-GAAP basis. By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the company’s performance and underlying trends. Management uses non-GAAP measures to better assess operating performance and to establish operational goals. Non-GAAP information should not be viewed by investors as a substitute for data prepared in accordance with GAAP.
And now, I would like to turn the call over to Canadian Solar’s Chairman and CEO, Dr. Shawn Qu. Shawn, please go ahead.
Shawn Qu — President, Chairman and Chief Executive Officer
Thank you, Isabel, and thank you everyone for joining us on our call today. Now please turn to the Slide number 3. I’m very pleased to report that Canadian Solar grew revenue over 50% for the full-year 2021 to a record $5.3 billion. We improved gross margin through the year to 17.2% for the full year and achieved diluted earnings per share of $1.46. When I think back to where the company has come from, it is humbling [Phonetic]. Over the past decade, we have been consistently one of the top module companies and our brand stands for excellence worldwide.
Importantly, we continue to work on creating sustainable value for our shareholders, both in up and down markets. The addition to our record revenue in 2021, we delivered 14.5 gigawatt in solar module shipments, nearly 900 megawatt hour of battery storage shipments and 2.1 gigawatt in project sales. It is important to note that as we grow, we continue to diversify and strengthen Canadian Solar. The fact that we have gone from zero to nearly 900 megawatt hours of battery storage shipments over such a short period showcases the strength and determination of our company. This success is just one of the many opportunities that make us so excited about Canadian Solar’s long-term business prospects.
Now please turn to Slide 4. I’m also pleased to report that we remain on track with the carve-out IPO of CSI Solar. In December, CSI Solar received approval from the star market of the Shanghai Stock Exchange for its proposed IPO. We are currently going through the registration process with the China Securities Regulatory Commission in line with usual procedures. In the meantime, we have started roadshows with strategic investors and the feedback has been encouraging. We believe the listing will be another important development as it will help us capture additional profitable growth opportunities and further unlock value for our shareholders.
Please turn to Slide 5. One of our mission is to build a better and more sustainable future as we explained it in our last ESG report. As a renewable energy company, we help our customers transition to clean energy and reduce their reliance on carbon. Internally, we are leading the way as we reduce our energy and water intensity, increase our use of recyclable materials and to minimize our impact on the environment. Our culture has always been to put people first and treat everyone with dignity. This extends beyond our company to everyone we interact with in the supply chain customers and partners.
I have said as before, but I would like to reiterate that Canadian Solar does not tolerate forced labor or any form of modern slavery and is committed to ensuring that modern slavery does not take place anywhere in our business, including our supply chain. We achieved this through establishing policies and procedures. We have also established implementation measures and verification mechanisms to ensure that our policies and procedures are effective. I encourage you to review these policies, which are publicly available on the governance section of our Investor Relationships website. We welcome your feedback.
Our suppliers have sign on to our supplier code of conduct which is also available on our website. We have been carrying out supplier audits. These are just a few examples of the initiatives we have taken to ensure we stay true to our culture of respect and dignity. This is a priority for us at all levels of the company.
Please turn to Slide 6. Before turning the call over to Yan, I would like to comment on the increased awareness of energy security. Energy demand is outbroken [Phonetic] supply worldwide at a critical time when COVID still lingering and supply constraints occurred across almost all industries. There is no way of getting around it. But with the cost of volume and gas and many other materials reaching new highs and with an ongoing rule, solar is once again the forefront of solutions. We must move and move faster to install more solar systems. Renewable is the only choice given climate change and the need for energy security.
Technology advances like our high efficiency panels and our state-of-art battery storage system will lead the way to a brighter future. This is the right thing to do for our company and for future generations. We remain committed as global citizens. I will continue to invest in R&D to support our vision of increased energy access and energy security.
Let me now turn over the call to Yan. Yan, please go ahead.
Yan Zhuang — President, CSI Solar
Thank you, Shawn. Please turn to Slide 7. I would like to start by thanking our team for their focus and execution, which allowed us to deliver on our planned revenue growth and including profitability in 2021. CSI Solar revenue was $4.4 billion or over 40% growth for the full year. And $1.3 billion in Q4. Gross margin improved sequentially by over 600 basis points to 21.3% driven by further price increases, efficiency improvements in manufacturing costs and lower raw material costs. Gross margin was also helped by the AD/CVD reversal benefit. But even excluding it, gross margin improved over 500 basis points sequentially to 19.4% as Q3 also had an AD/CVD reversal benefit.
Slide 8 please. That said, the operating environment remains challenging with higher transportation and material costs. There were some improvement on the material side in Q4, but that was short lived. So we are factoring in higher transportation costs, longer shipping schedules and higher material costs. Long-term shipping contracts have helped us reduce some of the impact. So this remains a challenge for the industry. And on the material side, given the supply and demand backdrop, there is little incentive for polysilicon pricing to come down significantly, particularly in the first half of this year. Huifeng will give more details on the financial impact, but overall this is, as we talked about last quarter.
Next slide please. We do expect an improvement later in 2022 as silicon capacity ramps up through the year, resulting in lower material costs although it is likely to decline at a greater pace. At the same time the downstream operating environment is improving meaningfully as PPA prices are increasing across most geographies. While you put upstream and downstream pictures together, we’re in a very strong position. As one of the top global solar brands with a very strong track record, we’re gaining share in a growing global clean energy market. We have been growing our global market share from below 6% in 2018 to approximately 9% in 2021 and we think we can reach 15% over the next 3 to 5 years. We expect to expand market share evenly across the globe and especially in important markets such as the US, Europe and China as we grow capacity to support our customer needs. Of course, our goal is to grow profitably and the carve-out IPO should help us achieve this goal.
Please turn to Slide 10. We’re also making significant progress on our battery storage business. We completed nearly 900 megawatt hours of battery storage shipments last year and expect further growth in 2022. In fact this year, we think we can double our volume to 1.8 gigawatt hours. These shipments are mostly to the US where the market is more mature, but we also plan to deliver projects in China and we plan to be active in the UK battery storage market as well. To help accelerate our product innovation, we established a state of the art battery storage R&D workshop in Suzhou in 2021. Interest in this area is high and we have been working with several strategic partners, leveraging their expertise and insight.
Over the next few months, we will formally introduce Canadian Solar’s own energy storage product for utility scale applications using our own proprietary design and technology. Our product was designed to be incredibly competitive and will be one of the safest in the market with long service lines. Currently we use lithium-ion technology but we are technology-agnostic, giving us significant flexibility to work with different types of battery technologies. We plan to make a formal announcement as we get closer to the product launch in a few months. So stay tuned.
With that let me turn over to Ismael for an overview of the Global Energy business. Ismael, please go ahead.
Ismael Guerrero Arias — Corporate Vice President, President of the Energy Group
Thank you, Yan. Please turn to Slide 11. I’m proud to report that we achieved 2.1 gigawatts in project sales in 2021, up 50% compared to 2000. We achieved 65% revenue growth to $1.1 billion and grew our operating profit by over 80% to $97 million. We successfully monetized both solar, and battery storage projects across the US, Brazil, Mexico, Japan, Korea, India and Australia. Crucially, we continue to grow our global pipeline of projects, which now stands at 24 gigawatts of solar and 27 gigawatt hour of battery storage. This gives us added confidence in future monetization and growth opportunities.
This slide provides a summary of our global pipeline as of January 2022. In Q4, Global Energy achieved $232 million in revenue and $8 million in gross profit. This was driven by lower margin project sales in certain regions such as in Brazil, combined with partial sales of projects where we recognize the full cost due to the transfer of controlling ownership of these projects, but only a portion of the profits.
Next slide please, 12. As you are all aware, power prices have increased meaningfully. Last year, we increased our development activities in markets where solar is competitive without incentives, such as in European markets including Spain and Italy where we now have the dominant position. Power prices have materially shifted upwards in most markets and likewise Solar PPAs have also adjusted in the same direction. In addition to economic and environmental considerations, recent geopolitical events are also making solar energy more attractive from an energy security standpoint. We expect a meaningful acceleration in growth in the European market in the coming years and are well positioned to contribute to this growth.
For example, last year in Italy we established the CSFS Fund I, a closed-ended alternative investment fund partnering with patient capital investors to retain ownership of projects over the longer term. We have been building up our pipeline of projects in the region for this fund and we are now the largest developer in the country based on contracted volume. Likewise, we expect to maintain and enhance our leadership position in the US market through our Recurrent subsidiary. On the other hand, we are advancing the geographic exposure of our project portfolio as we proactively manage risk. As an example, Latin America markets have been volatile from an FX and policy risk viewpoint.
We think one of the largest and most successful developers in Brazil where we currently have over 2 gigawatts of projects under execution. However, the Brazilian utility market has been impacted by inflation and hikes in interest rates. While we leveraged our position with inflation-linked PPAs, the inflation adjustment occurs only once a year, limiting our options to realize the true value of these projects. As part of our broader global strategy, we continue to make progress with our Brazilian infrastructure fund. This is on track, but has been slowed since Brazilian government bond yields are trading well into the double digits.
Please turn to Slide 13. Longer term, our strategy remains to retain greater asset ownership in select markets to increase the revenues generated through recurring income, such as power sales, operations and maintenance and asset management income. Our business is difficult to forecast on a quarterly basis given the lumpiness of our project sales and the difficulty to accurately time deal closings. With that in mind, we expect to increase our share of a stable recurring income relative to our project monetization.
We plan to hold on to certain assets for longer when it makes sense from a risk and value creation standpoint. In cases, we believe we can create more value by owning the assets over the long term and operating them ourselves. This is reflected in how we have adjusted certain project sales and retain assets targets to 2025. We are moderating project sales growth, as we will be holding a significant portion of some of them like we already did with the Crimson storage project where we retain 20% ownership. We have similar intentions in Europe as I mentioned earlier. This way, we will be gradually moving from a spot sales business to a recurring revenues one accounting for value creation and cash flow considerations.
Now, let me pass it to Huifeng who will go through the financial results in greater detail. Huifeng, please go ahead.
Huifeng Chang — Senior Vice President and Chief Financial Officer
Thank you, Ismael. Please turn to Slide 14. In Q4, we delivered a $1.53 billion in revenue, up 24% over the last quarter and a 47% year-over-year. Gross margin in Q4 was a 19.7% well above our guidance of 14% to 16%. Gross margin benefited from higher ASPs, lower cost and the AD/CVD reversal true-up. Without the true-up benefit, the gross margin would stand at 18% still ahead of guidance. At the end loaded the trend of cost improvements was short-lived and resume higher in Q1.
Selling and distribution expenses increased 28% quarter-over-quarter and doubled relative to last year. Here, I’d like to highlight the impact of higher transportation costs, which are included in selling and distribution expenses, not a gross profit. This number has been heading up from around $1.05 per watt to currently approaching $0.03 per watt. Now that transportation expenses are variable, the increase with higher shipment volume and the unit costs are increasing as well. Our transportation costs are still lower than spot prices helped by our long-term contracts, but we are slowly moving that towards the spot level and some of these contracts are up for renewal. We do pass on some of this cost to our customers, reflected on our high ASP but it is a higher cost burden nevertheless.
General and administrative expenses increased 8% sequentially, driven by a small manufacturing asset impairment. Research and development expenses increased 43% sequentially driven by higher spending on both our solar and battery storage R&D workshops. Total operating expenses — is up 33% and accounted for 15% of revenues. Excluding transportation costs, our opex is closer to the 8% to 9% region, which is below our historical range of 10% to 12%. Q4 income tax expense was $27 million, reflecting higher revenue from higher tax jurisdictions. This compares to a $3 million income tax benefit in Q3 when we were able to use net operating losses.
For the full year of 2021, the effective tax rate was 26%. We expect this to remain around 25% from an annualized standpoint going forward. Total net income was $40 million and the net income attributable to Canadian Solar shareholders was $26 million. Please note that the variance between total and core net income will increase going forward. This is because Canadian Solar’s ownership in CSI Solar is expected to decline from 80% to approximately 64% after completion of the carve-out IPO. Basic and diluted earnings per share were $0.41 and $0.39 respectively. You will notice that increased the share account. This includes 3.6 million shares from our ATM or at the money equity offering, of which 1 million were in Q4 when the program concluded. In addition, our diluted EPS is adjusted for 6.3 million shares to come for the additional shares at our convertible bond being fully converted into equity.
Now turning to cash flow and the balance sheet. Our working capital days increased moderately as turnover days affected by longer logistical cycles. For the full year of 2021, capex was around $430 million below our previous guidance as we adjusted the capacity expansion plans in light of market conditions. This year’s capex is likely to be higher, currently budgeting over $700 million. We ended the period with a healthy cash balance at $1.4 billion, giving us continued financial flexibility to support our long-term growth opportunities. Total debt increased moderately to $2.4 billion, although leverage measured as net debt to EBITDA, excluding restricted cash declined to 3.3x from 3.7x in the prior quarter.
Before turning the call back to Shawn, I want to highlight that in November 2021, we completed the transfer of the China Energy Asset from CSI Solar to the Global Energy segment. This was done to avoid any potential competition between the company and its CSI Solar subsidiary as part of the CSI Solar carve-out listing process. As a result, Global Energy now has all the Canadian Solar’s product development business, including China. And the CSI Solar contains off of Canadian Solar’s, solar and battery storage manufacturing and system solutions business, including EPC.
The asset transfer has no impact on the consolidated results and it was immaterial from a business segment standpoint. Also as part of the IPO, we may incur a onetime IPO-related stock incentive expense in 2022, continued upon the success completion of the IPO. This is expected to be in the magnitude of approximately $50 million or approximately $40 million after tax. Around 80% of this cost is expected to be incurred in Q2 whilst the remaining expected to be incurred in the second half of the year.
Now let me pass it back to Shawn, who will conclude with our guidance and the business outlook. Shawn?
Shawn Qu — President, Chairman and Chief Executive Officer
Thanks, Huifeng. And let’s turn to Slide 16. For the first quarter of 2022, we expect solar module shipment to be in the range of 3.6 to 3.8 gigawatts, including approximately 210 megawatt of module shipments to our own projects. Total revenues are expected to be in the range of $1.25 billion to $1.35 billion as Q1 tends to be a seasonally smaller quarter. Gross margin is expected to be between 14.5% to 15.5%, reflecting higher manufacturing costs. For the full year of 2022, we reiterate total module shipment guidance to be in the range of 20 to 22 gigawatt.
We raised our total battery storage shipment guidance to 1.8 to 1.9 gigawatt hours from previously 1.4 to 1.5 gigawatt hours. Total project sales guidance is trimmed a little bit to 2.1 to 2.6 gigawatts from 2.4 to 2.9 gigawatts previously as we expect to retain more projects and optimize our monetization strategy. Revenue for the full year of 2022 is raised to $7 billion to $7.5 billion, from $6.5 billion to $7 billion. We faced many market uncertainties, including the war in Ukraine, and recent COVID related lockdowns in China, which may impact our operations, especially logistics. These are the same challenges facing the global industry. We have been proactive in risk management. All that said, our focus is to increase our business resilience, building on our long-term position through strong sales channels and customer relationships and business and technology innovation.
With that, I would now like to open the call to your questions. Operator?
Questions and Answers:
Operator
Thank you, sir. [Operator Instructions]. Our first question comes from the line of Colin Rusch from Oppenheimer. Please go ahead.
Colin Rusch — Oppenheimer — Analyst
Thanks so much. This may be a question for Shawn. With the guidance for the first quarter relative to the full year, this looks like a return to a normal seasonal pattern that we’ve seen disrupted the last couple of years in the solar industry. So I’m curious what you can say about what you’re seeing in terms of initial indications on demand on a geographic basis relative to that seasonal pattern?
Shawn Qu — President, Chairman and Chief Executive Officer
Yes. Colin, we do see some seasonal pattern, as you said, and Q1 used to be a smaller quarter or slower quarter. And — but now we have more gigawatt-sized market around the world. So sometimes, one market can offset another. For example, for this Q1, the Indian market has been very strong. That’s because of the new import duty policy effective on April 1. So there was a lot of shipment rush into India before April 1. So that somehow made the Q1 better.
Now on the other hand, meanwhile, we also see a lot of inquiries from China market, for example. And as you know, China has released its action plan in order to reach the end target and also the 2060 carbon neutral target. So they released the plan to build large-scale data-based solar and wind power base. Now the — so we see that the power companies in China very actively and ask for supply plan. Now if it’s not because of the polysilicon price increase in Q1, I would expect that we have — we could have already taken in quite a significant order from China. But somehow, the polysilicon price turn up again since January. So I guess some customers still waiting and want to better judge the trend. But Q2, we should see some good demand coming from China.
Colin Rusch — Oppenheimer — Analyst
That’s super helpful. The second question is really around the project business, and it’s a two-part question. One, you’ve talked a little bit in the past on trajectory on PPA pricing. I’m just wondering if you can give us an update on kind of year-over-year PK pricing trajectory both in Europe and North America. And then the second question is about the size of the batteries that are attaching to these systems? Are you looking at kind of a 4:1 energy ratio? Or are you looking at larger batteries potentially H6 or H1 energy to power ratios on these systems.
Shawn Qu — President, Chairman and Chief Executive Officer
Hi, Ismael, do you want to take on this question?
Ismael Guerrero Arias — Corporate Vice President, President of the Energy Group
Happy to do so. Thanks for the question, Colin. Look, the PPA market has been moving on a rear wheel over the last couple of years for obvious reasons, right? At the beginning of the pandemic, what we saw is a significant drop on most of the power markets because activity was not there. But as activity started to come back what we saw was a significant increase from previous prices. And what we are seeing today is that in places like Europe, for instance, the price is totally out of the charts and it’s a big concern for politicians right now, for instance, they are considering on changing regulations and all these things. What we have been seeing is in certain — in Europe, in general, it grew around 40% to 50%, I would say from pre-COVID PPAs.
In the U.S., we are seeing that the merchant curves are being updated by all the consultants upwards to a much lower, though but good up, I mean, around 15%, 20%. In Australia, we are seeing similar things. This is what we are seeing right now, but keep some moving. I mean, at least in Europe, what we see is that the market is going to be very strong. On that term we anticipate the same in the U.S., but let’s see.
And the question on storage. Look it truly depends on project by project. And what degrade truly means, right? The main business driver today remains being energy trading. So you will see that happening more and more in markets where volatility is high. Where do we see that happening in the most, of course, in places like islands, right? That’s why in the U.K. and Europe is what is starting to happen. But what we are starting to see is that the regulation is starting to change in places like Spain, for instance, when they give you capacity now, you are required to have some storage or capacity is not going to be granted. We see this moving into the U.S. to market that is hot in the U.S. or everybody is talking about is Texas, for instance. But we need to wait a little bit for the regulation there because as you know, the policies are still under discussion, but I hope I answered your question, but if there is any, is there a way I can.
Colin Rusch — Oppenheimer — Analyst
Yes, that’s helpful. I’ll take the rest of line. Thanks so much guys.
Shawn Qu — President, Chairman and Chief Executive Officer
Hi Colin, I’d like to add a comment. We also see the trend of the requirement to our storage to solar in China. And these days for most of our province in China, the regulatory agency are requiring, for example, 20% of 2 hours, something like for the storage attached to the solar. And so yes, indeed, we are seeing that. But meanwhile, we also see a lot of independent storage project. For example, we are working on a few third-party storage project in U.K., those are independent projects. And for example, working on a few like 1 hour storage project in the size of 20 megawatt, 25-megawatt each. And in U.K., those are all independent power storage only.
Colin Rusch — Oppenheimer — Analyst
Great guys. That’s it for now. Thanks so much.
Operator
Thank you. I show our next question comes from the line of Philip Shen from ROTH Capital Partners.
Philip Shen — ROTH Capital Partners — Analyst
Hi, everyone. Thanks for taking my questions. First one is on the ’22 guide. I was wondering if you might be able to share the revenue mix between the project business and the module business? And then also, in terms of the margin outlook for 2022, I know you gave Q1, but I was wondering if you could talk through the cadence of those margins in — for the rest of the year by quarter? And if you can give a split between the module business and the project business, that would be great. Thanks.
Shawn Qu — President, Chairman and Chief Executive Officer
Isabel, do you want to take on this question?
Isabel Zhang — Director, Investor Relations
Sure. Hi, Philip, this is Isabel. So in terms of the split between CSI Solar and Global Energy for the revenue guidance for this year, — this year, from a revenue standpoint, CSI Solar will take a much bigger rate. So we’re talking about probably around 4, 6 or even more of that wage coming from CSI Solar. And then in terms of guidance or margin guidance, I think we’re looking at a Q1 is a little bit softer than in Q4, but we do expect margins to improve through the year.
Philip Shen — ROTH Capital Partners — Analyst
Great. Thanks, Isabel. Can you talk about the margins expected by segment between the project business and the module business?
Shawn Qu — President, Chairman and Chief Executive Officer
Isabel? Yes, I guess…
Isabel Zhang — Director, Investor Relations
Sorry?
Shawn Qu — President, Chairman and Chief Executive Officer
I said, I guess the question is also for 2022, right, Philip?
Philip Shen — ROTH Capital Partners — Analyst
That’s right. Thanks.
Isabel Zhang — Director, Investor Relations
For the — so obviously, we haven’t given full year margin guidance yet at this point. But overall, I would say that the margin outlook for the two businesses shouldn’t vary too much for the full year.
Philip Shen — ROTH Capital Partners — Analyst
Okay. Great. Thanks for that. As it relates to the demand outlook in Europe, I was wondering if you guys have seen a material change yet. And if you could quantify that or talk through how you’re seeing that play out in your business and in your conversations with distributors and customers? Thanks.
Shawn Qu — President, Chairman and Chief Executive Officer
Hi, Yan, do you want to take on this question? Module demand — demand change in Europe, right?
Yan Zhuang — President, CSI Solar
Yes. So for now, short term, actually, we don’t have much exposure directly relating to the war. We have no — almost no — we have absolutely no business in Russia and almost no business in Ukraine. But logistic-wise, we see some impact, minor impact for now. Long term, long term-wise, we see actually some positive movements because it looks like the demand for renewable energy in Europe is actually going up. And the increasing power price in Europe also can actually benefit renewable energy. So we see potentially, we see actually in mid, long term. This is actually — we see increasing demand.
Philip Shen — ROTH Capital Partners — Analyst
Okay. Thanks, Yan. And then as it relates to…
Yan Zhuang — President, CSI Solar
For the demand, it’s actually also warming up. Actually, it was a bit difficult in the entire last year from Europe, but now we see a steady growth in demand overall as well.
Philip Shen — ROTH Capital Partners — Analyst
Okay. Thanks, Yen. As it relates to the U.S. ADR delisting risk, I was wondering if you might be able to talk through that a bit. This has been a theme over the past couple of weeks and a key reason cited for weakness in your stock and other stocks. What do you expect to happen ahead with the SEC? And do you expect to be in compliance with the relevant regulations, et cetera? Thanks.
Shawn Qu — President, Chairman and Chief Executive Officer
Philip, yes, we are implying. So that’s a short answer. Yes, okay. Thank you.
Philip Shen — ROTH Capital Partners — Analyst
Great. Okay. I’ll leave it there and pass it on. Thanks.
Operator
Thank you. I show our next question comes from the line of Brian Lee from Goldman Sachs. Please go ahead.
Brian Lee — Goldman Sachs — Analyst
Hey, guys. Thanks for taking the questions. Maybe just a quick follow-up to Phil’s question around margins by segment. I know there was some lower-margin project sales in Q4 that depressed the margin to that low single-digit level. It sounds like you’re inferring that margins will bounce back to sort of the mid-teens-ish level, for projects and then for modules or for CSI Solar it’s going to come off the kind of 19% level, I suppose, into the mid-teens. Is that what you’re inferring here for Q1 as well as for 2022?
Shawn Qu — President, Chairman and Chief Executive Officer
Brian, as actually Isabel said that we are not giving first of all, we’re not giving the 2022 margin guidance yet. We only provide the Q1 margin guidance. For Q1, the CSI Solar margin and the project margin similar or in the same range. So moving down the quarter, although we are not giving margin guidance yet, but we are expecting the module — solar module or the CSI Solar gross margin to go up and hopefully go up to 18%, 19% level, which match 2021’s annual level.
However, you should know that we’re now facing another challenge, which is still logistic. Logistic used to be just over $0.01 per watt when the module price is at $0.30 per watt. But now module price has dropped and the logistic price went up. So the 18%, 19% gross margin in U.S. GAAP doesn’t translate to a very high margin after you take out the selling expenses, which include the logistics.
Brian Lee — Goldman Sachs — Analyst
Okay. Fair enough. I appreciate that color. I guess maybe to follow up on that then, two questions. Just I know last quarter, Huifeng had talked about pricing panels. Obviously, last year was up, but it sounds like they’re already starting to soften a bit here. Can you kind of speak to what you’re quoting generally over the next couple of quarters? Are you anticipating modest kind of low single-digit, mid-single-digit declines in module pricing?
And then secondly, on the logistics cost, shipping costs you’re talking about, Sean, do you have any I guess, mitigation strategies or contracts or any arrangements where you can sort of offset these shipping cost headwinds? Or are you just purely exposed to whatever spot freight and shipping rates are doing in the market.
Shawn Qu — President, Chairman and Chief Executive Officer
Yes, I would let Yan to take on this question first. And then I’ll add my comment. Yan?
Yan Zhuang — President, CSI Solar
All right. On pricing side, I think the project side, we’re observing that PPA is actually turning up with — together with the power price going up. And so we are observing that projects investors are slowly moving after tolerance level on the cost.
So this is we are observing as well. So it’s not going really fast, but it’s steadily going up. So this is something good, allowing us to absorb the high cost by increasing module price slowly whenever necessary. So this — over the year regarding the price trend, I would say we’re in the very elastic market.
In the past, the total installed — installation base annually is relatively more dependent because it’s more policy driven. But now it’s different. It’s more free market. So it’s more elastic against material supply and price. So we also observed on supply side that the silicon capacity is going to ramp up rapidly over the year. So we think in the second half of the year a certain point, we should observe that silicon price is going down. So together, is going to help us on gross margin over the year. In terms of shipping cost, on one hand, we have locked part of the total shipping plans with the fixed shipping cost, not 100% for sure because we’re at a very high point.
And secondly, we also believe that if the world situation has been resolved, we may see a chance that shipping costs in the situation may be eased. Actually, we already observed we’re already observing that U.S. site, the logistics, especially the port congestion situation has been improved already significantly especially on the East Coast and on the West Coast, we also observed improvement. So we think we remain positive moving into second half.
Shawn Qu — President, Chairman and Chief Executive Officer
Yes. This is Shawn. In terms of the shipping arrangement. In the past two years, we’re typically are locking about 40%, 50% with the shipping company for the annual contracts. So last year, we benefited from those annual shipping contracts so that our mixed average shipping cost lower than the spot cost. However, those are annual shipping contracts. And as those contracts expire, we have to sign the new and new shipping contracts.
And the shipping — annual shipping contract for 2022 higher, the price are higher than 2021. That’s why we’re seeing more the shipping cost impact this quarter in Q1. However, meanwhile, as Yan said, we also observed that the logistic situation started to improve in some of the areas, for example, for the lines to South America and the ocean cargo price has significantly reduced. And also, as Yan said, and the — for the U.S., I think the U.S. East Coast shipping cost has already started to go down. Now the U.S. West Coast shipping and ocean cargo price are still high. However, the poor congestion situation is getting improved. So we do see — we hope that the logistics is getting improved from Q2 on.
Brian Lee — Goldman Sachs — Analyst
Okay. That’s great to hear. I appreciate that additional color, Shawn and Yan. Maybe one last one for me, I’ll pass it on. On the battery storage business, I appreciate you breaking out the $500 million revenue target here for 2022. Can you speak to sort of what’s happening in that business from a margin perspective just given all the different inflationary trends that are happening in certain raw materials for batteries. Kind of what’s your supply situation? What’s your cost situation? And maybe just level set us as to the type of cells you’re using and what sort of exposure you have in general, but I really wanted to understand the margin situation there. Thank you guys.
Shawn Qu — President, Chairman and Chief Executive Officer
Yes. I will let Yan take on this question.
Yan Zhuang — President, CSI Solar
Thank you, Shawn. Well, that’s a good question. First of all, I want to say that the planned volume for 2022, we already secured the sales supply. So that is already building. And secondly, in terms of margin, it is about 10%, low teens around 10% on gross margin. However, in terms of net profit, it’s actually — or you could that contribution margin is actually much better than module. Because this business, we do not have the heavy opex or neither heavy capex. So it translates into net profit better.
In terms of business model, I want to point out that Canadian — CSI Solar’s business model on utility scale storage is quite different from our competitors. Reason for that is, you know that some module manufacturers in China also do a storage business. But our business model is we are not just shipping the equipment to the project, we are the system integrator ourselves. So we do the EPC ourselves. And we also provide the solution, the equipment. And aside from the turnkey side of the project, which is the first contract we fund on any project. We have a second contract, which is a long-term service agreement. So we also enjoy lifelong service fee on O&M and on the augmentation and on any possible storage expansion project. So this is something that makes us unique and more robust in terms of volume — sorry, in terms of revenue and profit sustainability.
Cellwise, as I said, it’s lithium-io. And we are working with both BID and CATL and as well as the EVE and some other Tier 2 battery cell manufacturers. And we’re actually — as we already mentioned, we start to ship our own projects, our own system, own storage containers start in a couple of months’ time, which is a very competitive product. And so we’re actually taking control of the manufacturing process, and we’re also going upstream on other technologies. For example, we invested in a leading BMS company, a leading storage BMS company in China. We were an investor in another company in London, right? So we talked about that before, Habitat on AI. so this is our strategy. So we start from system integration and long-term service agreement. And then from there, we’re taking control of our manufacturing process as well as try to take ownership of technologies upstream. Thank you.
Brian Lee — Goldman Sachs — Analyst
Thanks a lot guys. Appreciate it. I’ll pass it on.
Operator
Thank you. I show our next question comes from the line of J.B. Lowe from Citi. Please go ahead.
J.B. Lowe — Citi — Analyst
Hey, guys. Thanks a lot. We’re running out of time here. I just wanted to throw a couple of quick ones if I could. Number one, have you seen any impacts from COVID lockdowns in China on your business?
Shawn Qu — President, Chairman and Chief Executive Officer
Yan, you want to handle this question?
Yan Zhuang — President, CSI Solar
Yes. So it has a first minor impact on logistics right now for — mainly for the month of March. I would say, more like after mid of March. So of the 10th of March. So the impact is very limited, minor.
J.B. Lowe — Citi — Analyst
Okay. Great. Next one was — I know, Huifeng, you mentioned this in your prepared remarks on the cost of logistics on a per watt basis. Can you kind of describe how — like what was the logistics cost on a per watt basis in 4Q? And what are you kind of expecting that to be in 1Q? And then given that you’re recontracting some of your volumes with shipping companies over the course of 2022. How do you expect those logistics costs on a per watt basis to trend over the course of 2022? Thanks.
Shawn Qu — President, Chairman and Chief Executive Officer
Isabel, do you want to handle this question?
Isabel Zhang — Director, Investor Relations
Yes. Hi, J.B. This is Isabel. So the cost in Q4 was between $0.025 to $0.03. And for most of this year, we are expecting it to be around this level.
J.B. Lowe — Citi — Analyst
Sorry, around what?
Isabel Zhang — Director, Investor Relations
$0.025 to $0.03.
J.B. Lowe — Citi — Analyst
Okay. So same level in 2022 versus 4Q. Okay. Perfect. And then last one for me is, can you just tell me what your exposure is to Europe? Or what was your exposure to Europe in 2021 in the CSI Solar business on a percentage of revenue basis? And do you expect that to be higher in 2022?
Shawn Qu — President, Chairman and Chief Executive Officer
Isabel, you want to handle this question?
Isabel Zhang — Director, Investor Relations
It’s about 20%. We expect this waiting to be roughly the same year-over-year.
J.B. Lowe — Citi — Analyst
Okay. Great. Thanks so much.
Shawn Qu — President, Chairman and Chief Executive Officer
Thanks. Thanks, J.B.
Operator
Thank you. I show our last question comes from the line of Praneeth Satish from Wells Fargo. Please go ahead.
Praneeth Satish — Wells Fargo — Analyst
Thanks for taking my question. I was wondering if you could just elaborate on the new battery product that you plan to launch. I guess what are the key benefits versus competitors? And then do you expect a material margin improvement from launching your own product?
Shawn Qu — President, Chairman and Chief Executive Officer
Yan, this is your favorite question. Why don’t you handle it.
Yan Zhuang — President, CSI Solar
Well, so short answer, sure. So by manufacturing our own products with our own technology will significantly improve our margin. So comparing just buying ODM product from suppliers. And in terms of our technology, our product, so we have compared with our with the current available products in the market. And obviously, we’re very confident about our product in terms of different dimensions. And first of all, is the cost. When we’re talking about the cost, it’s not just Street capex, but it’s also in stock cost. So whatever solution that — with different designs, you have different shipping costs, you have different installation costs. So on that, we’re confident that we have advantage.
And also on the safety side. It’s a liquid cooling system, and we have studied the market — all the products in the market, and we’re confident that the safety standard that we have is actually — we think we have a clear advantage. It’s not just the temporary management but also the poisonous gas management and also, of course, energy density as well. So it’s — we’ve been into this area for a long time. Starting from many years ago, we had the first project in Canada and then 4 years ago, we had our own R&D team in the U.S. and then spread that into Canada, into China, in England. So we spent quite a number of years in those areas already. So we also start to do R&D on energy storage tailor-made battery cell technology.
So we understand that we have to think about the technology differentiation against the EV industry. So this is something that’s important. But the short midterm, we also spend a lot of effort on working with our suppliers on battery cell side. So we have established quite a few strategic partnership with the suppliers. We do see some battery sales suppliers started increasing attention to energy storage because all the newcomers in this industry, they have to think about their fast entry into the industry with volume and energy storage obviously is easier access to them. So — but we — but talking about that, it’s — we also see that there’s a differentiation already on battery cell side in terms of design, for example, the size of the battery cell is now bigger than the EV industry. So I hope this answers your questions.
Praneeth Satish — Wells Fargo — Analyst
No, that’s very helpful. I appreciate it. And then I guess just last question for me. Maybe if you could comment on your capex spending outlook for ’22? And also just on your funding needs, will you continue to access the ATM program this year? Thanks.
Shawn Qu — President, Chairman and Chief Executive Officer
Huifeng?
Huifeng Chang — Senior Vice President and Chief Financial Officer
Yes, the ATM program we have registered last year has already completed the $150 million. Of course, we have the option to do another one. But at this point, we don’t see this need yet. And also for capex, last year, we spent about $450 million, which is less than what we budgeted. And then for 2022, because our scale now is much larger and we see more opportunities. So the capex on the budget is raised to $700 million.
Praneeth Satish — Wells Fargo — Analyst
Great. Thank you.
Shawn Qu — President, Chairman and Chief Executive Officer
I would like to add some color. Yes, I would like to add some color here. This is Shawn. As you know, our strategy is to increase the vertical — the level of vertical integration in our solar module business. So our target is to have our solar cell capacity roughly 70% to 80% of our module capacity while our income wafer capacity at 70% to 80% of our solar cell capacity. That’s why in order to support the 7 gig — the 20 gigawatt module shipment this year and probably even higher module shipment in 2023, we need to further expand our solar cell and also the solar wafer capacity.
And not to mention that we to expand our capacity now, we can use the state-of-the-art new technologies so that we’ll be able to have better technology and better equipment than our competitor. That’s why you see higher capex numbers, the capex budget this year. And of course, this budget is subject to change, especially subject to the timing of the carve-out IPO in China. And right now, as we said, the carve-out IPO in China is on track.
Praneeth Satish — Wells Fargo — Analyst
Great. Thank you.
Shawn Qu — President, Chairman and Chief Executive Officer
Thank you.
Operator
Thank you. I’m showing no further questions in the queue. This concludes our Q&A session. At this time, I’d like to turn the call back over to management for closing remarks.
Shawn Qu — President, Chairman and Chief Executive Officer
Thank you, and thank you, everyone, for joining us today for your continued support. If you have any questions, I would like to set up a call. Please contact our Investor Relations team. Take care, and have a nice day.
Operator
[Operator Closing Remarks]