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Canadian Solar (NASDAQ:CSIQ) Q1 2018 Earnings Conference CallMay. 16, 2018 8:00 a.m. ET
Contents: Prepared Remarks Questions and Answers Call Participants Prepared Remarks:Operator
Ladies and gentlemen, thank you for standing by. Welcome to Canadian Solar's first-quarter 2018 earnings conference call. My name is Yvonne, and I will 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 Mary Ma with Canadian Solar's IR department. Please go ahead.
Mary Ma -- Investor Relations
Thank you, operator, and welcome, everyone, to Canadian Solar's first-quarter 2018 earnings conference call. Joining us today on the call are Dr. Shawn Qu, our chairman and chief executive officer, and Dr. Huifeng Chang, our senior vice president and chief financial officer.
Before we begin, may I remind our listeners that management's prepared remarks today will contain forward-looking statements, which are subject to risks and uncertainties. And management may make additional forward-looking statements in response to your questions. Therefore, 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.
And therefore, we refer you to a more detailed discussion of the risks and uncertainties in the company's annual report on Form 20-F filed with the Securities and Exchange Commission. In addition, any projections as to the company's future performance represent management's estimates as of today's call. Canadian Solar assumes no obligation to update these projections in the future, unless otherwise required by applicable law. At this time, I would like to turn the call over to our chairman and CEO, Dr.
Shawn Qu. Shawn, please go ahead.
Shawn Qu -- Chairman and Chief Executive Officer
Thank you, Mary. We appreciate everyone taking the time to join us today. We are pleased with our results for the first quarter. Both module shipments and net revenue for the quarter exceeded our guidance.
We have made progress on the monetization of our global solar project asset in the quarter. The net revenue from the solar energy and total solutions business as a percentage of the total net revenue reached a record-high of 64.2%. Despite our encouraging results, we did see a slowdown in the solar module demand in the first quarter, partially due to the typical seasonality. However, the Section 201 import duty decision by the U.S.
government also had a major impact. In addition, many solar project developers in India were waiting for definitive decision from an anti-dumping trade case launched against solar modules from China and a safeguard case similar to that in the U.S. We believe our commitment to technology, our strategy of steady, conservative investments gives us a competitive advantage to weather the turmoil. I'm happy to report that we're on track in our shift from the PIII to PIV technology.
The PIV technology, combining diamond wire-saw wafering plus silicon cell processing and PERC cell technology, can further reduce manufacturing cost, will increase the multi-crystalline solar module efficiency. We are about to ramp up production of multi-busbar cells and modules, which will gradually replace all our 5 busbar cells. The multi-buffer cells can further increase module efficiency and reduce manufacturing cost. Besides our high-power, high-efficiency HDM module based on the latest Mono-PERC technology help us to gain market share in premium markets such as Japan.
On the energy business side, we continue to execute and are encouraged by our achievements in project monetization. We sold 482 megawatts of solar power assets in Q1. The highlight is the transaction to sell 3 solar power plants in the U.S. totaling 309 megawatts to KEPCO.
Another highlight was the sales of 141 megawatts of solar power plant in the U.K. to Greencoat Capital. Demand remains strong for our solar projects, given the high quality of our development and EPC work. We expect additional sales in 2018 as we work to get an attractive return for our company and shareholders and redeploy the capital into new opportunities.
One of the more recent transactions was the sale of our 80.6-megawatt Guimarania solar project in Brazil to Global Power Generation, which we completed in April. Our portfolio of solar power plants in operation totaled 948 megawatts with an estimated resale value of U.S. $1.1 billion at the end of April. As part of our strategy to redeploy capital, we further expanded our global late-stage project pipeline and diversified geographically into Australia, Austria, and Argentina.
These are some of the developing markets where the next phase of industry growth is expected. Our global footprint is directly aligned with these developing markets, giving us a competitive advantage and valuable head-start. We have been investing in this market and building a foundation through brand awareness for several years now. For example, on Monday, we announced we secured an 8-megawatt project in South Korea.
And in March, we acquired a 97.6-megawatt solar project in Argentina. In April, we won three solar projects totaling 364 megawatts in Brazil's A-4 auction. Our late-stage solar power project pipeline increased to 2.3 gigawatts, including those in construction at the end of April. Now let me comment on our guidance for Q2 2018.
We currently expect total Q2 module shipment to be in the range of approximately 1.5 to 1.6 gigawatts, including 100 megawatts of shipments to our own utility-scale solar projects. Revenue for the second quarter of 2018 is expected to be in the range of U.S. $690 million to U.S. $730 million with gross margin expected to be between 20% to 22%.
Let me now turn the call over to our CFO, Huifeng Chang, for a more detailed review of our result for the first quarter. Huifeng, please go ahead.
Huifeng Chang -- Chief Financial Officer
Thank you, Shawn. Net revenue for the first quarter of 2018 was $1.42 billion, up 28.5% sequentially and up 110.5% compared to the year-ago period. Gross profit in Q1 was $143.9 million, compared to $218.6 million in Q4. Gross margin in Q1 was 10.1%, compared to 19.7% in Q4.
The sequential decrease was primarily due to low margin associated with the 309 megawatts of U.S. solar power plants sold to KEPCO, combined with higher blended module manufacturing costs with a partial offset from increased module average selling price in the first quarter of 2018. We expect a considerable improvement in Q2 with guidance in the range of 20% to 22%. Total operating expenses was $65.7 million in Q1, compared to $88.4 million in Q4.
Income from operations was $78.2 million in Q1, compared to $130.2 million in Q4. Operating margin was 5.5% in Q1, compared to 11.7% in Q4. Foreign exchange loss in Q1 was $8.5 million, compared to foreign exchange loss of $9.5 million in Q4. We recorded a gain on change in fair value of derivatives of $4.5 million in Q1, compared to a gain of $7.6 million in Q4.
Income tax expense in Q1 was $4.1 million, compared to income tax expense of $28.9 million in Q4. Net income attributable to Canadian Solar shareholders for Q1 was $43.4 million, or $0.72 per diluted share, compared to net income of $61.4 million, or $1.01 per diluted share, in Q4. Moving on to the balance sheet. At the end of Q1, our balance of cash and cash equivalents was $567.4 million, compared to $561.7 million at the end of Q4.
Our restricted cash balance was $624.4 million at the end of Q1, compared to $628.5 million at the end of Q4. Trade accounts receivable balance was $354.3 million at the end of Q1, down from $358.1 million at the end of Q4. Accounts receivable turnover was 26 days in Q1 2018, compared to 38 days in Q4 2017. Inventories at the end of Q1 2018 were $414.1 million, compared to $346.1 million at the end of Q4 2017.
Inventory turnover was 28 days in Q1 2018, compared to 35 days in the first quarter of 2017. Short-term borrowings at the end of Q1 totaled $1.86 billion, compared to $1.96 billion at the end of Q4. Long-term borrowings at the end of Q4 -- Q1 was $328.1 million, compared to $404.3 million at the end of Q4. Total debt at the end of the first quarter of 2018 were approximately $2.45 billion, of which $785.7 million was nonrecourse.
Senior convertible debt outstanding totaled $126.7 million at the end of Q1, compared to $126.5 million at the end of Q4. Short-term borrowings and long-term borrowings directly related to utility-scale projects, which includes $708.4 million of nonrecourse borrowings, totaled $1.12 billion at the end of Q1, compared to $1.38 billion at the end of Q4. The value of our build-to-sell project assets at the end of Q1 was $1.1 billion, compared to $1.9 billion at the end of Q4 2017. We are pleased with our significant success in monetizing our solar power assets globally.
We are working to secure approval for the sale of 3 other U.S. solar projects totaling 399 megawatts with the potential to close the deal in the coming months. Our continued success actions are enhancing our balance sheet and allowing us to redeploy our capital to support the profitable growth of our business and to build value for shareholders. With that, I would now like to open the call to your questions.�Operator?
Questions and Answers:Operator
Ladies and gentlemen, we will now begin the question-and-answer session. [Operator instructions] Our first question comes from the line of Colin Rusch from Oppenheimer. Please ask the question.
Colin Rusch -- Oppenheimer & Company -- Analyst
Thanks so much. Shawn, you've gone through a lot of these cycles in the past with the policy changes. And looking at what's going on in India, navigating the U.S. market, how do you think about incremental capacity and where it goes and how you're going to manage that as you go through the balance of this year? India's obviously been an important market for folks just as a kind of a backstop for volumes.
But what's your expectation and thought process and decision-making process as we go through the balance of this year and meeting all of the needs of these markets?
Shawn Qu -- Chairman and Chief Executive Officer
Yes, Colin, it's a good question. I have gone through several cycles like this. But every cycle is different. For example, this time, the U.S.
Section 201 trade decision, it immediately slowed down the new module shipments and projects in the U.S. In fact, it's quite dramatic. So I guess people already have commented on that. Some of the comments really is that there must have already been quite significant module inventory in the U.S.
shipped in before the Section 201 decision. So probably now all the distributors are just working through those products. Now India is an interesting phenomenon. It looks like the module importers were waiting because they didn't want to be caught with the tariff decision when a module is on the water.
And that's the common [Inaudible]. But if you think about it, how can a developer, if they already have product in hand, how can so many developers wait for three months, four months [Inaudible]?�So that's like just every cycle, it seems, is somehow different. Now your question on the capacity. Well, we do see capacity like we think the capacity along the value chain is not level.
It looks like, at this moment, there is more of a supply demand balance on polysilicon side. But that might -- that will probably start to change moving into the second half of this year. Now Canadian Solar hasn't touched the polysilicon yet. I guess we will continue this practice that we'll leave the polysilicon to the polysilicon suppliers.
And then on the Indian wafers, we have seen some significant announcements in India, especially the monocrystalline silicon expansions. So we try to avoid that. So from the capacity trend, which we updated in this earnings call, you can see that we are still quite conservative in terms of the India capacity. It looks like the solar cell, especially the high-efficiency solar cell, still -- that supply demand is well-balanced.
And that's why we are adding some capacity with our proprietary cell technologies, which is multi-crystalline-focused PIV technology, which combine the black silicon with the PERC technologies and also the bifacial solar cells. So that's where we'll add some capacity. And then on the module side, somehow the module capacity announcement is not that scaling as to India. So we're also adding some module capacity.
But we only add the module capacity with advanced technologies. So in the call, I mentioned that we started to deploy multi-busbar solar module, that kind of [Inaudible]. So we are shifting from the five busbar to the multibusbar. Canadian Solar has always been on the leading front of the module technology.
We're one of the first to move from three busbar to four busbar and then from four to four busbar. And now I think we will lead the shift or the upgrade from five busbar to multi-busbar. And we have been producing more and more bifacial solar modules. So I guess that's how we see the supply demand situation on the value chain, how we plan our capacity works.
Colin Rusch -- Oppenheimer & Company -- Analyst
Thanks so much. And then just I want to follow up on the comment around the bifacial because we're continuing to see kind of significant interest in that. What's your view on how quickly that technology gets adopted and how much market share it's going to take over the next couple of years?
Shawn Qu -- Chairman and Chief Executive Officer
We have -- we believe we have mastered the process for bifacials. So we are producing both multicrystalline and monocrystalline bifacial modules based on the P-type PERC technology. We have been producing those products -- well, we have started to produce those products massively. And in Q2, we'll produce over 100 megawatt of bifacials.
I don't know how other module companies are doing it. But for us, with Canadian Solar, we have mastered the bifacial technologies. We believe in it. And we have projects to deploy our bifacials in a massive way.
Operator
Thank you. Our next question comes from the line of Philip Shen from Roth Capital Partners. Please ask your questions.
Philip Shen -- Roth Capital Partners -- Analyst
First one is on ASPs. I think in your release, you talked about how your Q1 ASP increased. Can you talk about how that happened, which geography? Or what was the key driver of that? And then how do you expect the ASPs to trend into Q2 as well?
Shawn Qu -- Chairman and Chief Executive Officer
Yes, Philip, the branding and channel diversification really played a role here, really helped. So we secured many of our Q1 orders back in Q4. And then in Q1, although the market slowed down, but our customers, they see the value, I guess. So they stayed with us.
They sticked to the price. And I guess their investor and their bank also wanted them to stick with Canadian Solar. So we end up at almost the same ASP, slightly up. But I will say almost the same, slightly up from Q4 level.
However, moving from Q2, the ASP will go down. We don't guide the future ASP. But just the general trend is that Q2, the ASP of the module will go down. But fortunately, the material price from polysilicon to wafer, the material price also went down.
So our margin percentage is OK in Q2.
Philip Shen -- Roth Capital Partners -- Analyst
Great. Shifting to the balance sheet a bit and specifically interest expense, you gave us some detail on your debt levels. That said, want to ask the question about what you expect interest to be going forward. Do you expect it, for example, to be lower than Q1? And if you can give us what the Q2 interest expense might be, that would be great.
Shawn Qu -- Chairman and Chief Executive Officer
I think you are talking about interest expense, right?
Philip Shen -- Roth Capital Partners -- Analyst
Yes.
Shawn Qu -- Chairman and Chief Executive Officer
So I would expect the interest expense will go down because the debt level go down. We paid down a lot of debt. We paid down significant debt when we sold our solar project. So I would expect the interest payment -- interest expenses to go down.
Philip Shen -- Roth Capital Partners -- Analyst
OK, great, just wanted to confirm. And then in terms of Japan, can you update us on that region for you, especially the projects that you plan to drop down into your J-REIT? So how many megawatts could you drop down in '18 and '19? What's the expectation? And also perhaps, what might be the timing of the 2018 drop-downs be?
Shawn Qu -- Chairman and Chief Executive Officer
So from our press release, you see the update of our COD plan, 2018 and 2019 COD plan. I will say our drop-down plan is in step with the COD plan, right? If once we COD, we will either drop down or we sell, right? If it's a small project, let's say, 1 megawatt project, 1 megawatt, 2 megawatt project, you can assume that we will prefer to drop down into the J-REIT. Now if we COD a big project, 13, 15 megawatt big projects, then we have more options. We can drop down.
We can also sell to an investor in a single transaction. Actually, in Q1 and Q3, you will probably see some announcements of a couple of large projects in Japan which we will either sell in a single transaction or drop down to the J-REIT.
Philip Shen -- Roth Capital Partners -- Analyst
Great. You said Q1 and Q3, I think. Did you mean Q2 or Q3? And when do you expect...
Shawn Qu -- Chairman and Chief Executive Officer
Right, Q2 and Q3. You're right.
Philip Shen -- Roth Capital Partners -- Analyst
OK, good. So some drop-downs or some sales in the coming quarters. OK, one last one. Well, in terms of China, what do you expect the Chinese market to do year on year? Do you expect it to be flat? Last year, it was 53 gigawatts.
Or with the discussion out there about DG being a potential risk factor to the downside, could China be smaller -- could installations in 2018 be down year on year relative to '17? What's your overall view on the Chinese market now?
Shawn Qu -- Chairman and Chief Executive Officer
Well, Philip, I believe you will be in China for the SNEC show in 10 days, right? So you will find out. At this moment, my guess is as good as yours. I think the most probable scenario will be flat, almost flat. But if, let's say, if the government make a major announcement, especially on DG, and if they make an immediate cut, then the volume can also shrink.
The current draft of the EEA policy, if the DG project already registered with the provincial agency, will continue to be allowed. And that was why they drafted the policy. But the draft policy to the final policy -- well, sometimes it change, right? Let's say, if they believe this particular line, then, well, then I don't know what we will do with the DG project they already registered. But today, I read on the industry -- or some of the industry websites that there are China gigawatt of DG projects registered.
That seems to be the new number. I guess, that's why people rushed to register after the draft policy was announced, right? But India also have this piece of information. Let's see how they react to the situation.
Operator
Thank you. [Operator insctructions]. Our next question comes from the line of Brian Lee from Goldman Sachs. Please ask your questions.
Brian Lee -- Goldman Sachs -- Analyst
Hey, guys. Thank you for taking the questions. Maybe just quick housekeeping one. Are you making any changes to the full-year revenue or module shipment targets? I didn't see any updates in the release.
Shawn Qu -- Chairman and Chief Executive Officer
Well, no.
Brian Lee -- Goldman Sachs -- Analyst
OK. And then in your prepared remarks, Shawn, you mentioned some demand softness on modules. If you were to exclude shipments to your own projects, how much were your volumes down versus Q1 of last year? And I guess, similarly, if you exclude expected shipments for projects in Q2, what rough rate of decline are you forecasting versus last year? I guess I'm just trying to get a sense of where organic volume demand levels are trending through the first half of the year.
Shawn Qu -- Chairman and Chief Executive Officer
Well, our Q1, Q1 this year, our total shipment is 1.37 gigawatts as you see from our press release. We also gave you the reference of the Q1 -- Q1 2017, as I referenced, I believe that roughly is 1.33 gigawatts. So you can say that, "Hey, this Q1 is almost the same level of last Q1." I think that reflects the seasonality, so it's not a big surprise. Usually, Q1 is a slow season.
It's just another slow season like before. However, it also means, at least in our case, there was no growth, no significant year-over-year growth this year over next year. And in the past, you always expect growth, right? But think, the fact that there was no growth, the reason of probably the -- all those trade decisions, like the Section 201 from U.S., and all those trade challenges in India. Did I answer your question?
Brian Lee -- Goldman Sachs -- Analyst
Yes. And I guess maybe just to clarify a little bit, what number of megawatts did you ship to your own projects in Q1 of last year and also for the just reported Q1 of this year? I'm just trying to normalize for those to get to a sense of what your third-party module shipments were year on year. And then same question for 2Q, just sort of what's the third-party shipment level forecast implying on a year-on-year basis?
Shawn Qu -- Chairman and Chief Executive Officer
I don't have that number on my fingertips. But I think most of the Q1 shipments is third party. So you can assume maybe 90% or 95% or even more of our Q1 shipments went to third party. Because Q1 is linear.
So if other people help their utility to grow in the construction will also help.
Brian Lee -- Goldman Sachs -- Analyst
OK, fair enough. I'll take it offline. Second question is just around the margin outlook for 2Q. Can you -- it's quite a big increase from what you just reported here.
Can you speak to some of the mix assumptions or geographic exposure assumptions that you're embedding in there for the rise in gross margins for 2Q?
Shawn Qu -- Chairman and Chief Executive Officer
The manufacturing business is more or less stable. In Q1, our manufacturing gross margin is in highteens. And in Q2, we also see it in a high-teen level. So that shows that we have a good ability to maintain the manufacturing cost and price structure.
If the price goes down, we manage it to reduce the cost as well. And the difference from Q1 to Q2 all come from the solar projects we sold in the quarter. In Q1, the transactions we completed include some U.S. projects, some of the U.S.
projects which we CODed in 2015. At that time, the business model of the industry was yieldco. So we also accumulated some projects. But now there's no yieldco, Yieldco is not a factor anymore in the U.S.
Therefore, we're selling those projects. And those sales has low margins as we've mentioned. We also mentioned that in the press release. Now in Q2, we are also starting some projects in Q2.
Those were new projects. So projects we newly developed, developed last year and we sold in Q2, those projects have healthy margin. Therefore, the blended margin average there, about 20%.
Brian Lee -- Goldman Sachs -- Analyst
OK. No, that's very helpful. Maybe last question on that same topic. I missed it, Huifeng, I think, said in the next month or next several months.
But is the Shenzhen Energy sale of their Recurrent assets, the second slug of Recurrent assets, is that baked into your 2Q forecast? Or is that later in the year?
Shawn Qu -- Chairman and Chief Executive Officer
Well, I will just say that we haven't released the name of our future sales. So you can guess, but we don't make that -- we haven't released that information yet. And then I'll leave the rest to Huifeng
Huifeng Chang -- Chief Financial Officer
Brian, you understand -- the final outcome, before it happens, it's never 100% sure. However, we remain optimistic in the result. Like every other cases, it will take several months to get approval because [Inaudble] is short of staff. But the fact that we have been giving a lot of efforts, the fact that we already got approval for KEPCO, so we can get -- we are making progress every week.
We're getting close. We don't know if eventually the final results, when to come out. We believe and we are hopeful for a yes. But even approval or disapproval, once that happens, we'll report to the investors.
Thank you.
Brian Lee -- Goldman Sachs -- Analyst
OK. Yes, I just -- you've made to several comments in past calls and on this call that the margins on those projects are expected to be on the lower end. So I'm just wondering if the 20% to 22% gross margin guidance for 2Q captures the potential for those projects to be sold or if those margin targets would not actually reflect that. That was all I was trying to get at.
Huifeng Chang -- Chief Financial Officer
Brian, for that, I need to clarify that guidance for Q2 does not assume the close of the deal in the other three solar projects in Q2. However, it may happen. But just to be conservative, we have not included that in Q2 guidance.
Operator
Thank you. [Operator instructions] Our next question comes from the line of John Segrich from Luminus.
John Segrich -- Luminus Management-Analyst
Hi, guys. Just a couple more housekeeping questions. Could you give us the amount of capex in the quarter? And then secondly, Huifeng, can you just give us a sense of how much project revenue is included in 2Q? And then finally, maybe just can you walk which projects booked as revenue and which were booked as other income in 1Q, just so we can try to piece them apart?
Shawn Qu -- Chairman and Chief Executive Officer
The first one, Huifeng, do you have the number?
Huifeng Chang -- Chief Financial Officer
Yes, I'll handle them.
Shawn Qu -- Chairman and Chief Executive Officer
Huifeng is digging out the number for you.
Huifeng Chang -- Chief Financial Officer
John, let's -- I'll [Inaudible] and report the numbers. The cash -- the capex for the quarter was around U.S. $80 million for Q1, U.S. $8-0 million.
And then for Q1, most of -- for Q1, for the most of the projects we sold in Q1, we got around [Inaudible] projects because we are [Inaudible] other income in Q1. If you need any [Inaudible] numbers, I can provide after the call. For Q2, I think majority, almost 100% of the projects we currently include in our forecast was [Inaudible]. And almost all of them are the cells which we'll build at the projects, including those in Brazil and some of them in other areas.
But for that big one, the three U.S. -- the- the three big solar assets in California, we have not included that yet.
John Segrich -- Luminus Management-Analyst
Got it, OK. So of the $690 million to $730 million, about how much of the project, just ballpark?
Huifeng Chang -- Chief Financial Officer
OK. Around $150 million was the project sales in Q2 -- Q2 forecast
John Segrich -- Luminus Management-Analyst
Sorry, 1-1-5, is that what you said?
Huifeng Chang -- Chief Financial Officer
$150 million -- $140 million, 1-4-0
Operator
Thank you. Our next question comes from the line of Brad Meikle from Ampac Research. Please ask your question.
Brad Meikle -- Ampac Energy Research -- Analyst
Hi, good morning, and thanks for taking the questions. I think about a year ago, you had target of $0.25 a watt by 2020 as your outlook. Is that still your targeted cost per watt? And can you just discuss sort of the non-silicon cost per watt reduction drivers and how you see that over the next three years?
Shawn Qu -- Chairman and Chief Executive Officer
Yes, still see $0.25 as our cost target per solar module for 2020.
Brad Meikle -- Ampac Energy Research -- Analyst
And what are the main technology paths you see for driving non-silicon cost per watt down over the next medium term?
Shawn Qu -- Chairman and Chief Executive Officer
First of all, we think that the polysilicon process technology have improved a lot. And so that drove the cost down. And many of the new polysilicon facility -- many polysilicon factories are built in low-electricity regions. As you know, electricity is a big part of the cost for polysilicon.
So we think that polysilicon, we will see some healthy polysilicon price reductions with the leading polysilicon factories can still make money, either with a significant price reduction. So that's number one. And then on the manufacturing side, the cost efficiency improved. The solar cell and solar module efficiency improved.
The cost also got reduced. And some technology directly reduced the cost. For example, we mentioned the multi-busbar technology, the solar module technology in the call. That technology helped us to reduce -- not only improved efficiency but also reduced the silver paste usage.
And silver is the biggest consumables in the solar cell process.
Brad Meikle -- Ampac Energy Research -- Analyst
Yes, OK And I'm sorry if this was asked already. What's your outlook on ASPs for the rest of the year, on the module ASPs?
Shawn Qu -- Chairman and Chief Executive Officer
I don't have outlook because I don't guide -- I don't want to guide my customers to negotiate with me.
Brad Meikle -- Ampac Energy Research -- Analyst
Right. Well, could you speak to your level of visibility on the year, how much of your capacity has been sold in terms of bookings for the rest of the year?
Shawn Qu -- Chairman and Chief Executive Officer
We have sold -- well, at this moment, we have sold the majority of our Q2 capacity. That's why we are -- that's how we gave guidance. For Q3 and Q4, we also sold a significant percentage of the capacity. I don't have the exact percentage on my fingertips.
But our guidance -- our annual guidance, we have good confidence.
Operator
Thank you. Our last question comes from the line of Carter Driscoll from B. Riley FBR. Please ask your question.
Carter Driscoll -- B. Riley FBR -- Analyst
So in terms of 2Q gross margin guidance, is it -- I guess I'm struggling to get to that figure. So is it reasonable to assume the first thing is just you're no longer going to have the sales -- the 309 that obviously pulled down from the Recurrent sales in the quarter, maybe a geographic shift with the lower contribution from some of our price-sensitive markets, like the U.S.A. and India, maybe a little bit more penetration in some of the newer markets? I mean, directionally, my thinking, those are the big components on a Q-to-Q basis that are leading to the improved gross margin.
Shawn Qu -- Chairman and Chief Executive Officer
Right. Well, first of all, still an answer to the previous question that we included about $140 million into the Q2 guidance. So that gives you a feeling of the level of projects also we have in Q2. And we've also mentioned that we didn't assume the sales of another three solar projects in U.S.
in Q2. If it indeed happens in Q2, then, well, everybody happy. We would like to know once it's complete. But to be on the safe side, we didn't include that in the assumption.
But if it indeed happens, then you will see the revenue jump and the ASP drop, just like in Q1, right? And so that's the directions for the energy business, for the solar project business. On the solar module side, the shipment into U.S. was low. And the new shipments into U.S.
is low after the Section 201 announcement. U.S. was a high-margin market last year. So yes, you're right.
That high-margin market goes into very small volume. We are still selling some inventory. We also have some inventories in the U.S. So we do have some sales.
We have the modules to support our customers. But the volume is low. And in Q2, there will be significant volume into China. And the other market takes some products.
So you can say that the volume shipped, the main volume shipped is from U.S. to China.
Carter Driscoll -- B. Riley FBR -- Analyst
Got it, that's helpful. Thank you. Are you seeing any upper pricing on -- upward pressure on project financing at least from the debt component? Just with the gradual raise in rates, do you expect anything material in the back half of the year, if that's maybe moving to 4x this year? Do you expect any at least in the U.S.?
Shawn Qu -- Chairman and Chief Executive Officer
We don't. For our -- for the project, we budget to build this year. We don't see the pressure on financing. Not really.
Carter Driscoll -- B. Riley FBR -- Analyst
And then on the newer markets, you did mention earlier, Shawn, Australia and Argentina and Korea. Which of those -- I mean, if I remember correctly, you were one of the first to aggressively go after Brazil, non-Brazilian. And of those 3, could any of those kind of mimic, maybe not quite the same scale as Brazil, but surprise to the upside in terms of where it could grow incrementally outside of your current targeted areas?
Shawn Qu -- Chairman and Chief Executive Officer
I think Australia has lots of potential. And we also have significant pipeline in Australia. I believe we made an announcement of a pipeline acquisition back in Q1. If you dig out that press release, you'll see the size of our pipeline in Australia.
Argentina, I'm not sure. On one hand, that country also has lots of sunshine. However, with the current currency crisis in Argentina, maybe it will not grow as quickly as Brazil. But again, I'm just speculating.
We are working on our first project there in Argentina. And let's see how Argentina government can handle this current, this couple of issues..
Carter Driscoll -- B. Riley FBR -- Analyst
If I remember correctly, you were pushing 100% capacity utilization in your Chinese facilities but not in non-China. Is there any -- has that changed materially? Are you allocating or building more outside of China at all on a sequential basis or plan to this year? Or could you give us a rough figure of what utilization was for your non-Chinese plants in the quarter?
Shawn Qu -- Chairman and Chief Executive Officer
Yes, in Q1 -- first of all, Q1, both China and non-China have some capacity underutilization. In China, it was more due to holiday, due to the Chinese New Year holiday. And also in China, it was because there was a trade policy change. Now moving to Q2, since improving, as you see that our volume also improved.
But we still have some underutilization outside China, in some of the factories outside China.
Carter Driscoll -- B. Riley FBR -- Analyst
OK. But not enough that it's materially changed your capacity expansion plans?
Shawn Qu -- Chairman and Chief Executive Officer
Well, it is all included. If the capacity is underutilized, so then the per unit depreciation will be higher. So all that impact is included in the Q2 margin guidance. So I'm pleased that although you're going to always see some facility underutilization, we still maintained a stabilized, slightly up gross margin.
That shows that we have successfully stabilized the ASP and we also reduced our cost. Now moving forward, we are only adding capacities in the place where the capacity can be used. That's for sure. And also we're only adding capacities with new -- with advanced technologies.
For example, for the module capacities, we'll only add the multi-busbar. And we believe those technology -- those capacity will be fully utilized. Otherwise -- I mean, in reality, we don't have enough of those multi-busbar solar module capacity. And then on the solar cell side, our new solar cell factory will be fully capable, fully equipped to use this PIV technology, which is black silicon plus PERC, and also fully equipped to produce the bifacial cells.
So yes, there might be capacity underutilizations. But if you only invest into good and new technology, hopefully your customer will -- our customers will take our product.
Carter Driscoll -- B. Riley FBR -- Analyst
Yes. No, I mean, that's the right thing to be doing. Has there been any thought to either building solar module capacity in the U.S. after 201?
Shawn Qu -- Chairman and Chief Executive Officer
We have been doing feasibility studies for several countries but no decision on U.S. at this moment
Operator
Thank you. I would now like to hand the conference back to the management for closing remarks. Over to you, sir.
Shawn Qu -- Chairman and Chief Executive Officer
All right. Thank you for your continued support. And if you have any further follow-up questions after today's call, please contact us. And have a nice day.
Operator
[Operator instructions]
Duration: 51 minutes
Call Participants:Mary Ma -- Investor Relations
Shawn Qu -- Chairman and Chief Executive Officer
Huifeng Chang -- Chief Financial Officer
Colin Rusch -- Oppenheimer & Company -- Analyst
Philip Shen -- Roth Capital Partners -- Analyst
Brian Lee -- Goldman Sachs -- Analyst
John Segrich -- Luminus Management-Analyst
Brad Meikle -- Ampac Energy Research -- Analyst
Carter Driscoll -- B. Riley FBR -- Analyst
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