Q4 2019 Earnings Call
[music].
Good afternoon, everyone and welcome to first so fourth quarter and full year 2019 earnings and 2020 guidance call.
This call is being webcast slides on the Investor section a first solar web site at Investor thought for solar dotcom.
At this time all participants are no listen only mode. As a reminder, today's call is being recorded.
I'd now like to turn the call over to Mitch and is from for solar Investor Relations Mr. and as you may begin.
Thank you good afternoon, everyone and thanks for joining US today the company issued press releases announcing its fourth quarter and full year 2019 financial results as well as guided for 20 point a copy of the press releases and associate a presentation are available on first source of upside at Investor got personal or Dot com.
Me today are Mark Widmark, Chief Executive Officer, and now its Bradley Chief Financial Officer, Mark will begin by providing a business and technology update and out to discuss our financial results for the quarter and full year 2019.
Following these remarks, Mark will provide a business and strategy update for 2020 hours will then discuss the 2020 financial outlook. Following their remarks, you open the call for questions.
Most of the financial numbers reported in the discussed on todays call are based on U.S. generally accepted accounting principles and if you cases were reported non-GAAP measure such as non-GAAP EPS reconcile this non-GAAP measure to the corresponding GAAP measure at the back of our presentation. Please note. This call will include forward looking statements involve risks and uncertainties that.
Could cause actual results could differ materially from management's current expectations. We encourage you to review the safe Harbor statements contained in today's press releases and presentation for more complete description and it's now my pleasure to introduce Mark Woodmark, Chief Executive Officer arc.
You Mitch good afternoon. Thank you for joining us today I.
I would like to start I addressing our loss per share results for 2019, which was the dollar nine on a GAAP basis with earnings per share of $1.48 on a non-GAAP basis adjusted for litigation losses.
We are disappointed with the outcome, which came in below our EPS guidance range.
While Alex will provide a more comprehensive overview I wanted to highlight several items that had a material impact on this result.
Firstly as initially disclosed on January six we entered into a memorandum of understanding to settle the previously disclosed action litigation.
Which was originally filed in 2012.
Earlier this week, we disclose that we entered into a settlement agreement that is consistent with the among you.
As part of this agreement, which is subject to court approval, we agreed to pay a total of 350 million to resolve the claims asserted by the class action.
Settlement agreement does not contain any admission of liability wrong doing well responsibility by first solar.
While we are confident in fact, the merits of our position. We believed was prudent to end. This protracted an uncertain class action litigation process and focus on driving the business forward.
As a reminder, some agreement does not resolve any of the claims asserted in the opt out action against us for the derivative action.
Secondly challenges related to our systems business over the last few months as has had significant impact with respect to revenue gross margin. These challenges related to both projects sale and completion timing as well as higher expected costs due to adverse weather impacts.
This will provide more detail on the impact of these challenges to 2019 results.
Despite the EPS result, and in the year continued intense competitive.
Pressure across TV industry, I would like to highlight some of our notable achievements in 2019, please turn to slide four.
Firstly the company celebrated its twentyth anniversary and reached a significant milestone of 25 Gigawatts partnership we are the world's largest thin film PV module manufacturer and the largest PV module manufacturer in the western hemisphere.
Secondly, we saw strong net bookings of 6.1, gigawatts as well as record shipments of 5.4 Gigawatts.
Thirdly in 2019, we produced 3.7 Gigawatts of series six product of three gigawatt increase over 2018.
Our series six nameplate manufacturing capacity increased to 5.5 Gigawatts.
Our top production been reached 435 watts and our commercial production line, which we manufactured a new record 447 lot Cadtel module as validated by copper.
These remarkable accomplishments, which demonstrate the strength of the first solar team and culture give us confident in our ability to continue to realize the full potential of our competitively advantaged series six platform.
Turning to slide six I'll provide an update on our series six capacity ramp and manufacturing metrics.
Over the course of 2019, we realized significant operational improvements comparing December 2019 metrics against those at December 2018 megawatts produced per day was up 152% capacity utilization adjusted for planned downtime increased 26 percentage points to 100%.
Production yield was up 32% sanish points to 94%.
Average lots per module increased 20 watts and our highest volume been increased to 435 watts.
Finally, the percentage of models produced with anti reflective coating increased by 24 percentage points to 96%.
This momentum has continued into 2020 comparing February 2020 month to date I guess October 2019 metrics megawatts produced per day is up 25% capacity utilization adjusted for downtime remains over 100% at 105%.
Production yield is up two percentage points average modeled per watt led by our highest been of for 40 megawatts as increased seven lots.
And the percentage of modules produce within our reflective coating has increased by two percentage points.
This combination of our efficiency improvement program and increased arc utilization led to a significant improvement as a module been distribution.
Our been distribution from 430 to 40 watts. During this period was up significantly to 93% of production.
Turning to slide seven of next discuss our most recent bookings in the and the great in greater detail.
Our fourth quarter net bookings of 1.4, Gigawatts, bringing total 2019 net bookings to 6.1 gigawatts.
We're off to a strong start in 2020 with 0.7 Gigawatts of net bookings since the beginning of year.
Included in our new bookings since the previous earnings call or approximately 0.8 gigawatts of aggregate orders were deliveries in 2022 in 2023.
Our future expected shipments of 12.4, Gigawatts remains strong even after a record fourth quarter shipment, which accounted for 31% of the full year total.
Our net bookings for the year included 1.7 Gigawatts of de bookings, including 1.2 Gigawatts of de bookings in the fourth quarter.
Approximately 0.9 of the fourth quarter de bookings related to a customer and financial distress.
To improve our counterparty risk we have relieved this customer their obligation and re contracted majority of this volume.
Nope demand for our series six module remained strong as reflected in our gross bookings since our last earnings call of 2.6 Gigawatts.
We're very pleased with our bookings performance in 2019, which exceeded our one to one target book to ship ratio, we believe our record of meeting pricing and delivery commitments for long dated agreements enable us to contract significant module volume not only in the near term, but also in 2021 and beyond.
I'll now turn the call over to Alex who will discuss our fourth quarter and full year 2019 results.
Thanks Mark.
The floor is getting the financials for the quarter and fully on detail ill first provide some context around the fact is which led to the 2019 year end results falling below our guidance ranges.
Firstly in early January we set low class action lawsuit for 350 million.
As noted earlier the separately what remains subject to approval of the court.
Additionally, we accrued 13 million of estimated losses relating to the separate opt out case.
This represents our best estimate of the lower bound to the costs to result, this case.
The litigation losses recorded operating expenses in the fourth quarter of 2019.
Secondly, with respect to our international systems business within not complete the sales of I should call, let me Aldi and on the music projects in Japan.
For the time of all last earnings call, we're still evaluating the impact to the then recent tied to an hagibis, which Pos needs while Miyagi project.
We have since completed our analysis of the impact which has limited does damage. The project site itself, which is largely expected to be covered by insurance.
However, the road on which the Gen. Highline is designed to run was seriously damage, which prevented the project sales in 2019, and also impacted the structuring and timing of the private fund vehicle, which was expected to quiet all three assets.
In addition, the sale of approximately 40 megawatts of assets in India included in our guidance for the year did not plates.
With respect to use systems business in Q4, we completed the sale of 150 megawatt sunscreens, one 100 megawatts Sunshine Valley and 20 megawatt wind today projects.
Full three projects, which are being constructed by first solar SC achieved substantial completion in December of 2019.
During the quarter. We also completed the sale of our 160 megawatt little that portfolio.
This transaction was structured as a sale of the project entities within touch module sale agreement utilize utilizing a third party MPC provider.
Previously used in the sale of our code mountain and muscle Shoals assets in Q2 of 2019. This structure is reflective of our recently announced transition to a third party execution model.
Note that in a public filings. This also has the effect to removing the little their assets from our systems pipeline table and adding an equivalent volume of expected future module sales.
Thirdly as it relates to our series full production in Malaysia in December we began the transition of one of our remaining two series four plants to our second series six factory that and incurred 6 million a shutdown costs.
We anticipate discontinuing our remaining series for production in the second quarter this year.
Well this context the mine I'll discuss some of the income segment highlights for the fourth quarter full year 2019.
Starting on slide nine.
Net sales in the fourth quarter were 1.4 billion, an increase of 853 million compared the prior quarter.
Hi, a net sales were primarily results by US project sales and increased module shipments.
For the full year 2019, net sales were $3.1 billion compared to 2.2 billion in 2018.
Plus into our guidance expectations net sales were lower primarily due to the aforementioned delay in the sales about Japan, and India or assets as what a lower than forecast essentially completion from a U.S. asset sales.
The timing of revenue recognition on certain module sales.
As a percent of total quarterly sales systems revenue in the fourth quarter was 53% compared to 32% in third quarter.
For the full year 2019, 52% of net sales was from our systems business compared to 78% in 2018, as we expanded our module sale volume in 2019.
Gross margin was 24% in the fourth quarter compared to 25% in the third quarter for the full year 2019, gross margin was 18% compared to 17% in 2018.
The system segment gross margin was 24% in the fourth quarter compared to negative 5% in the third quarter.
Fourth quarter was positively impacted by the sale of our U.S systems assets previously mentioned offset by two principal license.
Firstly with respect to project, we're constructing in Georgia, which is among the final projects being constructed in house by first solar energy as we transition to a third party execution model.
Late December 2019, and January and February of 2020, we experienced heavy rainfall of the site, which resulted in project delays and increased costs impacting gross margin by approximately $12 million.
Secondly, based on an ongoing dispute with a customer we recorded a reduction to revenue and gross margins 7 million relates to certain outstanding EPC project receivables.
We're evaluating our legal options with respect to this massive.
For the full year, the subway systems segment gross margin of 16% compared to 25% in 2018.
The module segment gross margin was 24% in the fourth quarter compared to 40% in the third quarter.
Third quarter was positively impacted by an 80 million product warranty liability reserve release equivalent to 22 percentage points of gross margin as discussed on our third quarter earnings call in October.
In the fourth quarter module gross margin was negatively impacted by the aforementioned series for shutdown costs 13 million a ramp costs as we continue to ramp our secondary Perry's book facility.
For the full year modules segment gross margin was 20% compared to negative 10% in 2018.
As she and I R&D in production startup totaled 88 million in the fourth quarter, a decrease of approximately 9 million relative to third quarter.
This decrease was primarily driven by a reduction in startup expense from 19 million in Q3 to 7 million in Q4, as our second pairs that facility ramp.
SGN, a R&D and startup totaled 348 million in 2019 compared to 352 million in 2018.
Combined with the previous has discussed litigation losses of 363 million total operating expenses were 451 million in the fourth quarter and 711 million for the fully at 29.
Operating income was negative 118 million in the fourth quarter, a negative 162 million for the full year 2019.
And compared to our guidance the operating income was lower than expected as results. The previously mentioned factors.
We recorded tax benefits of 31 million in the fourth quarter, including a benefit of 91 million related to litigation losses.
For the full year, we recorded a tax benefit of approximately 5 million, which also include the aforementioned 91 million benefit compared to 3 million of tax expense during 2018.
The tax benefit was primarily driven by the tax effected litigation losses, offset by return to provision adjustments to certain foreign jurisdictions normalization of uncertain tax positions. They change in jurisdictional mix of income largely due to the aforementioned project NC plus module sale agreement structure. We recently employed in the U.S project sales.
Fourth quarter loss to share with 56 cents on a GAAP basis has the GAAP earnings per share 29 cents in the prior quarter.
For full year 2019, the loss per share was one dollar nine on a GAAP basis with earnings per share of $1.48 on a non-GAAP basis, adjusting for litigation losses compared to GAAP earnings per share of $1.36 in 2018.
In summary relative to our guidance our full year earnings were adversely impacted by several factors.
Firstly not closing the sale of our Japan assets impacted EPS by approximately 50 cents the possibility of which we indicates in our third quarter earnings call.
Secondly, we had an approximately 20 cents impact from a combination of the delay in sale of our projects in India delayed revenue recognition juice apart should reduce percentage of completion allow us systems assets under construction.
And the timing of revenue recognition on certain module sales.
Thirdly, we had an additional aggregate 20 cents of systems business impact due to adverse weather events and the reversal that accrual related to a customer dispute.
Foresee severance cost associated with the shutdown of our series four facilities combined with increased variable compensation and the other miscellaneous operating expenses impacted EPS by approximately 10 cents in the aggregate.
And finally increase other income from the set the gain on sale of certain securities associated with the end of life, we slightly obligations was offset by increased tax expense.
The next turn to slide 10 discuss select balance sheet items in summary cash flow mission.
Our cash marketable cash restricted cash balance at year end was 2.3 billion an increase approximately 9.6 billion from the prior courses.
Total debt at the end of the fourth quarter was 472 million a decrease of 9 million from the prior quarter.
As a reminder, all of our outstanding debt continues to be project related more come off our balance sheet when the project. So.
Our net cash position, which includes cash restricted cash and marketable securities less debt increased by 9.6 billion to 1.8 billion at the end of the fourth quarter.
The increase not net cash balances driven by the sales of our US project assets module sales and grace than previously forecast advance payments received for sales of solar modules. Prior to year end 2019 stepped down in the U.S. investment tax credit.
I would note our year end net cash balance does not reflect the impact to the accrued $350 million class action settlement, which was paid into escrow in January of Twentytwenty.
Net working capital in the fourth quarter, which includes non current project assets and excludes cash and marketable securities and the litigation related accrual decreased by 9.5 billion versus the prior quarter.
Change was primarily due to project development asset that was sold advance payments received module sales.
Cash flows from operations were 174 million in 2019, an increase of 501 million relative to 2018.
As a reminder, when we sell an asset with project level debt that is assumed by the buyer the operating cash flow associated with the sale of less than if by had not assume the debt.
2019 buys about projects seem to $88 million liabilities relating to these transactions.
Finally capital expenses were 158 million in the fourth quarter compared to 183 million in the third quarter.
Capital expenditures were 669 million 2019, compared to 740 million 2018.
Capital expenditures were primarily attributable to our series six past extension.
I'll now turn call back over to Mark will provide a business strategy update.
Thank you Alex turning to slide 12, I wanted to start by highlighting the strong market opportunity and drive us in the next five years alone as reflected in the graph to the left.
The amount of PV capacity installed globally as expected double.
As shown on the graph on the right.
In many markets is competitive with all major forms of fossil fuel generation.
Mark momentum for PV continues to build our series six technology product roadmap and market, leading research and development are all key Differentiators, which we believe will enable us to meaningfully participate in this way with demand for clean and affordable energy.
Within this context as the overall market Slide 13 provides an updated view of our global potential bookings opportunity, which now total 18.1 gigawatts of opportunities.
This includes 9.8 Gigawatts in 2020, and 2021 with the remainder 8.3 gigawatts for deliveries in 2022 and beyond.
In terms of segment mix the pipeline of opportunities includes approximately 15.4 gigawatts of modest sales with the remaining 2.7 gigawatts representing potential systems business.
In terms of geographical breakdown North America remains the region with the largest number of opportunities at 14.8, Gigawatts Europe represents 2.4, gigawatts with the remainder in other geographies.
A subset of this opportunity said is our mid to late stage bookings opportunities of 8.2, Gigawatts, which reflects those opportunities we feel good book within the next 12 months.
To subside as approximately 72% module only.
70% North America base.
With 43% of deliveries anticipated in 2022 and beyond.
This opportunity set combined with our contracted backlog gives us confidence as we scale our manufacturing capacity.
Turning to slide 14, with the addition of our second perished factory during the fourth quarter of 2019.
We exited the year with a name plate series six manufacturing capacity of approximately 5.5 gigawatts.
This includes increasing the nameplate capacity of our second factory in Harrisburg from 1.2 to 1.3, Gigawatts enabled by optimizing tool performance identification and alleviation of bottlenecks.
And optimizing work in process across the broader areas for complex.
Through 2020 rollout similar throughput improvements across three operating facilities in Vietnam and Malaysia.
Which will live our cat cap with limited capital expenditures will enable these factories to end the year at higher than 1.3 gigawatt nameplate capacity, an increase of 8.3 gigawatts of aggregate nameplate capacity.
In addition, we will continue factory optimization in Ohio, and expect to increase nameplate capacity there by an additional 0.2 gigawatts, resulting in a fleet wide year end 2020 nameplate capacity of six gigawatts.
Continuing into 2021, we expect the combination of improved throughput yield and efficiency to increase nameplate capacity at our international factories to 1.4 Gigawatts.
With the addition of the second series six factory Malaysia.
This implies total international manufacturing capacity of 5.6 Gigawatts.
Hi out through the installation of additional tools and optimizing the two very strict factories into one consolidated platform. We expect to increase nameplate capacity to 2.4 gigawatts by the end of 2021.
Resulted in anticipated fleet wide nameplate capacity of eight gigawatts by the end of 2021.
Turning to slide 15.
This capacity expansion will have a meaningful impact on our production capabilities.
In 2019, we produce approximately 3.7 Gigawatts of series six and two Gigawatts of series for.
As previously discussed we expect our remaining series for capacity to be wound down in the second quarter 2020 with total production in the year to be approximately 300 megawatts.
36 production is expected to increase significantly due to the started production of hers for two and implementation of the aforementioned manufacturing and module efficiency improvements.
In 2020, we expect approximately 5.7 Gigawatts of series six production.
With the second series six factory, Malaysia expected to start in the first quarter 2021.
And with anticipated increase nameplate capacity and parish, where we expect 2021 production of 7.3 to 7.7 Gigawatts.
With regards to bookings, we're effectively sold out through 2020.
And our approximately two thirds sold out so the midpoint of the expected supply in 2021.
In addition, we have approximately two gigawatts sold into 2022 and beyond.
Turning to slide 16.
I will now discuss our module efficiency improvement roadmap.
On our 2017 guidance call in November 16, and updated at Analyst day in December of 17, we provided an expectation of near and midterm efficiency goals.
As shown by the Purple Dot and the all line on the graph we expected to launch in 2018 at 420 to 430 watts per module.
And we set out in a midterm target of 460 watts per module.
At the end of 2018.
Despite a high band of 425 Watts, our average watts per module was only 411 as we faced challenges in initial ramp of our series six products.
We have continued operational improvements increased our penetration and the execution of our efficiency improvement roadmap.
Year end 2019, our average watts per module has increased to 430 was on a fleet wide basis with a high then a 435 watts.
Today, our highest volume Ben is 435 watts.
Which are consistently and we are consistently producing 440 Wap modules as mentioned previously.
We have certified a record production model of 447 Watts, which requires no significant technology changes and thus represents a near term production target.
As we look forward, we see a clear line of sight to achieving the target state in December 17 annual analyst day, a 460 watts per module.
As well as significant opportunity to go beyond that with a new midterm goal of 500 watts per module.
No. Unlike recent increases in Chris and Silicon margin sizes, the watched increase will be achieved using our current module form factor.
As previously discussed on the prior to earnings call. The key driver to achieving this efficiency increase is our copper replacement or pure program.
Structured three phases. The initial phase one were combined with other ongoing R&D programs is expected to lead to an approximately 20 watt improvement, bringing to US a 400 watts per module goal, which we expect to achieve by our on our lead line in the second half a 2021.
After the launch of cure there'll be further optimization and two additional phases.
It will be the main drivers behind our new 500 watt midterm target.
As shown recently through R&D efforts, replacing copper and the thin film device not only serves to increase model wattage, but also dramatically improves energy delivery.
This program is expected to increase the series six energy advantage by improving our temperature core fitted coats coefficient advantage relative to Chris and silicon modules as well as significantly reduce long term degradation and a predictable in quantifiable manner, and thereby thereby increase lifecycle energy.
Turning to slide 17, I'd like to compare the value proposition of our new cure series six model relative to a Chris and silicon model per by patient module.
While the potential energy advantages of bi facial modules are all compounded.
The increase costs are often overlooked.
As PVA and merchant energy prices continued to decline the ability to increase energy output with little to no increase cost is critically important.
Designing the solar power plant with bi facial Bob This is a trade off of cost for energy.
As it typically add incremental capital and operating costs compared to a monetization plan.
Among others. These collapsing include the requirements for additional steel to enable elevated structures additional land and development costs to accommodate increased rose facing an increase on m. and vegetation management costs to allow for diffuse light reflection.
Turning to slide 18.
I'll provide some context around our module cost per watt.
As presented on our 2017 guidance call in November of 2016.
Over a year prior to the production of our first module series six module.
We forecasted a series six cost for water approximately 40% lower than that of series for while at the same time, eliminating any significant form factor difference and associated cost penalty.
Does the started a series six commercial manufacturing.
We have faced challenges with regard to certain aspects of the overall cost per watt in particularly related to glass in freight costs compounded by tariff gyrations and uncertainty.
Offsetting these we have seen significant improvements in throughput and efficiency, especially in our high volume international manufacturing locations.
As mentioned on our third quarter 2019 earnings call. These international Billy said facilities have consistently been producing above 100% of name plate.
Reach in recent high of approximately 120% of original nameplate.
We were on Pat a plan to achieve our year end cost goals for these international facilities.
However in Harrisburg, the earlier production ramp of our second factory together with the challenges related to the bill of materials labor and sales freight costs created significant headwinds.
At this backdrop.
At Q3, we forecasted our fleet wide cost per watt to end the year approximately half a penny higher than the internal target. We set at beginning of the year, which is where we're at where our fleet costs actually ended the year.
Based on our 2019 exit point.
And forecasted throughput yield and efficiency improvements in 2020, we're expecting to exit 2020 at our low cost high volume manufacturing sites, having achieved the original cost ROA target that we set out in November of 2016.
Throughout 2020, the monitor cost a lot of Harrisburg is expected to improve as we ramp are significantly larger second facility and we drive throughput improvements across two factors. However, we do not anticipate to fully overcome the cost challenges experienced in 2019.
Across the fleet in 2020, Harrisburg, representing one third of the production will create a headwind of approximately a penny per watt.
Looking beyond 2020, I would like to discuss five key levers that we believe will enable us to reduce cost per watt in the mid term.
Relative to these levers it is important to note the significant impact improved efficiency and throughput have on cost per watt.
Firstly business the improvement generally have little if any impact on the cost of producing a model.
Therefore in general the percentage in improvement in watts per module can be directly translated into a reduction in cost per watt.
Secondly, throughput improvements essentially by definition are leveraged against fixed costs, which results in the incremental volume above nameplate capacity being the variable cost of production or typically the module bill of materials.
Now looking at the slide in starting on the left the Blue bar represents the original cost per watt target communicated in November 2016.
Which we anticipate achieving at our high volume international manufacturing sites by the end of 20 Twond.
Beginning with watts per module increased module wattage through our previously discussed R&D efforts and the cure program leads to a significant cost per watt reduction.
Secondly over the midterm, we see the potential to increase throughput by approximately 30% to 35%.
Which provide a fixed cost solution benefit.
Thirdly, we are targeting an increase in manufacturing yield from approximately 95% today to a mid term run rate of approximately 98%, which provides a direct benefit to fixed and variable cost.
Firstly, we see mid term opportunities to reduce variable bill of material costs between 20 and 30%.
Primarily across glass and aluminum.
And finally, we believe the combination of increased swaps per module in transport optimization and lead to a 10% to 20% reduction in sales freight costs.
Note for comparison purposes. Please remember unlike our competitors.
We include sales rate in warranty in our cost per watt.
Combined with the benefits of our cure and other R&D work.
With the aforementioned cost levers. We believe we are strongly position to continue to drive series six cost per watt efficiency energy improvements over the mid the near and midterm.
Relative to our commitment to technology leadership as I mentioned previously we have recently Reenergize, our advanced research team.
While there is still tremendous headroom in our series six platform. We continue to challenge ourselves on commercializing the next generation disruptive thin film technology.
Is exciting to see what the team has accomplished so far and the extraordinary potential there is for thin film Cadtel PV beyond series six.
Finally, before turning the call over to Alex I would like to provide an update on the internal review discussed on the third quarter earnings call.
As a reflect over to less than two years since our first series six production module came off our initial line and parish Bert.
We are extremely pleased with the progress we've made.
We've created a position of strength with our multiyear backlog.
And our module wattage energy in cost per watt roadmap.
However, as we look across the next decade, we need a challenge our business vertical strategy.
To assess if product offerings of our product offerings are in a position of strength that can leverage points of differentiation to create value for our customers and an attractive profit pool.
We have been conducting an evaluation of the long term sustainable cost structure competitiveness and risk adjusted returns of each of our product offerings, including the module development in autumn business.
At our core we our technology and manufacturing company.
Over time, we have added to this core competency in order to address unmet needs within the market optimizing around and enabling the delivery of our products and capturing an incremental profit pool.
These capabilities that included among others project development LPC and over now.
As discussed in our previous earnings call. We've made a decision to transition to a third party execution model.
We originally entered into VPC business to enable cost effective installation of our smaller form factor modules and to fill a credit the cabin capability gap in the PV market.
Overtime market consistent increase with many having economies of scale leveraged across multiple market segments.
The external ecosystem of VPC capabilities improved.
And risk adjusted returns diminished at the same time as our product evolved to be more capacity will with market balance of system offerings.
Consequently.
The premise for us maintaining and internally PC competency was no longer justified.
And hence we made a decision to transition to a third party BPC execution model.
The U.S. development business was likewise experienced a significant evolution and the business that we entered into in 2008 is dramatically different today.
Originally viewed as a channel to market for our smaller form factor modules. The development business. Initially saw VPA size in the 100 megawatts and a handful markets providing certainty of off take four significant portion of our manufacturing capacity.
We also benefited from a first mover advantage, enabling us to capture a profitable incremental to our module sales.
Today, we are significantly expanding our Matt might manufacturing capacity with a more advantage series six product competition within the development market has increased.
Project sizes have decreased and the risk adjusted returns have reduced as aggressive pricing has resulted in benefits to of the project slowing to declining LCL east rather than to increase development margins.
At the same time the capabilities required to be successful and the development have changed.
Assort pillars of solar project development include siding, permitting interconnection and securing a credit worthy PA.
Skills remain fundamental however, successful project development at a meaningful scale today requires a broader geographical market presence as well as additional competencies such as battery storage power trading the ability to manage increase offtake complexity and financial structure and complexity as well as asset ownership.
Yeah.
In this more competitive environment.
They remain opportunities for project developers to make acceptable margins. However for us to remain competitive in the long term, we would need to invest and enhancing our capabilities and offerings to the market to reflect this new development paradigm.
While maintaining a competitive cost structure.
Any such investment needs to be compared with our primary investment thesis to increase module R&D and add manufacturing capacity and improvements.
Accordingly, our focus is not to create internal capabilities that already exist externally.
As a result, we are working with an advisor to evaluate strategic options to best position, our us development business for the mandate position to position the business to succeed in it continually evolving market for solar generation assets, while maximizing value or first solar shareholders.
Well, we're open to partnering with a third party, who possesses complimentary competencies and capital to further scale the business. The pursuit of a partnership could potentially result in a complete sale of the us development business.
Turning to on M., we entered the business at same time as we entered into utility scale development NBC.
In order to satisfy another unmet need in the PV market and take advantage of another profit pool within the utility scale space.
Our own business over the natural extension of our position as one of the largest developers NEPC contract contractors in the PV industry, allowing us to maintain a long term relationship with Counterparties and the project. After was developed sold and constructed by us.
Over the last several years, we've expanded our own in business beyond our captive development pipeline to third party developed projects with and without our modules.
We have created a formal position as the largest onem provider in the U.S.
Our economy of scale largely have traded a competitive advantage and allowed us to maintain a profit pool in an aggressive pricing environment.
However, beyond scale additional value added services and cycles of innovation are needed to enhance our own end value proposition and deliver services and a more cost effective manner.
We continue to evaluate our own and strategy in light of these requirements.
Clarity.
Through our ongoing evaluation. The objective is to ensure our online business April without constraints to achieve its full enterprise value potential and continued market leadership.
The consideration of strategic options for our US development business is that preliminary stage and May not result in any transaction being consummate.
We do not intend to disclose further developments with respect to this evaluation process, except to the extent the process is concluded orders otherwise deemed appropriate.
I'll now turn the call back over to Alex will provide 2020 guidance.
Thanks Mark.
Turning to slide 21, I'll begin by discussing the assumptions included non Twentytwenty guidance.
Give me uncertainty around any outcome from the evaluation of strategic options for our development business Twentytwenty guidance assumes no change to existing lines of business.
Starting with production a serious in Saudi is expected to increase to 5.7 Gigawatts with an additional 300 megawatts assemblies for prior to shutting down our remaining series for capacity in the second quarter.
As a result of this transition we expect to incur approximately 20 million of severance decommissioning another shutdown costs and twentytwenty.
2020 volume selves inspect the 5.7 to 5.9 Gigawatts as a reminder, in 2019, we structured our coal mountain muscle Shoals Liberal that projects a sales a project tenancy with an upfront development fee and then associated module supply agreements.
2020, we expect to continue to structure you asked assets Andreas sales I'm very similar structure, including the sale of our American Kings and sunscreens two assets.
Optimized Ron you approach DTC execution, the structure will have the effects of moving approximately 900 megawatts of sales from our system segment to the module segment.
The mix 2020, net sales to anticipate to be approximately 70% module and 30% systems.
Included in the systems net sales in the United States. The residual revenue recognition associated with the GA solar full sunscreens, one Sunshine Valley Seabrook and win today projects.
Additionally, our guidance includes the sale of our Chicago Anatomies do assets in Japan, which may be sold together or individually.
Do you see uncertainty related to the cost and timing of the construction of the Gen side, we have executed miyagi from our 2020 guidance.
How long going 36 capacity expansion is expected to impact Twentytwenty operating income by 55 to 75 million.
This is comprised of 50 to 60 million of startup expense incurred by our second Malaysia factory and five to 15 million of ramp costs associated with our second parents that factory.
We anticipate our secondaries the factual exit ramp period by the end of the first quarter 2020.
While we're not providing specific guidance around the series six module cost per watt for 2020, we do anticipate continuous improvement over the course of the year.
Despite an increase in the proportion of module volume coming from our higher cost areas book facility in 2019 relative to where we ended.
So in 2020 relative to where we ended 2019, we expect our fleet wide cost a lot to decline approximately 10% over the year.
A brief out on the go to virus outbreak.
While we have a geographically diverse supply chain that does include partners in China, the supplies raw materials and commodities.
To date, we managed the impact of the CRO to virus outbreak and not having material impact on our operations.
Guidance. Accordingly assumes we will continue to be able to mitigate any such impacts on supply chain and operations without the incurrence material costs.
Finally in addition to the previously mentioned series forward a shutdown costs as part of the strategic review and cost structure analysis about discussed earlier, we recently effected a reduction in force.
Although we expect this lead to 25 to 35 million of long term run rate savings in 2020, you expect to see severance related impacts of approximately $10 million from these actions.
I will now cover the 2020 guidance ranges on slide 21.
Our net sales guidance is between 2.7 2.9 billion.
Gross margins projected to be between 20, 627%, which includes $5 million to $15 million ramp costs.
Operating expenses are expected to be between 340, and 360 million, which includes $50 million to $60 million production startup expenses, primarily for our second Malaysian factory.
I anticipate call R&D Ines DNA cost, excluding startup of 290 to 300 million.
Operating income is expected to be between 360, and 420 million of inclusive of between 55 and $75 million combined ramp costs about plant start up expenses 20 million series for shutdown costs 10 million a severance costs.
Turning to nonoperating items, we expect interest income interest expense and other income to net to zero.
For the attack expensive forecast the 15 to 25 million, which includes the benefit of approximately 60 million in the fourth quarter associated with the closing of the statute limitations on uncertain tax positions.
We expect no contribution from equity earnings.
This results in full year 2020 earnings per share guidance range of $303 25 to 375.
Signings expects the backend waiting with approximately 20% in the first off the an 80% in the second half was result of several factors.
Firstly, although asps are expected to remain relatively flat cost was expected to decrease throughout the year.
Secondly, we expect to recognize revenue on low margin systems business, including all remaining use CPC projects as one of the India or asset sales in the first off the year.
Conversely, our Japan assets are expected to be sold in the second half of the.
Thirdly series six ramp in startup costs series for shutdown costs severance charges are all weighted towards philosophically yet.
Capital expenditures and Twentytwenty are expected to range from 450 to 550 million as we convert one of our remaining two series four factories in Malaysia into our six series six factory invested expanding capacity on our existing series six facilities and begin the implementation of our cure program.
Our year end 2020, net cash balance is anticipated to be between 1.3 in 1.5 billion.
The decrease more 2019 year on net cash balances, primarily due to payment of the 350 million plus action lawsuit settlement.
Capital expenditures and deliveries against module Safe Harbor prepayments in 2019 offset by cash flows from module and project sales.
And finally, we expect module shipments of 5.8 to six Gigawatts in 2020.
Turning to slide 22, I'll summarize the key messages from today's call.
We continue to make significant progress on our series six transition both from a demand and supply perspective.
On the demand side, we ended 2019 net bookings of 6.1 Gigawatts in current contracted backlog of 12.4 Gigawatts.
Opportunity pipeline continues to grow.
Going into 2020 with a global opportunity set of 18.1, gigawatts, including mid to late stage opportunities of 8.2 Gigawatts.
On the supply we continue to expand our manufacturing capacity and expect to increase on nameplate series six manufacturing capacity to six gigawatts by year end Twentytwenty, an eight gigawatts by year end 2021.
In 2020, we expect to produce 5.7 Gigawatts of series six volume year over year increase of over 50%.
Let me see significant Miss an opportunity for improvements to our module efficiency cost and energy metrics.
Despite a challenging end 2019, we recorded non-GAAP EPS of $1.48 forecasting fully at went for the earnings per share $3 25 to $3 75.
And finally, following a review of our cost structure risk adjusted returns and strategic value, we are exploring strategic options for us developing business.
And with that will conclude our prepared remarks and open the call questions operation.
As a reminder to ask a question you press star one on your telephone to withdraw your question press the pound or hash key please standby Willie compiled acuity Rob.
Your first question comes from Philip Shen with Roth Capital Partners. Your line is open.
Hey, guys. Thanks for the question. The first one is on your definition of mid term.
I was wondering if you could provide a little bit more detail on that Mark I think you mentioned that the lead line with copper.
Replacement, a technology would be starting back half was 21, so is that kind of mid term targets.
A back half a 21 or early 22 type.
Timeframe.
And then as it relates to the systems business was wondering if you could walk us through kind of how we should be.
The modeling going forward you historically, you guys have talked about.
Gigawatt of system sales per year, I think thats, probably whats baked endeavors model.
Should we start to southern backward just remove that completely any thoughts on on that would be would be great. Thanks, Mike.
Yes, so on the.
Mid term. So if you think about the cure program will start the initial production our lead line in the.
Second half of 2021, and then start to see it really realized across the entire fleet in 2022.
So if you think about even that lets say the 2022, we originally sort of set the midterm goal and in 17 or so so it also gives you some indication of a horizon, which we may be looking towards for the 500, while module that we've indicated as well.
But we're very obvious im pleased with the launch of our copper replacing program and we're also the couple that with where our backlog position is right now it really hits the window, where we wanted to hit is the when do we need to sell through into in 22. In 23, you should look to the majority of that volume in that window wellbeing.
To have our.
Copper replacement program out there and competitively pricing into the marketplace and capturing the full value the energy and it will be would realize from Matt.
This has been.
Alex and give you some some insight around model. If you don't want to make sure as clear as well is we have committed to a safe Harbor investment and we've talked about that we've got the capability of safe heart rate a couple of Gigawatts, we have a mid to late stage pipeline of close to two gigawatts here in the.
Wes of opportunities that we're actively engaging and.
We have purposely look to try to monetize those projects into 2020 to 2023 window.
I'd also somewhat ties in nicely to where the tool one terra start to wind down plus year value of your safe Harbor investment is most accretive in 2002 in 23. So you'll see you know as we continue to build out that pipeline and monetizing contract. Most of ours is going to be out in 22 in 23.
I think the best way to think about a right right now Phil is not to assume any changes because we're going down to pass one is but look I think when you position us into.
Utility owned generation space.
When you were seeing a lot of that happening in the market right now in a pretty significant inflection point of that happening in a big portion of our two gigawatts.
That's a sweet spot for us and we'll hit home runs Theyre all day long as exactly where we want to because we don't want on generating assets when we'll work with great Counterparties.
The problem, we have a little bit aware I want to see how we can further enhance our capabilities is more complex transactions merchant risk exposure hedge contracts basis risk.
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Basically block power shapes storage that the space that we I don't think yet or where we need to be relative to the capabilities of marketplace and so we need to challenge ourself in New York, How do we best accomplish that in one of the past due that is can we find a partner or somebody else. We can work with that has those patrick capabilities that are complementary to where we are.
But we also highlighted to the extent we go down that path. It could result in a sale of the business through a partnership structure that someone may you know, obviously, we'll look to new within the passengers our shareholders, but if it resulted in someone pain maximum value for the platform that we have we may look to that is the best Pos.
Possible outcome, if we feel we're uncomfortable with getting kind of the partnership capabilities that we think we would need to best compete over the next decade and as you May remember this is with the objective we set out for is how do we position not only our module business, but our energy services business and our develop business to be able to thrive in the upcoming decade.
And we need to make sure there is a path to do that and that's what we're exploring right now yes. So the only thing I'll add to that is on the near term send the guidance. We set about 70% of revenue line is going to be on the module about 30% of the systems that reflects only a pretty small portion. So there's any somewhere around three to 400 megawatts going through that line.
However, as I mentioned that remarks, we'll make sure as clear in the last year was that we've been structuring deals differently as we've been looking at our APC capability is looking to exit internally BC and go to third party model and so what we've done as we've changed how we sell projects to selling a project SPV or end CNN entering into a module sale agreement and if you look.
All the deals we've done that weather over the last year the impact that means as about 900 megawatts of volume that is going to go through the module segment. This year the added up into that new change in structure would have gone through the system segment. So we've historically guided to somewhere around the gigawatt to year volume. If you look at this year, you're going to be somewhere around 1.21.
Three 1.4 Gigawatts of volume generated by the systems business or that volume was originated through the system channel, although you're not going to see it flows through the system segment. This year based on those those deal structures.
So I think in the long term for modeling purposes stick to that roughly gate on a year systems business that we guided to absent any changes that we guide to later in the pending the outcome of our.
Our discussion to the market around the systems business.
Your next question comes from Brian Lee with Goldman Sachs. Your line is open.
Hey, guys. Thanks for taking the questions Matt had to hear first if I looked at the module gross margin for Q4 here exiting 2019 and 24%.
You assume flattish ASP, which I think you mentioned on the call. It a 10% cost decline for 2020, it seems to imply gross margins for modules in 2020 will be high 20% or so 28, let's say it first is that the right read here and I guess that does also assuming no mix shift impact from series six either given.
2020 will be almost all series six can you still had a meaningful amount of series four in Q4, but we'll be curious if you could provide some color around the the module margins this year.
And then just secondly on the strategic review for the systems business.
And just trying to understand the thought process here would assume.
He is taking a partner.
Potentially if that's an option or outcome of this review does that lower the Opex can you give us some sense of how much of your Opex is tied to that segment versus modules and then if you just end up divesting the segment in one transaction will be the motivation to that versus.
Simply selling down the systems over the course of the next few years implied in the pipeline Cod dates thanks guys.
Yes, Brian give you a little bit of color on the on the gross margin. So we haven't broken out by module and system you can see in the guidance, we're guiding to a 26% to 27% on a consolidated basis, you're right that there is limited reduction on the ASP side as we go from 19 and 20 or that we are seeing some we are seeing a cost a lot drag largely associated with various folks. So we talked about ending the year.
About half a penny higher than our expectations on a fleet wide basis, largely driven by cost for the Perez book, If you think about the mix shift, although we'll get some benefit from moving series for the series six as we ramp varies by two this year on a mix basis, we're going to have more relative volume coming from a higher cost factories, and we did last year.
So that track now across the fleet is going to be around the penny cost a lot in.
In 2020.
On the system side they got.
Yes, lower volume, hence you seeing lower revenue the revenue line, but on the on the margin side. The three other things I'd point to that of dragging down consolidated gross margins for the year.
You've caught startup and ramp costs, which are coming in and about.
60 to 70 odd million coming through and Thats associated with bringing varies by two up and Malaysia Twos, you got a pretty significant drag that we've also got about 20 million of shutdown cost associated with closing the series for factory in Malaysia is going to see that coming through the gross margin line as well and then finally about 10 million severance costs as you look through the gross margin.
In line this year, just bear in mind, you've got somewhere close to $100 million relative to that two point.
Eightish midpoint of revenue line, thus impacting gross margin on negative basis.
Equity when you normalize for four of those items that are impacting the module segment.
Brian I mean, you're going to get to a number that's in the raises the reference from that standpoint.
The systems business first off I think as we think about the way we I look at this is that theres the market need and then as internal capabilities.
And we have to understand given the market needs.
How do we best address that and then what's the most efficient way in Opex way of doing that and to sort of.
Replicate or to invest in certain capabilities, let's say the power trading capability. As an example, right I don't know if we wanted to step into that space and so to me a partnership can bring a lot of value.
To us in the fact that we can create a complimentary offer we've got a great development team with great development sites interconnection positions and capability with Safe Harbor that we've made the investment in the real question is how do you monetize and capture the optimal value with it and for me. It is is that I'd, rather instead of internally.
We create something that maybe as externally already in the marketplace and.
Is already performing well it makes more sense from my standpoint to say, how do we engage with those types of partners and then create the synergistic impact versus trying to invest heavily and create maybe not as strongly market capability, we would with otherwise for the partnership so thats kind of the motivation Vietnam.
As it relates to.
So to the to the Opex.
Look there's a meaningful mark up portion of Opex that is not only resonates with just the direct let's say the customer facing team from development, but you know it's my project Finance team is the legal structuring cost around these deals it's the complexity around the accounting it drives tremendous.
Tax.
Related activities and separation of new entities, and setting them up and manage through that so there is a pretty significant.
Opex impact I mean, if you look at our K, we use slows that we have about 500 has crossed the companies.
North of 6000 that are related to our systems business. Now that also includes our energy services business, but which is a good portion of that total but you can tell that there is a pretty significant head count resource intensity associated with our systems business that we've got to make sure that and again on sub segments of the market and so.
Solutions that are required and I'll use yohji has a great example, I think we do very well there and we'll continue to excel there, but no different than our module business or no different than our energy services business, which I indicated we've created tremendous amount of scale advantage and being at market leader and when I look at our development business I have to become comfortable that.
We can create scale there as well because that infrastructure related cost is going to were to be there and you've seen it happened over the years because the cost of the to develop and resources to develop a 500 megawatt project like we did in the early days is really no different then to develop a 75 or 100 megawatt project right.
The project sizes have come down and therefore, you actually losing the leverage scale and so those are things that we're looking at it we're trying to figure out what's the right path forward for to enable or we think is a great platform. We're not to mention the platform at all but as we think through how do we make sure we can thrive and excel through this upcoming decades, there are certain capabilities, we think.
Partnering with someone else could bring to us that would further enhance the value proposition of our development.
Your next question comes from Paul Coster with JP Morgan Your line is open.
Yes, thanks much.
Thank you my question it looks like something in the original solar.
Of the shortfall.
Fourth quarter was attributable to Japan, and Europe et cetera, how much of that solar approximately.
Carries over into two into the.
When too.
Really influence if I look at a time business right.
Yes, if I look at it you've got about dollar a shortfall about 70 cents that is related to timing.
You've got Japan in the U.S. projects.
And you asked module, but there is also another call it roughly $30 million of.
True cost increases.
Impacts from U.S. project, whether in issues, we had an accrual change relation to dispute with the customer we have some severance and other miscellaneous costs.
So if I look at those you've got call. It 70 cents of the roughly dollar is associated with timing versus true cost impact when I roll that forward into Twentytwenty about 50 cents of that is going to roll into 2020. So the breakdown. There is in Japan two of the three asset to being pushed into 2020 I'm Yagi asset. However, it is not just based.
Well, we see the the timing a construction and agenda today now if that changes that could get pulled in light of as of now that's not in the guidance to 2020. The other pieces that previously we have assumed destruction about Japan assets will go through this private fund that I mentioned on the prepared remarks based on pulling the obviously out in the complexity, we've seen I think with Tom.
Shifting now selling those assets on a bilateral basis versus in the fund for the small impact to value that so that 50 cents of Japan, you get a pull about 35 cents or the other timing piece, you're going to pull about 15 of the 20.
That's a function of in the U.S., although we hit substantial completion on the projects that we were targeting by year end, we had some small cost increases to do so.
As well as the fact that on the India or assets. We just had some diminishing of a value as we've been negotiating the sale contract. So if you look at that you can assume about 50 cents gets rolled 2019 to 2020.
Your next question comes from Ben Kallo with Baird. Your line is open.
Hey, guys.
So I guess.
Sure can you talk about what your low cash balance.
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Well you could give his work all your capex.
My second question is so strong.
I guess, we're all trying to figure out what cost for what we're using 41 cents or some words.
Good how offshore reorder remark there.
Going forward.
Thanks, Yeah. So on the on cash so you've got.
Two big thing this year you caught the remainder of the series six Capex. So we told originally about about $2 billion of capital associated with what was then 6.6 gigawatts of capacity.
So we largely through that about 250 of the mid point 500 guidance announced for the years the finalization of that initial capacity.
Of the remaining was about 100 that is associated with increasing Perry's books capacity and that takes us from the current 1.9 up to alongside run rate by year end 2021 of about 2.4. So that extra 100 million is getting you about half of gigawatt of capacity and then in the year. There's about another 150, which is other miscellaneous capacity expansion plus on.
The spend so if you think about that by the end of this year were largely through not only at initial Capex program, but a lot of the capex is going to take us through the increasing capacity that we showed on the slides. It takes up to a name plate of eight gigawatts by the end of 2021. The other piece that you will remember is starting the year out by immediately pulling 350 million dollar.
Was the cash out when we settled the the class action lawsuit. So when you think about the low point this should be the low point, we think by the end of the if you look at anticipated capex going beyond assuming no incremental greenfield or brownfield expansion that didnt happen counted in these numbers today, we should be at a high point.
Spend with through a lot of that Capex by the end of the year, we should start to build cash thereafter.
Yes, I think this thing about it and when you go into especially in 2021, Capex burn rates down significantly and then you've got.
As we show the production plant.
Hi.
Five plan that we anticipate at about two gigawatts of incremental shipments in 2021, so you've got.
Hi, seven relative to a high end of seven seven in 2021, so that is going to drive incremental significant incremental cash flows because that contribution margin margin flow through to cash.
As it relates to cost cost per watt.
Ben I think the we haven't given a discrete number but theres. Many numbers that are right around that range and and those are numbers that.
We.
As said before that we're comfortable with I mean, we got to near term issue, we're still working through with.
With parish, Bert and got a headwind against the fleet, which I highlighted in our remarks of.
Of about a penny.
And.
Expected to work that out over time, but not not anyone not in 2021 and we've got.
Actually the 2020, we've got ramp related costs and other things of that are flowing through and severance as weve into me the commissioning costs and other things like that are starting to flow through the results for for 2020, but the other thing I want to make sure that we don't submits is that you know we have many levers to go let's use youre, leaving off point just as an example.
The levers of which we can continue to drive costs down.
Our significant in highlighted in the slide that we showed in the during the call.
Just the increase today we're at.
On average is for 35 type number slightly lower than for 35, and we take that up to 500 beds tremendous increase in watts, which largely is scale correlates specific lead to a reduction in cost per watt throughput that we have the teams done a tremendous job of putting forth a roadmap that can take our.
Original nameplate capacity of a factory at increase it by a third.
That's another significant lever so I think there's a near term issue that we're dealing with.
But when we look across the horizon, where we can ultimately go from a cost and performance standpoint of our product we're extremely happy with where we are and what the potential is in products.
Your next question comes from Michael Weinstein with Credit Suisse. Your line is open.
Hi, guys here on Slide 18 is is it your intention to show that costs are coming down about half of where the half of the starting point is that.
You know that diagram of scale or is that not essential.
Now I'd like if you had made it clear if you look at the footnote there it says not to scale, so thats not meant to be.
Okay.
Yeah, I mean is there any any particular reason why you don't give an exact numbers, it's a competitive reason for something or some other yet it's exactly right. So.
Look we we are outselling the value of the product price. If you. If you look at I'll give you. An example, if you look at our 2.6 gigawatts on a gross basis that we booked within the quarter.
The average ASP across at 2.6, which includes volume that goes out into a 22 in 23 is.
Slightly down from the average that we reported in the.
Last Q I think you did the math on the last few was somewhere around 34 cents or something like that.
We're selling through out into horizon that.
22 in 23, and we're still holding.
Very strong asps.
And the value of cure hasn't been captured in that horizon yet.
So we have our contractual structures as we go that far out will allow us to capture the value of the energy that the product can ultimately deliver on margin degradation benefit temperature coefficient benefit spectral response officially everything so it all kind of create value as we move forward. If we were to provide a discrete.
Cost that gave you a number that out into 20 122 and 23.
Then then my customers starts to hold me accountable to a cost plus model and that's not what we want to do we want to be out there selling that full entitlement of the value that we create and not get stuck on a cost plots and so we have purposely moved away from giving a discrete cost per watt theirs.
You are very adept at modestly you can easily take the inputs that we've given to give you an indication. There is there is room still to go as we move forward.
I think thats really whats most important as you think through the window. This business is going to continue to scale, we're going to maintain and hold relatively tight fixed cost structure, and we'll leverage that and drive incremental operating margin right and that's what we've been saying since day, one in more transparent I am with a cost number so more vulnerable.
I am really realize the full potential as a business model that we've created and the technology and we want to capture the value that technology.
Your next question comes from Julien Dumoulin Smith with Bank of America Merrill Lynch. Your line is open.
Hey, getting here.
Yeah.
Excellent. It guys just wanted to talk a little bit led the systems business again sort of status quo independent of monetization here, what what's systems and volumes are we talking about nominal terms had another thing to move it around here, we recognize in 2020 of the on ongoing basis. They go out the size and scale of your operations today again.
Well the thought process of what does this business worth in the monetization scenario.
We think peak systems years coming up here you guys groups, you talked about hedging upwards that gigawatts size number I'm in terms of annual systems business, where does that still now 2021.
Gulfport.
Yes, Jason So we previously guided to a gig and sometimes up to a gig and a half now that you're going to half a year was also partly APC projects as we've now moved away from internally BC today. So it's all the execution model.
The best we can give you the anchor around that gigawatt of year volume as I mentioned in 2020 are not going to see that relatively flow through the system segment, just given how we structure. Some of these deals so.
The same volume as that was a was approximately originated through the system segment through that channel, but on the accounting side by virtue of how we structure those deals you're going to see that mostly flowed through the module segment in 2020, but absent any change to.
Any strategic change here that we've been discussing.
Continues a model around that gave a lot here. The other thing I'd say as as you go farther out we have they have a two gigawatts.
Asking we would like to try and use that are out in more and 22 in 2023 I was largely sold through a lot of our capacity in the near term and we've done so capturing full value entitlement for the for the module so been able to do that without losing much money relative to a system sale, but without taking the risk of those systems deals. So I think from a relative.
Risk perspective, we've captured full value in the next couple of years. We think if you look through into 2022 in 2023, when the relative Delta between a safe Harbor, 30% ITC project relative to going down then towards 10 is greater that's when you're looking to deploy that product and so in terms of value the significant value creation down 20 to 23.
Your next question comes from Moses Sutton with Barclays. Your line is open.
Thanks for taking my question for the systems business, assuming you find a partner that lets say solves the basis in related risks how might cost need to come down the core cost itself you moving to third party B C to let's say allow you to bid at PPA prices of $30 per megawatt hour, while still maintaining saying around the 20% margin as a developer.
Cost as it relates to our own development cost to achieve that margin.
It.
First off I don't I never given where we are right now in where PV prices are module prices or any things move towards I'm not sure that a margin percent is always necessary the best way to look at it partly because.
The development revenue stream on number from a sense perspective is relatively low.
I would actually like to have to ensure that we can capture at least 30% to 40% margin on our development activities.
In order to say that is sustainable and within a position that we want to maintain.
Because you have to look at the risk profile that you are taking I mean every time. This is why don't you know our preference is to do more yohji and that's what we're trying to position ourselves every time, there's a change and emerging curve that gets published every six months. There's a risk that you are taking because you bid a mitch merchant curve that two years ago Yearago whatever it is.
Every time that gets updated especially with shorter.
10, or PPA case, you know I've got a risk for every time, a merchant curve moves one way or the other and so we prefer to try to find long 10 or PA is we also prefer to look too.
You will G, which I just have to worry about either providing a site with the module agreement or building a power plant in transferring that to the long term owner.
But there's others that are willing to take those are the types of risk and at the risk they're comfortable with taking.
And we just would like to see if theres a path out there that we can partner with someone that is comfortable those risks and has ways to manage.
Those types of risks that I would say, we're not in a position to do that I mean, if you look at Texas as the market, Texas as the markets a very strong market, we do extremely well in Texas from a module standpoint.
We just haven't been successful doing development because the hedge contract structure that you see in Texas. The merchant exposure you see in Texas the basis risk that's in Texas, I mean, those are not things that we're.
Good at managing or hedging those types of risk profiles, but others are and we find a path that we can be complementary we can continue to develop.
And provide great.
Module product and build it may be.
A power plant, but somebody else's when to step in to take those other risks and so those are passed we're looking at we're also looking at with somebody will be willing to.
Team with us at the time of bidding into a PPA, where they are willing to provide underwriting assumptions, we lock in on how we underwrite a PPA and then a hedge my exposure from the time of award were securing risk profile forward until time, most sell down or CNG or whatever point in time that may be.
That is all the time, we have for questions. This concludes today's conference call you may now disconnect.
Hello.
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