Canadian Solar Inc

NASDAQ:CSIQ

Earnings Call Analysis

Canadian Solar Reports Q2 Success Amid Industry Challenges

In the second quarter, Canadian Solar achieved notable results, shipping 8.2 gigawatts of solar modules, exceeding their previous guidance. Despite pressures in the market, they maintained competitive pricing and generated $1.6 billion in revenue with a 17.2% gross margin. The company observed market rationalization, driving out less competitive players. Canadian Solar's diversified operations, including a 500% growth forecast in their energy storage segment, positioned them well for future demand. While challenges remain, particularly in price pressures, the company's strategic investments and strong North American performance underpin a positive outlook for the second half of the year and beyond.

Strong Performance Amid Market Challenges

In the second quarter of 2024, Canadian Solar showcased resilience by delivering 8.2 gigawatts of solar modules, surpassing guidance of 7.5 to 8 gigawatts. This achievement led to a revenue of $1.6 billion, with a gross margin maintained at 17.2%. The company successfully balanced increased volume with competitive pricing, even as peers in the solar industry faced significant losses.

Forecast for Growth and Strategic Positioning

Canadian Solar anticipates ambitious growth in its energy storage division, expecting over 500% growth in 2024. The company is well-positioned to leverage emerging technologies like AI and electric vehicles, which are expected to drive future demand for renewable energy solutions. As of now, the energy storage sector, with a cumulative target of 1 terawatt-hour by 2027, is becoming increasingly significant for Canadian Solar's long-term strategy.

Market Dynamics and Demand Challenges

Despite positive growth indicators, CEO Shawn Qu acknowledged challenges within the solar sector, particularly the need for market rationalization and supply-demand balance. Price pressures have influenced competitor dynamics, suggesting a potential extended downturn. However, Canadian Solar's diversified approach allows it to navigate these challenges effectively.

Financial Insights and Operational Adjustments

During Q2 2024, Canadian Solar experienced a net cash outflow of $429 million primarily due to increased project assets and accounts receivable related to higher module sales. This prompted a downward revision of capital expenditures for FY 2024 to approximately $1.2 billion. The company’s strategic initiatives included reducing debt for CSI Solar while adjusting Leverage for Recurrent Energy to support asset accumulation.

Third Quarter Expectations and Guidance

For Q3 2024, the company expects solar module shipments between 9 to 9.5 gigawatts and revenue ranging from $1.6 billion to $1.8 billion. Gross margin is predicted to be between 14% and 16%, reflecting underlying market pressures but bolstered by robust performance in the e-STORAGE segment, expected to yield record revenues in Q4. This conservative yet optimistic guidance underscores Canadian Solar's commitment to profitability over sheer volume.

Recurrent Energy and Long-Term Opportunities

Canadian Solar's project development arm, Recurrent Energy, is transitioning towards a partial Independent Power Producer (IPP) model, which will dampen short-term revenue contributions but position the company for sustainable growth in the future. The firm currently boasts a significant backlog of projects, alongside secured financing that is expected to unlock new revenue streams by 2025.

Commitment to Sustainable Practices

In its sustainability endeavors, Canadian Solar reported substantial reductions in greenhouse gas emissions and other environmental impacts. The company continues to prioritize ethical labor practices and aims to power its global operations entirely with renewable energy by 2030, reinforcing its commitment to corporate social responsibility.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to Canadian Solar's Second Quarter 2024 Earnings Conference Call. My name is Rob, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Wina Huang, Head of Investor Relations at Canadian Solar.

[Wina Huang, executive]

Thank you, operator, and welcome, everyone, to Canadian Solar's second quarter 2024 conference call. Please note that today's conference call accompanies slides, which are available on Canadian Solar's Investor Relations website within the Events and Presentations section.

Joining us today are Dr. Shawn Qu, Chairman and CEO; Yan Zhuang, President of Canadian Solar's subsidiary, CSI Solar; Ismael Guerrero, Corporate VP and President of Canadian Solar's subsidiary, Recurrent Energy; and Xinbo Zhu, Senior VP and CFO. All company executives will participate in the Q&A session after management's formal remarks. On this call, Shawn will go over some key messages for the quarter. Yan and Ismael will review business highlights for CSI Solar and Recurrent Energy respectively Xinbo will go through the financial results. Shawn will conclude the prepared remarks with the business outlook, after which we will have time for questions.

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

Management's prepared remarks will be presented within the requirements of SEC Regulation G regarding Generally Accepted Accounting Principles or GAAP. Some financial information presented during the call will be provided on both a GAAP and non-GAAP basis. By disclosing certain non-GAAP information, management intends to provide investors with additional information to enable further analysis of the company's performance and underlying trends. Management uses non-GAAP measures to better assess operating performance and to establish operational goals. Non-GAAP information should not be viewed by investors as a substitute for data prepared in accordance with GAAP.

And now I would like to turn the call over to Canadian Solar's Chairman and CEO, Dr. Shawn Qu.

[Shawn Qu, executive]

Thank you, Wina, and thank you all for joining our second quarter call today.

Please turn to Slide 3. In the second quarter, we delivered strong results. We shipped 8.2 gigawatts of solar modules, surpassing our previous guidance of 7.5 gigawatts to 8 gigawatts. While increasing volume, we maintained competitive average selling prices, resulting in revenue of $1.6 billion and a gross margin of 17.2%, both in line with our previous -- both in line with our guidance.

Over the past few months, we have observed signs of market rationalization. Record low prices are driving out uncompetitive players. Meanwhile, our industry peers, they announced significant first half losses. In comparison, we have performed well, striking a delicate balance between volume and profitability. I'm proud of what we have accomplished in one of the most challenging industry cycles I have experienced in my career.

The underlying fundamentals of solar remain robust. As I have mentioned before, AI-driven data center expansion, electric vehicles, cryptocurrency and other emerging technologies will generate substantial demand for clean energy. Solar and energy storages will also contribute -- will also continue to be a major trend. We must not forget that the distance to meeting our global climate goals remain large. However, the challenges ahead should not be underestimated. It will take time to rebalance supply and demand in solar given that today's industry competitors have more scale and resilient than ever before.

How will we navigate a potentially extended downturn? Please turn to Slide 4. Canadian Solar is a diversified business with complementary divisions that enable us to not only weather, but also succeed in this challenging industry landscape. To date, our module business has reached an optimal scale, marking us to maintain a highly competitive cost structure yet linking us to adapt swiftly to change in industry dynamics.

Our approach to capacity investments has always been strategic, carefully balancing vertical integration, the right technology mix and magnitude. At the same time, we are positioning ourselves for sustainable growth through our rapidly expanding energy storage segment, a business for which we began laying the foundation 10 years ago. We are on track to grow by more than 500% this year and we are doing so at industry-leading margins. Wood Mackenzie forecasted a cumulative energy storage base of 1 terawatt hour by 2027. We have the expertise to grow alongside this market.

Complementing our global manufacturing expertise in both solar and energy storage are our outstanding business teams. These local experts have enabled us to develop both global operations and a truly global brand. Finally, our project development platform, Recurrent Energy, is poised to deliver additional long-term value as it transitions to be a global developer, owner and operator of solar and storage assets. A key element of our growth strategy is to do so sustainably and ethically.

Please turn to Slide 5. In May, we proudly published our latest corporate sustainability report, which features expanding disclosure and enhanced transparency. Highlighting our few achievements. In 2023, Canadian Solar achieved reduction in greenhouse gas emissions by 37%, energy consumption also by 37%, water usage by 72% and waste intensity by 54% compared to the levels in 2017.

Additionally, we remain on track to meet our target of powering all global operations with 100% renewable energy by 2030. As we have consistently emphasized, ethical labor practices are of utmost importance to us, also within our operations and throughout our supply chain. As a participant in the United Nation Global Compact, which we adhere to the UNGC's 10 principles of human rights, labor practices, environmental protection and business ethics.

To ensure the integrity of our operations and supply chain, we also engage with responsible business alliance to conduct validated assessment programs on that at our facilities and those of our suppliers. The RBA VAP audit is an industry-leading standard for on-site manufacturing evaluations, assessing labor practices, health and safety, environmental impact, ethics and management systems.

Finally, we remain committed to promoting diversity, equity and inclusion. At Canadian Solar, we foster our productive workforce that benefit from diverse perspectives in decision-making processes. Our newly included gender pay analysis review that women at Canadian Solar earned 95% of what men earned in 2023 with the remaining 5% gap deemed equitable.

In conclusion, I'm pleased with our achievements in the second quarter and the first half of this year. We have demonstrated the resilience of our business in challenging circumstances and remain vigilant in our work moving forward.

I will now turn the call over to Yan, who will provide more details of our CSI business -- CSI Solar business.

[Yan Zhuang, executive]

Thank you, Shawn.

Please turn to Slide 6. In the second quarter of 2024, we shipped 8.2 gigawatts of modules, marking a 30% quarter-over-quarter growth. We generated revenue of $1.7 billion and achieved a gross margin of 16.7%. Despite the industry facing record losses, CSI Solar delivered an operating income of $93 million. Our revenue and profitability were bolstered by strong performance in North America, which accounted for approximately 30% of our shipments. In most other regions, average selling prices remain challenging. We managed our orders stringently. This coupled with a reduction in cost, supported our financial performance.

To walk through key drivers of our module business, please turn to Slide 7. Alongside the rapid decline in polysilicon prices, the entire supply chain is under pressure, leading to continued cost reductions. While this trend may initially seem concerning, it highlights the advantages of our partial vertical integration. We can flexibly source upstream materials at prices that enhance our competitive cost structure.

In line with our flexible strategic manufacturing approach, we're moderating our capacity expansion plans to capitalize on current market conditions. Specifically, we intend to delay upstream investments until a more opportune window, reducing our planned capital expenditures this year. Thanks to our ongoing technological advancements, anti-TOPCon costs are now nearly aligned with those of PERC. Today, TOPCon technologies and industry standards, offering lower levelized cost of energy compared to mass-produced non-crystalline technologies. This means our customers benefit from using less land, installing fewer trackers, reducing end-of-life disposal costs and more.

As I mentioned, our U.S. business remains strong with higher volumes delivered at competitive prices in the second quarter compared to the first. We currently have contracts signed and under active negotiations through to 2030. In the U.S., bankability is even more critical than in other markets and customers prefer to buy from a select group of Tier 1 suppliers where trust and the proven track record are paramount.

As in the past, during periods of uncertainty, we continue to actively service the U.S. market. In addition, we are investing over $1 billion in the U.S. to ramp up 2 state-of-the-art and highly competitive manufacturing facilities. One facility is already producing solar modules in Mesquite, Texas, while the other will manufacture solar cells in Jeffersonville, Indiana. Together, these facilities will create more than 2,500 American manufacturing jobs. As a domestic manufacturer, we believe that regulatory certainty and clarity are essential for maintaining a long-term resilient solar industry in the United States.

Now turning to our e-STORAGE business. Please go to Slide 8. In the second quarter, we continued to achieve record shipments, delivering approximately 1.5 gigawatt hours globally. Our backlog continues to grow and now stands at $2.6 billion. Our key markets include the United States where we have a long-standing track record across all our businesses as well as the United Kingdom, Australia, Canada and other countries we're entering as we expand the business.

One deal in our backlog that I would like to highlight is our contract with Nova Scotia Power to develop flagship energy storage projects across these -- across 3 locations in Nova Scotia; Bridgewater, Waverley and White Rock. These projects totaling more than 700 megawatt hours will play a crucial role in enhancing grid reliability and stability. As Canadians, we take pride in making a significant environmental impact at home, contributing to both provincial and federal targets of achieving 80% renewable energy by 2030.

The growth potential for e-STORAGE is enhanced. As of June 30, 2024, our total project turnkey pipeline for e-STORAGE stands at approximately 66 gigawatt hours. This pipeline includes both contracted and in construction projects as well as projects in various stages of negotiation. Moving forward, we expect to continue growing volume at healthy margins. With the support of our energy storage segment and the continued strategic management of our module business, we anticipate the second half of the year to be stronger than the first.

Now I will hand it over to Ismael to provide an overview of Recurrent Energy, Canadian Solar's global project development business.

[Ismael Arias, executive]

Thank you, Yan.

Please turn to Slide 9. Second quarter results were relatively modest with no major project sales. We generated $50 million in revenue with a gross margin of 47.4%. During our transition to another focus on accumulating operating assets, project sales will be lighter. In the second half, due to policy changes in Europe, our projects will experience delays between 1 to 2 quarters in Spain and longer in Italy, depending on the region. Within the U.K., we obtained approval on several projects. We also anticipate potential interconnection delays in certain parts of the U.S. These risks we will continue to manage through our hybrid developer owner and operator business model with global presence.

Since the announcement of BlackRock's $500 million investment in January, we have made significant progress, securing the requisite regulatory approvals and making internal operating milestones. We are pleased to have announced the initial closing, representing $300 million of the planned capital infusion. A key aspect of the growth expected from this transaction is our ability to secure the financing needed to support the construction and monetization of our high-value pipeline projects.

Over the past few months, we continued to obtain competitive financing at both the operational and construction levels. In May, we secured a landmark multi-currency revolving credit facility valued at up to EUR 1.3 billion, involving 10 banks to support the construction of renewable energy projects across several European countries. In June, we obtained $513 million in project financing for our 1.2 gigawatt hour storage project in Maricopa County, Arizona. Papago Storage is the largest energy storage project in Arizona and holds a 20-year tolling agreement with Arizona Public Service company.

The battery energy storage system used for this historic project is sourced from Canadian Solar's e-STORAGE division. Also in June, we closed a $103 million tax credit facilitation agreement with Bank of America for our 160 megawatt North Fork Solar Project, which is already in operation. This transaction marks our first production tax credit deal and exemplifies our ability to execute globally to optimize our funding access.

Please turn to Slide 10. We continue to lay the groundwork for long-term shareholder value. We have expanded our total development pipeline to 27 gigawatts hours of solar and 63 gigawatt hours of battery energy storage. Our pipeline is valuable not only for its scale and geographical diversity, but also because of the interconnections we can secure and the competitive PPAs we negotiate with top-tier counterparties.

For example, we recently signed a 10-year PPA with GKN Automotive, a global leader in drive systems. This agreement will facilitate the annual production of approximately 200 gigawatt hours of renewable electricity and marks GKN Automotive's first renewable energy PPA in Europe. Across the world in Japan, we entered to a 20-year PPA with Toyota Tsusho Corporation to secure 100% of the solar power along with the Non-Fossil Certificates generated by 3 of our solar projects. This accomplishment marked our first private PPA with Toyota Tsusho, a key member of the Toyota Group.

Recurrent Energy currently owns 1.6 gigawatts of projects in operation and 1.7 gigawatts under construction along with 1 gigawatt hour of best projects in operation and 3.8 gigawatt hours under construction. The vast majority of these projects are fully funded and secured with PPA contracts, positioning us to begin generating substantial revenues from 2025 onwards. Additionally, we have around 10 gigawatts of PV and 16 gigawatt hours of BESS with granted interconnections, which are expected to be ready in the near-term, driving significant growth. Our O&M business continues to grow steadily with 11 gigawatts of contracted projects, making it one of the largest operational fleets globally. This steady growth is supported by our own project portfolio, which provides clear visibility into future expansion.

Now let me hand it over to Xinbo, who will go through our financial results in more detail.

[Xinbo Zhu, executive]

Thank you, Ismael.

Please turn to Slide 11. In the second quarter, we achieved revenue of $1.6 billion and a gross margin of 17.2%, both of which were in line with our guidance. The sequential increase in revenue was primarily due to a higher volume of solar module shipments, partially offset by a decline in module ASP. Gross margin decreased 180 basis points quarter-over-quarter, mainly due to lower module prices.

Total operating expenses in the second quarter increased to $234 million, primarily driven by higher shipping and handling expenses. Freight costs are likely to remain elevated in the second half of the year given the ongoing Red Sea and the industry's efforts to clear shipment backlogs from Asia to the United States and Europe. Net interest returned to a normalized level in the second quarter, following the absence of an interest benefit derived from the interest income generated by anti-dumping and the countervailing duty deposit refunds in the first quarter of 2024.

Net foreign exchange and derivative gains in the second quarter of [ 2026 ] amounted to $13 million, mainly driven by the weakening of the Chinese yuan and the Japanese yen against the U.S. dollar. Total net income was $27 million, while net income attributable to Canadian Solar was $4 million or $0.02 per diluted share. Basic and diluted earnings per share included the Recurrent Energy redeemable preferred share dividend payable in kind that is associated with BlackRock's investment, resulting in an EPS effect of $0.03 deducted on a dilutive basis.

Here, I want to address the impact of Recurrent Energy's business model transformation on Canadian Solar's P&L in the near to mid-term. As Recurrent transitions to a partial IPP model and accumulate more assets, 2 key effects will emerge. First, Recurrent will sell fewer projects, leading to a lower contribution to Canadian Solar's P&L. Second, as more projects are retained on balance sheet, a greater portion of revenue and gross profit created by CSI Solar will be eliminated at the consolidated group level. The unrealized CSI Solar revenue and gross profit on premium sales to Recurrent for those projects will be recognized gradually over the life of the project assets. Due to these effects, during the transition period, Canadian Solar's P&L will be systematically and consistently lower than that of CSI Solar, while Recurrent assets will deliver value longer term.

Now let's discuss cash flow and the balance sheet. Please turn to Slide 12. Net cash flow used in operating activities in the second quarter of 2024 was $429 million. The operating cash outflow was primarily driven by increased project assets due for sale and increased accounts receivables mainly associated with higher module sales during the second quarter.

Regarding debt, going forward, CSI Solar and Recurrent Energy's leverage profiles will align with their respective strategic goals. This quarter, CSI Solar reduced its debt, optimizing its financial leverage to better navigate the industry cycle. Meanwhile, Recurrent Energy will continue to increase leverage in the near-term to support its transition to a partial IPP model. In summary, total financing at the half year mark stood at $4.2 billion with a decrease at CSI Solar and a net increase at Recurrent Energy.

In the second quarter, we spent approximately $390 million in manufacturing capital expenditures. As Yan mentioned earlier, in light of market conditions, we are dialing back our upstream capacity plans. We have revised our full year 2024 capital expenditure expectations downward to approximately $1.2 billion. We ended the period with a cash position of $2.2 billion, reflecting CSI Solar's debt repayments, Recurrent's solar and storage asset growth and change in working capital.

Lastly, I would like to speak to the private convertible bond announced on Monday. Please turn to Slide 15. The rationale for this transaction is both financial and strategic. From a financial perspective, the notes provide us a versatile financing solution, offering a flexible drawdown schedule and the reasonable funding costs. From a strategic standpoint, we are pleased to welcome PAG as a new potential equity partner.

Please turn to Slide 14 for additional comments. With more than $55 billion in assets under management, PAG is among a select group of global investment managers with specialized capital pools across multiple asset classes dedicated to investing in renewable energy. PAG is an experienced investor in the solar sector. After acquiring the First Solar Japan platform in 2022, it expanded its portfolio to over 600 megawatt across Japan. PAG is also the largest owner of distributed solar projects in Hong Kong. PAG is well positioned to partner with CSIQ to strengthen the company's market leading position across the solar value chain. In key operating markets, we anticipate that PAG will collaborate with Canadian Solar to explore and realize strategic synergies.

Now let me turn the call back to Shawn, who will conclude with our guidance and business outlook.

[Shawn Qu, executive]

Thank you, Xinbo.

Please turn to Slide 15. For the third quarter of 2024, we expect solar module shipments by CSI Solar to be in the range of 9 gigawatts to 9.5 gigawatts, including approximately 100 megawatts of solar module shipment to our own project. Total battery energy storage shipments are expected to be between 1.4 gigawatt hours to 1.7 gigawatt hours, including about 1.2 gigawatt hours for our own project. This significant volume to our own project is primarily for Papago Storage, a landmark project in Arizona developed by Recurrent Energy.

Total revenues are expected to be in the range of $1.6 billion to $1.8 billion. Gross margin is expected to be between 14% to 16%. At this midpoint of the year, we observed a second half characterized by certain uncertainties -- by some uncertainties. Given the potential extended period required for the supply-demand balance to normalize, module margins will continue to face pressure. However, this is counterbalanced by the strength of our e-STORAGE business. e-STORAGE is expected to deliver record revenue and profitability in the fourth quarter, even after accounting for elimination of shipment to our own project.

As such, we are revising our total solar module shipment guidance to be in the range of 32 gigawatts to 36 gigawatts, including 1 gigawatt to our own project. CSI Solar's battery storage shipment are expected to be between 6.5 gigawatt hours to 7 gigawatt hours, including approximately 2.5 gigawatt hours to our own projects. We expect full year revenue to be in the range of $6.5 billion to $7.5 billion. These revised forecasts reflect our continued commitment to our strategy of prioritizing profitability and driving sustainable growth.

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

[Operator]

[Operator Instructions] And our first question comes from the line of Colin Rusch with Oppenheimer.

[Colin Rusch, analyst]

With the new AD/CVD charters, can you talk a little bit about how you're expecting the sales and distribution cost to trend to the balance of the year and just on a percentage of revenue would be super helpful?

[Shawn Qu, executive]

Yes. Colin, I don't know which AD/CVD you referred to. If you refer to the new AD/CVD petition for the 4 Southeastern Asian country, then we have to wait. We have to wait for the -- at least for the preliminary ruling expected in October and then November. So it's difficult for me to speculate the impact of that AD/CVD case at this moment.

[Colin Rusch, analyst]

Maybe we can take it offline, but the question is really around how are you accruing for that in the meantime as you bring products into the country. All right, let me take that one offline.

The second question then is really around...

[Yan Zhuang, executive]

Colin, this is Yan. So let me answer your question. So in the meantime, we actually work with our customers on the conditioning price mechanism, so both sides are protected with the assumption of different tariff level. So we are actually doing business as usual at the moment. So that's what we do right now.

[Colin Rusch, analyst]

Okay. And then you guys have had a history of being flexible with the market in terms of building out capacity and managing margins around where best returns are. And you've still got a very strong distribution business in a number of countries. Can you talk a little bit about the dynamics for that distribution business as you've seen some of the kind of disruption that's happened in that distribution channel here in the last couple of years? And how you see that opportunity evolving for your distribution business? Is that something you can grow into or are you still managing a lot of relationships and kind of working somewhere at some point?

[Yan Zhuang, executive]

Yes. So distribution business has always been our strong channel and they continue to be strong. Actually, we anticipate this year more than half of the volume goes to the DG market. That include residential rooftop and the C&I rooftop market. And in particular, I would say, we're even under the current situation with a very low price, in the market price of module, we're doing well in the U.S., for example, on the distribution channel and we're doing well in Japan. And we even started our bundling business, bundle module and residential storage and inverters in the channel to enhance our margin. So long-term wise, we will expand that bundling business in different markets and it has proven to be a very profitable way of conducting sales by providing our solutions.

[Operator]

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

[Philip Shen, analyst]

First one is on the '24 guide. Can you share some additional color on what drove the latest 2024 shipment reduction? Was the main impact driven by the Southeast Asia AD/CVD tariff process? I know the tariffs have not come out yet, but there is uncertainty. And so just with the petition filed, did that slow business and the willingness of customers to receive modules? And if it wasn't that then was the driver more driven or more the -- just the global slowdown that we're seeing?

[Shawn Qu, executive]

Yes. Philip, this is Shawn. The new guidance is not because of the new AD/CVD case in -- for our Southeastern countries, it's rather for other markets. For U.S. funded shipments, we are more or less on target with our previous target. There's not much impact. And as you know, the preliminary decision for the new AD/CVD is only expected in October and November, so it's rather late. So you won't have much impact to the total annual shipment. So the impact is really from the other market.

Now as we mentioned every time in earning call that we want to strike a balance between shipment volume and profit. In other words, we don't want to lose money just to sustain or to achieve a shipment numbers. So we look at the current situation. But as you know, our shipment has been going up every quarter, quarter-by-quarter. The first quarter we delivered I think 6.3 gigawatts and second quarter 8.2 gigawatts and third quarter we just guided 9 gigawatts to 9.5 gigawatts.

So actually, we have stabilized our sales channels and we are getting back with more and more orders. We'll still be able to protect our profitability. But still, we are already at the second half of August. And in order to strike a balance between the volume and profitability, we have taken actions. So we look at how much we can reasonably ship, while still maintain the profitability. Then we decide the new guidance, the new shipment range is a reasonable estimate, is a reasonable update.

[Philip Shen, analyst]

Great. Okay. Can you share any color on a potential Recurrent IPO time line? Additionally, are you thinking about spinning off the e-STORAGE business as well? And then finally, related to e-STORAGE, do you plan on building a battery cell pack line in the U.S.? And how much solar cell capacity? Well, you guys talked about how much you have in the U.S. now. How much more could it be? How much more could you grow it? Sorry for so many questions in a row.

[Shawn Qu, executive]

Well, Philip, thanks for highlighting so much of the strengths of Canadian Solar. You see our strength in Recurrent. You also see our strength and differentiation in the storage. So thank you very much for seeing our strengths and seeing our differentiators. Now we haven't talked about how to speculate this. However, we are moving to a partial IPP model as I myself, Ismael and Xinbo mentioned. And going through this model, you can reasonably speculate that at some point, we will look for a way to capitalize on what we accumulate and what we build. However, we just started this process. So I would say, to build a good IPP, it takes a couple of years. So I guess, this is the indication of any capitalization plan for Recurrent.

Now e-STORAGE, we don't have a plan to spin-off. e-STORAGE is a important and dynamic component of CSI Solar and it sit well in the CSI Solar family. So we don't have a plan there. Now, what's your next #3 and #4 question?

[Philip Shen, analyst]

Yes. So the next one is, do you plan on building battery cell and pack in the U.S.? And then as it relates to U.S. solar cell and module capacity, just remind everybody what the capacity is today and what your plans are for expansion? And I think that's it.

[Shawn Qu, executive]

Well, we plan. In other words, we have been studying the battery cell pack and the BESS production in U.S. No question about that. However, we haven't made an announcement of any factories there. So I would not make an announcement today. Now for solar cell and solar module, the module capacity in Mesquite is 5 gigawatts. The cell capacity in Jeffersonville, Indiana is also 5 gigawatts.

[Operator]

The next question is from the line of Praneeth Satish with Wells Fargo.

[Praneeth Satish, analyst]

So the guidance for the second half, it sounds like you expect margins to be under pressure because of the challenging market conditions and supply -- oversupply across the solar value chain. I guess, when do you think things get back into balance? You have kind of an internal view there. And then at a high level, do you expect this challenging market conditions and margin weakness to extend into 2025?

[Shawn Qu, executive]

Yes. I would like to clarify that we see the margin for solar module business under pressure. However, we see a sustainable and healthy margin for our energy storage business. So overall, we still have confidence for the second half of the year. Now I will let Yan to make further comment, especially for the question of how long the pressure on the module business may continue.

[Yan Zhuang, executive]

So first of all, as Shawn has already mentioned that we're going to have a strong Q4, a very strong Q4 on storage side. So we believe the pressure will continue throughout this year, for sure, and it may carry into next year. So I'm not a magician. I cannot tell you when it's going to be recover. But we're already seeing it's actually reaching the bottom. So people are very careful on inventory control and we're seeing capacity are actually start to flushed out slowly, but it's going to accelerate we believe when we move into next year. And for us, we're going to have -- continue to have a very healthy business on our storage moving to next year, significantly higher volume with a healthy margin. So -- and we believe next year's module situations will further be stabilized. I don't think it's going to worsen than this year. So overall speaking, we're still confident about our business next year.

[Xinbo Zhu, executive]

Let me add additional color. Yes, the weaker gross margin in Q3 is kind of fluctuation, mostly because of the gross margin recognition in Q3. e-STORAGE is kind of system cell. And the revenue and profit recognition may fluctuate because of cut-offs. So we expect lower gross margin to be recognized in Q3. And as both Yan and Shawn mentioned, we confirm that even after elimination, we are going to deliver a stronger second half of the year for e-STORAGE. So it implies a very robust Q4 for e-STORAGE.

[Praneeth Satish, analyst]

Okay. Got it. So maybe just to be clear on that point for -- I know you haven't provided guidance for gross margin in Q4, but given the commentary around e-STORAGE being strong in Q4, the margin there is higher. Should we assume then that the gross margin increases potentially from Q3? The midpoint is 15% from Q3 to Q4?

[Xinbo Zhu, executive]

Reasonable.

[Shawn Qu, executive]

Well, we're not providing Q4 gross margin yet, as you just mentioned. So it will take quite some computation to determine the gross margin range. So usually, we reserve it before the next earnings call.

[Xinbo Zhu, executive]

So we already stated that we're going to have a stronger second half than first half.

[Operator]

Our next question is from the line of Vikram Bagri with Citi.

[Vikram Bagri, analyst]

Could you give some insight into U.S. module pricing more recently? We know that it's far higher than module pricing globally, but we've also seen an increase in module imports this year, quite a sharp increase. So could you talk about how that impacts your domestic U.S. module pricing compared to your imported volumes? Have you seen a big change or differential in the pricing of those 2 markets that would be helpful?

[Yan Zhuang, executive]

Well, so we have a very healthy margin in the U.S. on module side and we're actually growing our volume in the U.S., shipment to the U.S. And so I think we see some price fluctuation. And however, the AD/CVD, the petition, actually, making the price situation more complex. In general, we're seeing price trending up. So -- with the impact of the AD/CVD. But still, we're confident -- from the deals we're signing up, we're actually quite confident that our margin in the U.S. will continue to be healthy in Q3. And even in Q4, we have strong -- high confidence.

[Vikram Bagri, analyst]

Got it. That's helpful. And just a question on the third quarter guidance, could you give some color on what's driving that step-up sequentially in the module shipment to that 9 gigawatts to 9.5 gigawatts range? Are there any specific regions that you're shipping to that are driving that? Just trying to understand that step-up, especially in light of managing volumes against pricing?

[Yan Zhuang, executive]

Well, we have a volume increase in the U.S. in Q3 and also in Europe slightly. And other than that, it's actually small changes, small increases. So it's actually in the end it's from 8.2 gigawatts up to we give a range of 9 gigawatts to 9.5 gigawatts. So it's like about 1 gigawatt hour.

[Operator]

Thank you. At this time we've reached the end of our question and answer session. I'll hand the floor back to management for closing remarks.

[Shawn Qu, executive]

Thank you for joining us today and for your continued support. If you have any questions or would like to set-up a call, please contact our Investor Relations team. Take care, and have a great day.

[Operator]

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