Q3 2019 Earnings Call
Relations Ms. to Franco you may begin.
Thank you good afternoon, everyone and thank you for joining US today the company issued a press release announcing its third quarter 2019 financial results a copy of the press release and associated presentation are available on the first solar web site at Investor Dot first solar dotcom.
With me today are Mark Widmark, Chief Executive Officer, and Alex Bradley Chief Financial Officer, Mark will begin by providing a business and technology update Alex will then discuss our financial results for the quarter and provide updated guidance for 2019. Following their remarks, we will open the call for questions.
Please note. This call will include forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the safe Harbor statements contained in today's press release and presentation for a more complete description. It is now my pleasure to introduce Mark Widmar Chief.
Executive Officer Mark.
Thank you Andrea good afternoon, and thank you for joining us today.
I'll begin by noting our third quarter earnings of 29 cents per share we had a variety of sources contributing to our Q3 EPS result, firstly, the third quarter reflected our strongest quarter the year with respect to third party model sales driven primarily by a significant increase in the volume was sold compared to previous quarters.
Secondly on the system segment side, we successfully closed the sale of our 72 megawatts Eva project on our continuing the momentum with the recently signed transactions for the sale of our 150 megawatts substrate.
100 megawatts franchise Valley and 20 megawatt wind projects. These deals remains subject to certain conditions president for closing, which we expect to be satisfied during the fourth quarter, resulting in a meaningful contribution to our full year revenue and earnings.
Finally reflective of our models outstanding field performance lower than expected warranty return rates and other factors the third quarter EPS results benefited from a reduction to our product warranty liability reserve.
Alex will provide further details on this later on the call.
Total module production standpoint, we continue to make significant strides in the ramping of our series six modeled capacity.
As of the beginning of this week, we started the ramp of our second Paris or factory approximately three months ahead of schedule. This marks the fifth series six factory, where we have commenced operation within a period of only 18 months.
Across our manufacturing fleet.
We had 4.2 Gigawatts of series six nameplate capacity at the under the third quarter, increasing to 5.5 Gigawatts. This week with the addition of parish for too.
Gross bookings perspective, we added an additional 1.1 gigawatt of net bookings since the last earnings call, bringing total revenue expected shipments to 12.4 Gigawatts.
Importantly, we have significant visibility regarding the module business into 2021.
During the quarter, we announced an evolution in our APC delivery approach transitioning away from an internal MPC execution model and moving towards leveraging the engineering procurement and construction capabilities of innovative partners in the United States over.
While we are proud of our history as a leader and pioneer in the global PVC industry. There were several drivers to the decision.
Among these is leveraging the advanced capabilities of our partners, whose primary or sold business focuses VPF execution.
Which enhances product cost competitive this and de risk project execution for first solar.
Moreover, our ability to execute this transition reflects an improved balance of system compatibility of our series six module.
In the past one of the drivers of our APC business was to enable the cost effective installation of our series for product with its unique form factor.
Our series six module, which has a larger form factor consistent with other technologies. The emphasizes the need for our in house CPC solution.
As previously noted this transition to leveraging third party DPC services in the United States is not expected to impact any projects under construction and slated for delivery this year.
Turning to slide four.
As mentioned previously our second pairs for facility commenced production approximately one quarter ahead of schedule.
And we are expected to ramp to be completed by the end of the first quarter of 2020.
As discussed on prior earnings call by removing certain finishing constraints through inventory buffers and limited additional tooling, we expect to increase barriers for two nameplate capacity to 1.3, gigawatts, resulting in a tough total nameplate capacity in Ohio of 1.9 Gigawatts.
The accelerate started manufacturing has potential to add up to 80 megawatts of incremental output in 2019.
However, due to production timing and quality review, we do not expect any impact to 2019 revenue guidance associated with this change.
These same process improvements will be applied across the balance of the production fleet and we expect the comparable increase in nameplate capacity once they're fully ramped in 2012.
Starting on slide five I'll provide an update on our series six production metrics.
On a fleet wide basis since the Q2 earnings call. We'll continue to see significant operational improvements comparing October month to date metrics against the month of July megawatts produced per day is up 8%.
Capacity utilization has increased six percentage points to 100%.
The production yield is up two percentage points to 93%.
The average loss per module has increased for loss and the top production been is 435 watts.
And finally, the percentage of modest produced with an added reflective coating has increased five percentage points to 96%.
The combination of our efficiency improvement program and increase our utilization has led to a significant improvement in the module been distribution.
We are been distribution between 420 watt to 430 Watt modules is up five points to 92% of production.
Relative to our efficiency roadmap there were a couple of noteworthy accomplishments during the quarter.
Firstly following the implementation of the latest process refinements in our lead line in Ohio, We have started to produce our first 440 watt been modules.
Leveraging these refinements with upcoming process nodes, we have recently provide sample modules to front offer when measured in validated a 19% aperture area efficiency, which is 447 watts peak and is a new world record Cadtel module.
This is a tremendous accomplishment by our world class R&D and manufacturing teams and further validates the near term compatibility of our.
Acknowledged.
Secondly, our continued investments to improve long term performance of Cadtel cells has resulted in a significant scientific advancement.
As someone you may know copper serves as a critical role in the Cadtel device.
Through our recent R&D efforts, we have successfully replaced copper with an alternative material, which dramatically improves device performance more importantly, these high efficiency devices demonstrate an improved long term delegation rate a significant benefit to PV plant economics.
While yet to transition this advancements to our commercial products. We expect the combination of improved efficiency and long term variation will further enhance the competitive advantages of our technology and gives us confidence in our long term roadmap.
At the beginning the year, we laid out an aggressive series six cost per watt reduction target for 2019.
And Weve as we expected a drop in series six cost for walk from Q1 to Q4 of approximately 30%.
Relative to our expectations through Q3, we're pleased with the progress made and are slightly ahead of the roadmap laid out during the 2018 yearend earnings call, which took place in February .
On a fleet wide basis throughput as ahead efficiency is in line and yield is slightly behind.
By region, our low cost factories are performing well and specifically with the faster ramp of our second Vietnam factory, we are seeing a cost per watt benefit.
However, our Irish facility is behind expectation and is facing some significant headwinds we continue to see challenges to the bill of materials, including aluminum and glass as we work through our supply chain strategy to mitigate the impact of tariffs.
In addition, our labor and sales freight costs remain above plan.
Looking forward in Q4, we expect continued improvements in our low cost factories, which will end the year in line with our expectations.
Repairs Berg will be challenged for the reasons mentioned as well as the earlier production ramp of our second factory.
Our current view is that on a fleet wide basis, we will exit the year approximately half a penny higher than target we set at the beginning of the year.
Turning to slide six ill next discuss our bookings activity in total we have 5.4 gigawatts of net bookings in 2019, including net bookings over 1.1 Gigawatts since the last earnings call.
After accounting for shipments of 3.8 Gigawatts in the first three quarters of year, our expected future shipments are 12.4 gigawatts.
Our net bookings since the last earnings call were almost exclusively for series six product.
And were approximately 85% in North America with the remainder in Europe .
This includes 0.3 Gigawatts previously included in our mid to late stage pipeline as sign but not both opportunities.
Following these most recent bookings we're sold out through the remainder of 19 and full year 2020.
We are largely contracted through the first half of 21.
And approximately two thirds, both relative to the 2021 supply plan of 6.5 Gigawatts.
Notes this excludes anticipated future systems projects not currently recognized as bookings.
We also now have collectively over one gigawatt book for 2022 and beyond.
Our de bookings include a 75 megawatts for our Willis Springs project. This the booking is relative to our previously disclosed petition to the PG any bankruptcy court to terminate the PPA.
During the third quarter of the bankruptcy court granted the petition and we terminated paved the EPA, which will allow us through re market the project to another off taker.
With our year to date net bookings of 5.4 Gigawatts, we have achieved our target of a one to one book to ship ratio in 2019, approximately two months ahead of year end and continue to see ongoing demand through the remainder of the year.
Slide seven provides an update updated review of our mid to late stage bookings opportunities, which now total 8.1, Gigawatts DC an increase of 2.1 gigawatts from the prior quarter.
When factoring in the bookings for the quarter, one gigawatt of which were included as opportunities in the prior quarter, our mid to late stage pipeline increased by 3.1 Gigawatts.
Additionally, the pipeline includes 0.3 gigawatts of confirmed opportunities awaiting satisfaction of outstanding conditions, President before being recorded as a booking.
As a reminder, our mid to late stage pipeline reflects those opportunities we feel could book within the next 12 months.
That is a subset of a much larger pipeline of opportunities, which includes 15.2 Gigawatts DC.
Which increased 1.9 gigawatts from last quarter. This includes 1.6 gigawatts opportunities in 2020, which provides demand resiliency to our near term production, while maintaining 13.6 gigawatts of demand would be for module deliveries in 2021 and beyond.
In terms of geographical breakdown of the mid to late stage pipeline North America remains the region was the largest number of opportunities at 5.8 Gigawatts.
Europe represents two gigawatts with the remainder in Asia Pacific.
In terms of some of the segment mix our mid to late stage pipeline includes approximately two gigawatts assistant opportunities across the United States in Japan with the remainder module only sales.
Our energy systems business continues to perform strongly with an additional one gigawatt contracted since our previous earnings call. This brings new bookings in 2019 to 2.6, Gigawatts and our total energy services portfolio under App of assets under contract to nearly 14 gigawatts flow.
Before I turn the call of Alex I would like to cover a few items.
Firstly I would like to note that we are pleased with United States Trade Representatives decision earlier this month to withdraw its exclusion or by facial modules from the section tool on import tariffs.
This decision supports a level playing field for manufacturers such as first solar that innovate manufacture invest and create jobs in America.
Secondly, as first solar celebrate this twentyth year since its founding we would like to take a moment to reflect on incredible strides. The company has made and then solar industry has experienced over that time.
What was once a producer of a niche technology has evolved into a global company with upstream and downstream capabilities.
From establishing the industry's first PV modules recycling program in 2005, the breaking numerous cost per watt barriers to having over 10 gigawatts of solar assets under operation and maintenance management.
The shipping over 25 Gigawatts of modules since our founding and today, having 5.5 gigawatts of capacity of our new series six model.
For solar has continued to evolve its business model to remain competitive and differentiated and a constantly evolving market.
We have done all of this as a us headquarter company with its manufacturing and technology roots in Paris, Virgo Hydro and our advanced research and technology capabilities centered in California.
Long, our competitive differentiators, including our technology differentiation industry, leading balance sheet strength and the sustainability advantage. We are in a fortunate position of being sold out through the second quarter of 2021.
With significant bookings visibility throughout the balance of that year.
This was visibility over a multi quarter horizon has allowed us to be does this very discerning or the opportunities that have availed themselves over the year.
Finally, our competitive and financial position enables first solar to continuously evaluate the cost structure competitiveness and risk adjusted returns at each of our product offerings, including module development and own and businesses.
As discussed we've evaluated our APC capabilities and our transitioning to a third party execution model.
As a result of this transition approximately 100 associates directly associated with our APC capabilities will leave the company.
But this is our valuation is not being done in isolation.
Since announcing the launch of series six we have contracted over 15, Gigawatts and have created a position of strength with a multiyear pipeline.
However, we cannot be can place.
Rather now at the time to challenge ourselves to secure the right long term sustainable cost structure for our module manufacturing development and own in businesses in order to best position each for success over the next decade.
We expect to conclude of this very in depth to review and communicate the results and the ended the first quarter of 2020.
Ill now turn the call of Alex who will discuss our third quarter financial results and provide updated guidance for 2019.
Thanks, Bob.
Starting on slide nine I'll cover the income statement highlights for the third quarter.
Net sales in Q3 were 547 million decreased to 38 million compared to the prior quarter.
The decrease was primarily a result to produce systems project sales in the United States in Australia, partially offset by the sale of the Seabrook project in the us and higher module sales volumes.
On a segment basis as a percentage of total quarterly net sales of systems revenue in Q3 was 32% compared to 61% in Q2.
Gross margin was 25% in Q3 compared to 13% in Q2.
The system segment gross margin was negative 5% was negatively impacted by several factors, including low overall revenue recognized in the quarter relative to the system segment fixed costs.
Hi mix of lower margin APC projects relative to self development projects.
Ultimately 8 million the charges associated with the decision to transition to a third party execution model.
Also our Seabrook asset, which was acquired in late stage development and was anticipated relatively low risk on low development margin compared to earlier stage development assets was impacted by the economy greater than expected variable integration cost under the PPA, which adversely affected the sale value the project.
The module seven gross margin was 40% in this quarter, which was positively impacted by 18 million reduction in our product warranty liability reserves.
Actually offset by 6 million of series six ramp related costs.
The reduction of product warranty liability business was driven by an analysis of module return rates improving module return rates, while most recent series of modules.
Data and information regarding our historical module warranty claims experience.
The increase in module seven gross margin was driven by increased shipments low ramp costs lower costs towards the product warranty liability decrease.
The 18 million reduction the reserve was equivalent to 22 percentage points of module segment gross margin.
Operating expenses were $97 million third quarter, an increase of 11 million compared to Q2.
This is driven predominately by increased off of expense associated with our second part has been factory.
Net operating income of 41 million in the third quarter compared to an operating loss of $9 million in the prior quarter.
This was the result of increased module sales on the product warranty liability reserve reduction.
Offset by reduced systems segment revenue and gross margin and increased operating expenses.
We recorded tax expense of 15 million in the third quarter two beds in tech expense of $12 million in Q2.
The increase in tax expense for the quarter was attributable to higher pre tax income as well as the jurisdictional mix.
Combinations, the aforementioned items that the third quarter earnings per share of 29 cents.
Led to a loss per share an 18 cents in the second quarter.
And that's on slide 10 discuss select balance sheet items in summary cash automation.
Our cash and marketable securities balance ended the quarter at 1.6 billion a decrease of approximately 500 million from the prior courses.
Total debt at the end in circles is $480 million almost unchanged from 491 million at the end of Q2.
As a reminder, all of our outstanding debt continues to be project related and will come off balance sheet when the project to salt.
Our net cash position, which is cash restricted cash and marketable securities less debt decreased by approximately 500 million to 1.2 billion.
Decrease in on net cash balances primarily related to increased project assets associated with construction of unsold systems projects and capital investments and series six manufacturing capacity.
As of the end of the third quarter that approximately 570 million appointed assets under construction on the balance sheet.
Net working capital in Q3, which include non current project assets and exited cash and marketable securities increased by 241 million. Thus prior courses.
James was primarily due to increased accounts receivable and reduced accounts payable.
Cash flows used in operations were $318 million in the third quarter.
And finally, Capex was 183 million in the third quarter compared to 179 million in the second quarter as we continue to six capacity expansion.
And turning to slide 11, Onyx discuss update some related assumptions to our 2019 guidance.
Firstly 2019 costs associated with our decision to transition to a third party execution model and not previously in our full year guidance, including asset write downs of severance costs are expected to total approximately 10 million.
But this amount 8 million was recognized in Q3 with 2 million expect to be recognized in Q4.
Roughly 1 million a cash charges within remained a noncash an annual savings from these charges are expected to $10 million to $15 million.
Secondly relating to the module business there are four key updates.
The reduction in product warranty liability reserves of 18 million recorded in the third quarter was a noncash item not possible previous full year guidance.
The early than previously anticipated stopping of our second Perry's. The factory is expected to increase 2019 ramp costs by 10 million offset by a 15 million reduction in startup costs.
Additionally, participant to production may provide up to an additional 80 megawatts of products and 29 team, which is not expected to be sold in 2019.
As it relates to all remaining series full production, Malaysia, we're still evaluating the timing of the series for shutdown to facilitate the conversion to 66 and any resulting costs.
Thirdly relating to the systems business.
In the US we've recently signed agreements to sell our Sunshine Valley Sunscreens, one and wind up assets.
Although still subject to closing conditions, we expect to close and complete the sales in the fourth quarter.
Product sale values are in line with our expectations relative to our 2019 guidance with the exception of an ongoing development itinerant item related to one project, which negatively impacted value by approximately $40 million.
In Japan, two weeks, so touching hagibis Pos freight close to home Yaghi project.
Thankful there are no injuries us now related to projects.
However, the impact of heavy rainfall in block prone to so far limits in our access to the site.
Projects in early stage construction with the majority of the work performed today being civil engineering.
Until we complete the aside assessment unclear what impact this event will have on project construction timing the value.
In addition in Japan, a recent proposal by the Ministry of autonomy trade in industry, which would levy any wheeling charge on solar projects with high feed in tariff rates introduce some uncertainties in the market for equity ownership.
This project is Chicago Anatomies, you are currently being structured b cell together using private fund vehicle.
However, we also have the ability to sell these projects as individual assets.
We continue to evaluate sales structure and these events in order to optimize the aggregate value of the projects.
While sales of these assets are willing to not 2019 guidance. We may decide on the basis of this evaluation to defer closing until next year, which would push revenue and margin recognition into 2020 .
And the event none of these three asset sales closed this year, we could see full year 2019, EPS 50 cents below the guidance range with a corresponding benefit to 2020 .
Note that our evaluation the preferred sales structure from development assets is not unique to these assets as we've noted in prior earnings calls this year such as when discussing optimizing the sale of those projects with NFC offtake and like to perceive risks related to the PGT bankruptcy, we will not compromise project value in order to here to any particular timetable.
Fortunately as a result of this uncertainty related to the timing of project sales are ongoing evaluation of the long term sustainable cost structure for off module manufacturing development and OEM businesses the model discussed earlier.
On the wind down of series full production.
Decided to push out the scheduled for the full providing on 2020 guidance.
While we typically provide a year forward outlook in the fourth quarter of the year, we believe that clarity around these masses any associated actions will allow us to providing more informed full year 2020 outlook.
Therefore, deferring guidance until the fourth quarter 2019 earnings call, which is anticipated to occur in February of 2020 .
Lastly, as a reminder, and as previously disclosed ongoing class action lawsuit, which was originally filed in 2012 is expected to go to trial in January of 2020 .
As we've noted in the past given the uncertainties of trial, we continued to not be in a position to access the likelihood of any particular outcome hold to estimate the range of potential loss if any.
We continue to believe we have meritorious defenses and vigorously defending the case.
Our guidance does not take into account the financial impact today resolutions that lawsuit given the uncertainties of trial.
With respect to mine rotating our 2019 guidance as follows.
Our net sales guidance remains unchanged.
Our gross margin guidance has increased by 50 basis points to a revised range of 19% to 20%.
To the product warranty liability reserve release, partially offset by reduced margin associated with a specific development issue relates as one of our us projects.
Costs relate to transition to a third party execution model and increased ramp cost associated with the earlier commencement of operations and our second Facebook factory.
Operating sense forecast has been lower by $10 million, we revised range of $350 million to $370 million as a results decreased plumped south of expense is now focus be 15 million lower at 40 to 50 million, partially offset by higher SG name variable compensation expense.
Operating income guidance has been increased to revised range of $320 million to $370 million as a result for the above changes.
Tony attacked expenses now forecast to be approximately 80 million up from previous estimate usseventy million due to increased operating income and a shift in the jurisdictional mix of income.
Unexpected net cash capital expenditures and shipment guidance are unchanged.
Finally, I will summarize the key messages from a pull today on slide 12.
Firstly, we continue to be pleased with the premise facility six platform, including the significant improvements across key manufacturing metrics and module efficiency.
Secondly, with year to date bookings of 5.4, Gigawatts, we met I want to one book to ship target of approximately two months ahead of year end and we continue to strengthen our contracted position.
And finally, we've increased our gross margin operating income guidance and maintained our full year revenue and EPS guidance ranges.
Well that we conclude our prepared remarks and open the call questions operator.
As a reminder to ask a question you'll need to press star one on your telephone withdraw your question first the pound or hash key.
Please standby little compiled acuity roster.
Our first question comes from Philip Shen with Roth Capital Partners. Your line is open.
Hey, guys. Thanks for the questions. The first one is around your projects Alex I know you gave some detail.
Just now.
In terms of what to look for in the fourth quarter, but can you specifically comment on your confidence level and potentially.
Or possibly the risks around.
Closing on time in Q4 and also is there.
Japanese project that is required for 2019.
Secondly, as it relates to your shipments I think in Q3, the implied shipments were 1.6 gigawatts.
How many megawatts of the of that number was recognized in revenue versus megawatts shipped but not recognizing revenue and then also what was the mix of megawatts shipped that was recognized that was series six versus sort of sport.
Yes.
Yes, I was with regard to the projects in the U.S., we have three assets Sunshine Valley. Some streams of wind up projects and we have signed a deal to sell those assets and that was signed off to the end of the causes that you're not seeing that reflected in the financials for Q3.
I would expect that to close in Q4.
Obviously, there's always some risk until you get to close but we're through the commercial negotiation outs getting through just final conditions precedent to closing so a high level of confidence in those assets.
When it comes to the full year for the the forecast has three projects from Japan in Asia collar asset.
Yeah, the asset on our enemies you assets as of now those threea all structured to be sold in the one fund structure together.
The typhoon the winter, Japan has had an impact to one of our assets as we mentioned in the prepared remarks, we're just starting to get access to the site I understand the damage that now I think.
From the very preliminary views, we have we think the damage. The side is not an extensive however, the damage perhaps steve the surrounding area in potentially the gen tie, we're still waiting to get an assessment of that.
When we look through that obviously this insurance on the side as well as I know, it's early to save it up.
Very early indications would seem to be that from an economic perspective will be okay from a timing perspective, it's still unknown.
So that those those pretty asset Dol rule in the guidance there will GDB.
[laughter].
Individually as well I could be some delta and value doing so and we obviously structured the fund because we think thats the optimal structure in ultimate value for all three assets thousand now they're in the guidance, we'll get more information over the coming weeks and.
The other key is that.
Two things one we had not going to compromise the value. So if we get to a point, where we could pillars assets out and sell them. This year, but we would be destroying value by doing so we won't do that.
Okay them altogether and the second is if there is a delay in selling that that it's simply a timing shift it just pushes out from key for into the next quarter. So it's not a change of value is complete.
And have revenue and margin so thats the.
That's the project piece.
By the shipments.
So I don't what are your questions on the revenue mix. The revenue mix was on my 6% with series six in the 4% Bossa series for.
And then few other question was around the shipments within the quarter, how many were recognized within the quarters as when measured as question correctly.
You know I think we calculated 1.6 gigawatts of shipments in Q3, sometimes you guys ship, but don't nationally recognized those megawatt in revenue. So did you recognize all 1.6. Thanks no no. So we as the number was you're close to the number around around shipments we actually have little over.
Were 800 megawatts of third party module sales that have not been recognized there.
Deferred revenue at this point in time most effectively.
Recognized in the fourth quarter, we also shipped and other close to a little bit north of 100 megawatts into our own system asset. So you've got to combination about 800 megawatts that didnt get recognized.
For third party module sales just based off of shipping terms and trigger for revenue recognition that you got another 100 megawatts or so of 'em series six product ECA deferred out into our systems projects, which will be now recognized a significant portion of that will be recognized associated with our.
Goldeneye.
So on stream.
Hi Valley excuse me and.
And we'll have projects that we will we signed which will close in the fourth quarter and fell if you're trying to walk at forward from last quarter. We said last quarter had about 1.4 gigawatts of shipments in about a third of that recognize revenue a third of that was shipped to our systems assets didn't recognize revenue a third went on to the module business and then recognize revenue so.
As you carry over the module shipments in Q2 that didn't Rubbernecking Q2, Willem Resurrecting Q3, however that the shipments. The went saw systems assets in Q2 may likely not have done still because a lot of that will have an associated with the U.S. assets that we haven't.
Recognize revenue on yet completed the sale.
Your next question comes from Julianna.
Thank you Maam your line is open.
[noise].
What this year versus next year.
I believe there.
Got a bit.
This around the SEC projects and I'll, let Alex handle the balance of but yes. The projects that we just reference that has now been signs of Cps to close to three of them.
Those are all with NFC as the counterpart.
So we're very happy to move those forward.
As you know we've talked about those throughout.
The earnings calls earlier in years, so those are moving forward.
That is again sunscreen Sal Sunscreens Sunshine Valley in would help those are all being the process of being signed basin sign now into the process of closing, which we will expect to happen here in the fourth quarter. The other projects that are still moving around or Japan assets, which Alex can talk about yeah that span.
The previous answer so it should call asset.
In the out yen asset on that Adam Meizu asset. So all three of those are currently in the guidance full cost for the yet.
Got it and it just the 50 cents would be for which will lead again just to clarify that.
So that they comment given was around if we do not sell those Japan assets, we could see coming in 50 cents below the long into the range guidance.
Okay jumped up Japan, Alright, excellent and then if I can give me your.
Thank you.
Can you comment did about this happened pretty improvement for the initial work you guided to let's say, how does that who acute or are they can you with respect to further cost reduction.
Edging into 2020 and onwards, I mean, how do you think about that roadmap certainly good success across the board here can you comment broadly if you can't especially the big lift the optimization elements.
Yes, so that it again at the half Penny.
Actually higher than our target right. So if you look at across the fleet, where it or exiting the year will be about a half a penny higher across the fleet and you get put in perspective that with a 30% reduction from where we started the year and we're talking about a few percentage points that we will be above that number from our current view we're sitting.
We are better than where we had anticipated through three quarters.
But we've got a couple of.
Headwinds that I mentioned in the call, mainly impacting our Ohio factories, and I think factories, because when we began the year. We did not anticipate the startup of areas for two to the target that we gave you would not have had parish for too in that number and so very scared to startup and again under utilization and.
Just general ramp and initial production men's b.
Lower than average while we are now starting the using our this week, we started up on Monday with arc will start to be commission. This week will we actually you're getting good bands without arc and when we include arc will seem better been but they will be slightly lower bins and the overall distribution across the fleet. So you've got a little bit of.
Startup under utilization, we refer to is that some Ben distribution is not nearly a where the fleet average is a little creates a little bit of headwinds you combine that with the.
Tariff related costs that we have on our us manufacturing, it's impacting the overall fleet by about a half a penny we're in the process, we've largely have resource our.
Cover glass to avoid tariffs, but even there we're seeing a slightly higher costs than we would have otherwise we're still working through our aluminum frame around resourcing of that aluminum that would bring the tariff down so that will help drive costs out as we go into next year, but the other lovers around costs will be further throughput it.
Manages and so what we've indicated we've already are starting up errors for two with higher nameplate capacity almost another 100 megawatts will leverage at across the existing fleet. So that incremental throughput will drive better cost per watt average the efficiencies are already improving weve whoever.
Our top ends right now or for 35, we just started to read for 40, so as we roll that higher.
Efficiency higher watts across the fleet next year, we're going to see benefits from that as well. So there's a lot of positives that will help drive costs down further next year, but we do got to figure out we still have some labor inefficiencies that we're working through sales rate in the U.S. in particular for various reasons is higher and we got to find.
The way to bring bring that down so there are some headwinds.
But as I look across the long term horizon and ultimate destination, where we'll end up we're very confident that will meet the targets that we set out for with series six but we are dealing with near term headwinds and and we are evaluating obviously, what the potential impact if any will flow into next year.
Our next question comes from Brian Lee with Goldman Sachs. Your line is open.
Hey, guys. Thanks for taking the questions.
First one just on the gross margin Alex.
Lots of moving parts here for the module segment.
Excluding the warranty I mean, I think for breaking that out the gross margin I guess is implied to be 18%. There. But then you know there's some other moving parts you mentioned the pull forward on Perry spread too I think $10 million.
Some ramp up cost and then some other items. So if we adjust for all of that I'm getting to something in the low twentys.
Sort of as a clean gross margin for the module segment is that fair, we maybe something missing something else. There maybe if you could walk us through some of the moving parts and then I had a follow up.
Yeah. So that you doing the right math on the product warranty release comes out of called side of the module segment.
The roughly 40 million reduction to Cogs coming out of one of the development items that comes out of systems segment.
But thats an affiliate guidance, you're not seeing that in the quarter.
In the call so you're going to see about 10 million a ramp that's out of this out of the module side and then about 10 million associated BPC said he won't that Matt.
You know at 18 minus 40 minus 10 minus 10 in each of about 20000 gross margin. That's what you see in the.
Off point increase to the guidance.
Okay fair enough and just on that point, there's there's nothing from the Q3 quarterly result that would repeat in Q4 is it just just to make sure I get my follow and then on just on them on the capacity here you know last December on the update call you.
You talked about five to five and a half gigawatts to production in 2020 at the target range I think with Perry's bird to pulling forward three months, maybe some optionality to keep series for online through Q1 for Safe Harbor, how should we be thinking about that range. It seems like it had some upside at this point and you also with the de bottlenecking. Thanks guys.
And just just the last thing for me.
On the quarter South of the severance we talked about on the.
VC charges associated with exiting the USBC business as 10 million 8 million hits the cost as you will see 2 million flow through into Q4, but outside of that the warranty.
Reserve release was a one time in Q3 and the development item will hit all in Q4 as we roll through the.
Direct revenue recognition on those projects itself and then it relates to capacity next year for Brian you mean, we're not in a position yet to give guidance on that but I will say that the early start of Harrisburg effectively allows us now we.
Yes, two we'll have more production out of period for two in 2022, it would've otherwise I mean, we're really happy with where we're starting off at a given initial.
And that we're seeing is coming across structural Maya is a really good.
And you know throughput, we expect to make meaningful progress of ramping up throughput between now and we ended the year. So our leaping off point exiting this year and entered into next year will allow us an opportunity to get incremental production in 2020.
Out of our parish for two factories. The other items of in terms of incremental throughput de bottlenecking and other things that we can do across the fleet that exist as well. So we've highlighted that on nameplate capacity right. Now at 5.4 that does not include the additional it'll be volatile.
And and other things that we can do across the other factories, so there's a little bit of upside there.
So I would say we were comfortable over sure we'll be at the high ended the range that we previously guided you for production for next year, and we'll see where we can go above and beyond that and include this one of the things that was we were highly motivated to to start up production.
Not only because we were ready, but obviously driving that through in ramping that factory gives us incremental capacity next year in a very strong demand opportunity set for us and hopefully with that incremental throughput will drive better from a better revenue for next year as well.
Okay.
Our next question comes from then kilo with Baird. Your line is open.
Hey, Thanks, guys.
Maybe going back to the analyst day, you and your margin targets you talk about where you are with we're hitting those targets going there and how.
Oh, I guess trades, you from BPC business module sales changes.
The overall model.
And then maybe just a little more context warehouse capacity within your target meetings.
You can still get to that grew 40% gross margin on six.
Thanks.
Yeah, I mean, I guess way, we'll look at vented Mars, though it's a combination of two things margins. The combination of what are we able to capture in the market from an ASP and then what's the actual cost to produce products.
If you look at.
Our our bookings at 1.1 Gigawatts.
We highlighted again with volumes going now I'm, not only 21, but a portion of that beyond 21.
The Adas fees when it when you look across the are all very good other very much in line with if you look at our.
On a blended base if you look at the.
Q that will come out tomorrow, I think the numbers will find something around 34 cents somewhere in that range and these additional bookings post the end of quarter will be consistent with that type of number so.
When you when you look at that result of good ASV. When I also look at the beds were producing in not only that over time, the energy advantage because suddenly that we wanted to highlight in the.
Typically.
Improvement that we made the or discovery that we've made around replacing copper that will significantly improve long term degradation of the product and we've always said two things is not only efficiency, but energy to or whatever we do need to drive better energy and that's a meaningful driver to improve the energy in that drives value accretive value back into the mom.
Excellent in the market price that we can get.
So when I look at that I feel confident there the cost right now across the fleet. The fact, our low cost regions are where they need to be that's extremely encouraging. We just got some challenges we're dealing with in Ohio, specifically will address some of that with the throughput is is the great way to help dilute your fixed cost and drive your cost for walk out.
Highlighting that benefit in our factory or second factory in Ohio will help we got some work though to be to do on the on the labor and we got to find a way to get some labor costs out of out of Ohio, It's running higher than we had indicated we indicated that earlier in the year. We've got to work through that we're just not quite there yet so when I look at these long term destination of where we.
We will be relative with when I look at where a is fees are and what the.
Cost per watt profile is we're very comfortable with the original gross margin targets that we set for a series six nothing's changed from that standpoint. This half pennies not going to move that is like it would argue that again that have been these being more than compensated by the strongest fees that were seeing.
Ben just to add on the PC piece.
I think we guided that analyst day about a year and a half ago Ninex he is going out to.
5% to 10% gross margin business in MVC, so that is going to come out as we don't.
Goldman MPC and outside where else are the same time as we commented taking cost structure out and we pointed to 10 to 15 million of annual recurring savings as we exit LTC business. So going forward you may see a change in topline revenue as we exit.
The internal performance of that function on an overall consolidated basis, given the MPC when they love percentage margin business, you should see a beneficial impact across the consolidated gross margin.
Our next question comes from the line of Jeff Osborne with Cowen <unk> Company. Your line is open.
Yeah. Good afternoon, guys I was just wondering in terms of the a post the bi facial decision can you talk about what you're seeing in terms of the broader market discussions you're having into the closing material, but safe Harbor.
Is there any a heightened activity or is it a two way so we'll see further at this point.
That we've seen some some.
Additional activity related to that part of the promise we don't have a lot of supply. So that you know that's been one at one of the challenges.
You know in people are looking at it series four we still got a few opportunities potentially that we could enable from say harboring around arounds around series forces. So that that could happen, but you know I wouldn't say look like we were very.
Even though the there's obviously the the exemption was there for a period of time in getting we'd like to continue to size as we said on the call. We're very happy with you a crs decision around the eliminating the exemption that was provided.
Yeah, we were very happy, though still with the ability to go through in sell through that I think when the announcement first came out in June of last year. It. Shortly thereafter, we highlighted that we booked are one of our large orders ever with a single customer which is about 1.7 gigawatts and that was the backdrop of that exception being provided so we've been able to.
So we feel very confident with our capability where technology to compete against by visual models now there could be certain applications in certain geographies that could we could be.
Less advantaged in or maybe disadvantage that that can happen.
But you know I, we've never been we understand the by patients have validated capability relative to our technology, we have accomplished with a relative competitive position. I also continue to look forward of what we're doing that not only inefficiency, but all other ways that we can drive energy performance out of our technology that will further enhance that competitive position against by facial. So we were our teams over.
Looking very hard and were very where as you know the competing technologies that are out there and we're doing everything we can to make sure that we again have differentiated technology of any advantage technology. So.
Yeah, and it'll be a little bit of opportunity here and maybe by throughout the year end, but it hasn't been a real move for US is because we don't have the supply available.
Your next question calls comes from Paul Coster with Jpmorgan. Your line is open.
Yeah, Hi, this is mark strouse on propose don't feel much for taking my questions.
Most of them I've actually been answered, but so mark wanted to ask you a high level question, you're not symbol.
18% efficiency on the 440 walk panels.
You know as you continue to improve your Pollard should investors think of that as you know kind of relatively modest tweaks to series six technology or you know.
How much runway do you have until.
Series seven platform would be a potentially required.
So the way I. The way then with describe it is that you know a core were a technology and manufacturing company. Then we have to stay ahead of the game on the technology. So there's still plenty of runway to go on on series six again driving efficiency improving the energy profile of the product not only long term degradation look at.
Ways that we can improve temperature coefficient look away to the extent, we can to improve spectral response rights anyone due to generate more energy.
You know in real world condition, because of the point I always like to make is that the efficiency that that flash test are labeled on a module is at 25 degree C. The real world operating parameters of the module.
How many other issues to deal with not only with temperature, but moisture in the air and other things that can adversely impact the performance of the model and then you have the long term their creation impact in more of that you can do to improve that overtime all enhances value of the technology. So we have many levers still to go around series, six but I'm not going to rest.
Without thinking through the team's doing a great job to think about use the word series seven whatever you want to call. The next evolution of the technology, where that's a top of mind for us and we have one of the nice things that we have always had as we've had our advanced research team is in California, that's always been out in front of the game and looking at.
Other potential technologies and capabilities, we've made investments over the years and early investments in six of made investments with mono crystal and and tight did to understand that technology, where we've made investments to study rosgaard. So were funded the game and we're always looking at what can we do to take our technology. So the next level.
We are looking at the next generation technology, we have two but in the interim we're very confident and comfortable with the with the product that we have and its capabilities to compete and to further enhance is there something more disrupted the could be out in the horizon. There. Maybe you know we will keep working on that and you know and hopefully.
Crystallize those thoughts and communicate when we're ready.
Our next question comes from Michael Weinstein with Credit Suisse. Your line is open.
Hi, guys.
Hi.
Most of my question to answer to maybe you could just talk a little bit more about the.
Where you stand regarding the relative to the 40% targeting below 2016 levels for series six cost reduction you know maybe more specifically around you know that 40% number where you stand now.
What I would say I mean like that that 40% number if I if I look at it at our let's say our.
Lowest cost factor today, not only because of just.
Of the region, but also because we're running to production lines in Vietnam, Vietnam right now because of that in one of the things that will happen when we put our second factory in Malaysia, you'll be able to leverage the you know the.
The tool set across both factories, which we know helps drive throughput and managed through downtime and other things that create headwinds around your cost profile Vietnamese is our advantage factory today.
And when I look at where that cost is as we exit this year relative to do that 40% target you know will will be a very good position.
To have achieved that number when I look at the fleet were slightly behind.
Mainly for the reasons that I mentioned and that's what we have to work on in terms of getting at the end of this year. It doesn't mean that destination is going to change. There's many levers we can get to get to the destination, but at this leasing off point or bought across the fleet about a half a penny higher than where we need to being we've got to figure that went out.
I mean.
Is this one of the is this the main reason why you're pushing out guidance into early next year for 2020.
No I guess, if you look at guidance.
I think the commented in the script right on the module cited a lot of moving pieces.
In terms of when we shutdown series four and transition that over to series six.
You go back to.
Early 2018 at that point would have said we were planning on shutting down that series for the end of 2018.
There was a surge if demand around the safe Harbor, especially had a large custom order come in that just that volume all the way out through the back end 2019, we're actually in a position right now where.
One of our customers around series floors is potentially in some financial distress now we have secured against those bookings, but we're looking to optimize our risk profile that may make sense for us probably low risk value timing detention reduce some of that series for earlier than planned helps us come but only at the series six and get it get to a more advantaged products technology. So there's some uncertainty for us.
Around the module business around when we make that goal the significant uncertainty around timing in the systems business as I mentioned earlier this is timing of value, but right now we've got.
You asked assets that even since the end of the quarter.
As commented earlier with significant uncertainty around.
What's happened in Japan.
On the two weeks ago, ace or a Thai food and kind of true.
Which is completely and I'm on for.
Plan.
So we bought all that is moving pieces and then I think as Mark mentioned in his prepared remarks as well. We're also doing deep dive into the cost structure across the entire business. That's we've made the decision around.
Turning our APC approach.
Is that as part of that we're looking Andy I. Its legacy costs that are remain in the developed business as well as looking at all of it about the business units, including the module.
To make sure that cost competitive across every business unit.
So with all the moving pieces.
It's not the case it having one binary outcome, we are designed to enable or fees in our business case, we've got a lot of different is that makes it very hard to keep.
An accurate tied to it wrong again through all of those come out and.
More accurate numbers.
Yeah. It along those lines is concerned and just to put it back in perspective, because it's been a while if you looked at last three factories, which we've commissioned a the too.
Two in Vietnam, and then or Ohio factory.
While we had its still the in the Oh.
We didnt have any associates and then we've built a brand new facility and a second facility in Vietnam and that we've built a brand new facility in Ohio.
If you go back and remember what happened and we did the.
Winding down for Harrisburg, and our first factory in middle aged their water reductions.
And they were de commissioning costs.
Yeah.
Reduction because youve you'd have to remember that the effectively.
Basis, Theres about 50% less labor and its series six versus series.
And the product.
Our second Faq document aleisha to headcount lead rather than the factory through.
We feel it's bad thing they do with waited until.
Our final question will come on the line of Joseph O'shell with JMP Securities. Your line is open.
Oh, Hey, I made it a thank you.
Just following on from there quite <unk> I will get your hard for them to the end of 2008.
Yeah, Yeah, and you you alluded earlier Mark to six Gigawatts in capacity in you know going into <unk>.
That number would seem to be a little conservative you're you're suggesting that youve got five 1.2 gigawatt poignant or Ohio.
That 6.6, right there are a mats or any of these 15 fees that you talked about so.
All good things being equal I'm, just wondering whether we should be thinking about you know <unk> through <unk> due to walk through route put into the HM 2021.
And the way the waiting we always try to refer it is is that you know we're very much.
Man group demand driven drive off.
And our supply capacity plan road map and as we did more and more comfortable and confident with the following you've made only 21.
And again, we're about.
Two thirds right now plus you've got in corporate color gigawatt hours. So over the systems business relative to that original also apply to six of the App, we're starting to get to claim to have more confidence in 22.
They want and I also like that we're starting to fill up some totaling 200 beyond so the more of the better we do with bookings in the more we book out and forming wanted beyond it gives us a higher level.
To optimize and make sure we drive higher than supply Atlanta.
I wouldn't be alliances the demand that we see highly predictable to man to ensure we could get scale and I'm going to ramp that path to be efficiently because of the customer offtake requirements for by numbers, we've been doing ourselves.
Our plan for Rob.
This concludes today's conference.
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