Q3 2020 First Solar Inc Earnings Call
[music].
Sorry.
Good afternoon, everyone and welcome to first Solars third quarter 2020 earnings call. Thanks.
This call is being webcast live on the Investor section of first of all its website at Investor Dot for solar Dotcom at this time all participants are in listen only mode.
As a reminder, today's call is being recorded I would now like to turn the call over to Mitch any from first solar Investor Relations. Mr. ended you may begin.
Thank you good afternoon, everyone and thanks for joining us.
Today, the company issued a press release announcing its third quarter 2020 financial results.
Copy of the press release and associated presentation, our Belmont personalized website at investor Dot personal or Dot com.
With me today are Mark Widmar, Chief Executive Officer, and Alex Bradley Chief Financial Officer.
I will begin by providing a bit technology update out to then discuss our financial results for the quarter and provide updated guidance for 2024.
Following their remarks, we'll open the call for questions. Please.
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, including among other risks and uncertainties the severity and duration of effect of the COVID-19 pandemic. We encourage you to review the Safe Harbor statements contained in today's press release and presentation for a more complete description.
Now my pleasure can produce Mark Widmar, Chief Executive Officer Mark.
Thank you Mitch good afternoon, and thank you for joining us today.
I would like to start by thanking the first solar team for delivering a solid third quarter, our operational and financial results were strong and market demand for our series six technology continues to be robust.
We had a number of highlights since our last earnings call.
Including record series six quarterly production of 1.5 gigawatt.
Solid bookings of 1.6 gigawatt.
Commercial production of 445 Watt module.
And earnings per share of $1.45, bringing our year to date earnings to $2.65.
Our Q3 financial results were driven by a module segment gross margin increase as well as sales of system project.
While significant uncertainty remain as a result of the COVID-19 pandemic. We're pleased with our year to date performance as a result of the improved visibility provided by the closing of certain system project sales, we are reinstating financial guidance for the fourth quarter of 2020.
Alex will discuss our financial performance and guidance in greater detail.
Turning to slide three ill.
I'll first discuss our module segment performance.
To date, we have produced 4.9 gigawatt, including 4.7 gigawatt a series six.
With each factory, averaging over a 100% capacity utilization during the third quarter.
Group. It was led by our international factories, which averaged 118 and 119% capacity utilization September and October month to date.
Domestically our high one in Ohio to factories are performing well, averaging 109 and 121% over the same period.
On a fleet wide basis in September and October month to date megawatts produced per day was 16.9 and 17.9.
Manufacturing yield was 96.6 and 97.2%.
Average watts per module was for 36 and 438 watts.
And the RPM distribution from 435 to 445 loss modules was 92 and 96%.
At the time of our third quarter 2019 earnings call. We had recently validated a new world record for 47 Watt Cadtel module.
Building on this we have implemented these learnings and started commercial production of a 445 watt module CA.
Continuing this momentum over the next few quarters, we expect our top into increased further to 455 watts.
In September and October month to date.
Non factories achieved a manufacturing yield of 98%.
We continue to implement the learnings and best practices across the fleet.
With a fleet wide yield target of 98% for our current manufacturing footprint by the end of 2021.
In the future, we see the potential to incrementally improve beyond this target.
As noted previously continued throughput.
Module watts and manufacturing yield improvements will help drive down our module cost per watt.
Since the previous earnings call, we have not experienced significant disruption to our manufacturing operation from the pandemic.
Much of our ability to mitigate the potential impact stems from our vertically integrated manufacturing process diversified supply chain and differentiated Cadtel technology.
By contrast, the largest PV module manufacturers globally produce Chris and Silicon models.
Using a batch process technology with multiple process steps none.
None of these manufacturers are fully vertically integrated.
And rely to varying degrees on third party sourcing of poly silicon ingots wafers and cells.
Production of a single Crystal Silicon module acquires each of these process steps several factories in multiple days.
During the third quarter several poly silicon produces experience significant disruptions that hinder their ability to maintain manufacturing operations.
This disruption coupled with the supply chain largely concentrated among a few Chinese companies reduce the available supply of polysilicon.
The polysilicon price increase that followed resulted in downstream pricing pressures for.
For wafer cells and modules and consequently, we're project developers.
While the market for poly Silicon has since improved these events highlight the benefits of our vertically integrated manufacturing process, which enables price the delivery time certainty for customer orders within our contracted backlog.
From a shipping and logistics perspective, the most significant impact to date remains a challenging global freight market.
While limited freight capacity has increased spot rates, our logistic strategy, which primarily relies on forward shipping contracts as help reduce this impact.
Regarding our capacity roadmap, we haven't received the major equipment required to commence commercial production at our six series six factory in Malaysia. However, as highlighted during our second quarter earnings call third party equipment vendors as well as our US based associates are needed on site for tool installation.
Currently all non citizens travel into Malaysia must have explicit written permission from the Malaysian authorities prior to arrival and are subject to mandatory 14 day quarantine period.
While several vendors have received the necessary travel approvals, we are continuing to cooperate with the relevant agencies to gain approval for the remaining travel in a safe and timely manner delay.
Delays in the approval process and compliance with required isolation procedures has the potential to impact the timing of commercial production and consequently, our full year 2021 production plant.
Despite this uncertainty we continue to evaluate opportunities across our existing manufacturing footprint to further increase our production capacity in Thailand.
Touching on the system segment, our EPS results were favorably impacted by the sale of three projects in Japan and two in India.
The sale of our American Kings project in Q2, the Japan, India sales in Q3 and with the potential sale of the Sunstreet two project in Q4 2020, we.
We have a viable path to close each project sales contemplated in our original 2020 guidance from February.
Turning to slide four I'd like to highlight the bookings and shipment activity for the quarter.
In September we were awarded the PPA for 180 megawatt AC solar project.
With the option for future energy storage located in Arkansas.
This project will support the clean energy needs of three general mineral General motors facilities in the Midwest starting in 2023.
Building off of this and the recent PPS, we have signed with Verizon and now we are witnessing leading corporations, taking bold steps to reduce their environmental footprint.
In doing so supported by technology developed and manufactured in the United States.
As the only us headquartered company among the 10 largest PV module manufacturers globally with a different shaded cadtel technology, ULIN lowest carbon footprint in water usage, and a leading PV module recycling program that recovers, 90% or more of the glass metals and CAD Tel semiconductor mint materials, we are well positioned to address.
This market need.
Additionally.
It has been an active quarter for our systems business in Japan, as we continued success, adding to our contracted backlog with the addition of two projects totaling approximately 80 megawatts.
From a third party module sales perspective, Theres six demand has been robust.
Among other bookings as announced last week, we secured a 0.9 gigawatt of volume from district energy for deliveries scheduled in 2021 and 22.2.
As part of this deal our series six technology will support six projects in Texas, a region that leverages, our temperature coefficient spectral response durability and quality advantages.
As the U.S. solar technology provider, we are proud to play a supporting role of distrust commitment to achieving net zero carbon emissions by 2015.
As highlighted during our Q2 earnings call. We've had a significant volume of 2021 opportunities that were in late stage negotiations, but were delayed due to uncertainties and a tax equity market.
While the Alex will provide a more detailed tax equity market update I would like to note that visibility into 2021 tax capacity has modestly improved and.
And we secured 0.5 gigawatts of 2021 opportunity since the previous earnings call.
Additionally, demand in 2022 and 2023 have been strong.
With 0.9 Gigawatts of bookings since the previous earnings call.
As a result of the re consistent with the third party module wins net bookings since the previous earnings call totaled 1.6, Gigawatts across 1.5, Gigawatts of third party modules and 0.1 Gigawatts assistance bookings.
Additionally, volume not yet meeting all the requirements of a booking we have contracted 0.6 gigawatts subject to conditions precedent for expected deliveries in 2021 and 2023.
So the project associated with General Motors PA has been sold in conjunction with a modest first quarter and has been recognized as third party module bookings.
Included these most recent bookings we have 6.7 gigawatts so for deliveries in 2021, and 3.6 Gigawatts book for deliveries across 2022 and 2023.
Q3, we shipped 1.2, gigawatts, resulting in year to date shipments through the end of the third quarter of 3.7 Gigawatts as.
As mentioned during our Q1 earnings call in May our shipment profile has been back weighted to the second half of the year.
Despite this profile our year to date shipments, including the third quarter have been low have been below our expectations from the start of the year largely due to the accommodations for COVID-19, German customer project financing delays.
Before delving into the specifics of our pipeline of bookings opportunities. It is important to highlight that some of the trends we are seeing including the impact of COVID-19 on the near and long term growth of solar installations globally.
In the United States, the EIA forecast that approximately 14 gigawatts of utility scale solar capacity will be added in 2020.
This strong demand is led by several states, including Texas, California, North Carolina, Nevada in Virginia, each with near term development pipelines exceeding one gigawatt.
The continued growth in utility scale solar despite the pandemic related headwinds speaks to the relative health of the U.S market.
Internationally the impact of the pandemic has varied by market.
While China remains the world's largest solar market and installed capacity is expected to increase year over year.
We are seeing project completion timeline slipped due to the pandemic. This.
Despite these challenges the country's 14 five year plan scheduled to be launched in 2021 is expected to call for targets of at least 60 gigawatts per year of installed PV capacity or approximately 300 gigawatts over the duration of the plan.
In Europe, we anticipate a contraction in new installed capacity of countries like France extend projects you'd be deadlines by six months to accommodate for code 19 related delays.
In India. Despite a five month to use the extension delays caused by a combination of the pandemic and the seasonal monsoons are expected to take a toll on the country's aggregated installed capacity this year.
While the global PV industry has clearly not been immune to amend demicks impact some developments this year will shape the long term future of the industry.
The first of these is a range of new policies designed to Decarbonise electricity and mobility further while powering post dynamic economic recovery plans.
Arguably the most wide ranging example is the European Greendale, which is aimed to transform to block into a carbon neutral economy by 2050 by de Carbonize in electricity and transportation grew.
Greendale, which could make solar the number one source of electricity in Europe. By 2025 is an example of how political leaders are bundling post pandemic economic recovery with de carbonization commitments.
The other comment I would like to note is the growing recognition of the importance of self reliance and a diversified solar supply chain in some of the world's biggest solar markets.
The combination of factors, including governmental policy increasingly tense bilateral relationships, the pandemic and pricing and supply volatility on the crystal and silicon industry has reignited the debate around risk posed by allowing a single country to dominate the PV solar supply chain.
Responsive and Barry.
With new rules that favour PV modules with a lower carbon footprint in South Korea.
While India and Europe have renewed talks on domestic manufacturing.
Earlier this month, the United States, the President issued a proclamation revoking the exemption abide facial panels from the application of this selection tools tool one safeguard tariffs although.
Although this exemption is currently subject to a temporary restraining order preventing the presidential bi facial exemption relocation from taking effect. The common thread. However is an underlying desire to boost supply certainty and security.
While safeguarding domestic manufacturing from unfair competition.
In summary, we believe our investment thesis remains in diving as we are well positioned to benefit from the current dynamics in the solar industry.
As shown on slide five our mid to late stage pipeline of opportunities remains robust and has increased 0.5 gigawatts. Despite bookings of 1.6 gigawatts since the prior earnings call.
In terms of seven mix. This opportunity pipeline of 8.3 Gigawatts includes approximately 7.7 gigawatts of potential module sales with the remaining representing potential systems business opportunities.
In terms of geographical breakdown North America remains the region with the largest number of opportunities at 7.1, Gigawatts Europe represents 0.9, gigawatts with the remainder in Asia Pacific.
As a reminder, our mid to late stage pipeline reflects those opportunities. We believe could book within the next 12 months and is a subset of a much larger pipeline of opportunities, which totaled 16 gigawatts of opportunities in 2022 and beyond.
From a cost perspective, we indicated during our Q2 earnings call Center Vietnam factory, we have achieved a 40% reduction relative to our 2016 series for cost per Watt Bill.
Building on this momentum and is a reflection of our manufacturing execution. We've also achieved this milestone at our Malaysia factories during the quarter.
No as a reminder, our cost per watt metric, including sales freight and warranty.
So bill materials perspective, growing solar demand in the emergence of bi facial modules, which generally are dual glass have contributed to pressures on the supply and cost of PV glass.
Similar to our shipment strategy, our glass procurement strategy largely relies on forward contracts, which has substantially mitigated this impact today.
For a fleet wide perspective, as a result of our continued manufacturing execution, we remain on track to achieve and potentially exceed our 10% cost per watt reduction target between where we ended 2019 and expect to end 2020.
In Ohio.
Our third quarter core cost per watt produce continued to be higher than our international average.
Our us manufacturing provide strategic benefits and overtime, we anticipate a reduction in the cost for walks through the following initiatives.
Firstly by installing additional tools and optimizing the two how factories into one consolidated platform. We expect to increased nameplate capacity slightly more than 25% to 2.4 gigawatts by the end of 2021.
With this additional capacity, we are able to amortize the fixed cost structure, including labor and depreciation over more lots produced.
We are starting to see that benefit as reflected in our turnover capacity utilization.
Secondly, as previously disclosed we have contracted a flow glass supplier agreement with a producer in Ohio.
We anticipate starting to receive initial benefits of disagreement in Q4 and continuing into early 2021.
An expected reduction in the associated variable bill of material costs.
Finally, our manufacturing yield in Ohio, with approximately two percentage points below the fleet average.
Through the implementation of learnings from our international factories, we see a path to achieve similar yields that are higher factors.
Through the implementation of these key initiatives among others, we anticipate our higher cost per watt premium overtime to reduce to two cents, including sales rate.
Turning to slide six I would like to discuss the relative performance of our technology and the lab versus real world operating conditions.
PV module lab testing protocols were developed in the early days of solar using.
Using standard text conditions of 25 degrees centigrade at a terrestrial standard spectrum.
PV modules in the field, however are exposed to variable conditions, including heat humidity dust and extreme weather events, such as wind and hail.
Each of these factors caused deviation from lab performance.
With the effects vary by technology.
Ultimately lifecycle energy produced in the field is what drives project economics and.
By analyzing the factors that caused divergence from lavatory performance, we can better understand the value proposition of our Cadtel technology.
Firstly as it relates to temperature module device operating conditions can exceed 70 degrees centigrade.
Bottled water tell lever is assigned to a lab standard test test condition of 25 degrees and as panels heat up over the course of the day beyond this threshold there was a corresponding decline in power.
36 of the temperature coefficient advantage relative to Chris and Silicon, which is anticipated to increase further with our copper replacement module.
Meaning cadtel responds more efficiently than Chris and silicon to real world temperatures.
Secondly, due to the unique spectrum of light series six captures our technology outperforms crystalline silicon on a walk per watt basis in human environments.
Thirdly estimated useful life of PV power plants can exceed 30 years as a result segregation is an important driver of project economics with.
With the expected implementation of our copper replacement program, we anticipate a reduction in long term degradation beyond our current warranty of 50 basis points per year.
We expect this innovation will enhance our competitive advantage by increasing lifecycle energy and project value for our customers fine.
Finally, as it relates to bi facial technology, while there is a potential for backside energy game. The ground reflectivity known as a beto varies by geography climate in season, and is often inversely correlated with hot and humid climate.
Slide six depicts the relative lifecycle kilowatt hours expected to be produced by our equal watts of our copper replace series six modules.
Which we call series six cure relative to leading crystalline silicon bi facial modules as.
As a result of the aforementioned advantages as compared to leading tourist and silicon bi facial modules, we estimate that our series six cure module can produce up to 10% more lifecycle kilowatt hours per kilowatt installed.
And clients with extreme heat and humidity, including Brazil central.
Central Africa, Southeast Asia, India, and southern United States simply.
Importantly, when implemented.
Our care product is expected to be well positioned in other key markets with more modern climates, including France, Spain, Japan, and the Midwestern United States.
We expect to begin delivering series six care models in the second half of 2021.
Turning to slide seven I would like to review a framework that highlights the factors that influence ASP starting.
Starting with bi facial.
While backside energy gain is accretive to HP with only a modest increase to manufacturing cost per watt the downstream costs related to additional balance of system structures increased vegetation management and higher cost of capital associated with our Vito uncertainty are partially offset offer.
Offset to the CFC benefit.
As it relates to Chris and Silicon with larger form factors the potential ASP benefit largely stems from the dilution in the manufacturers six bill of material costs, rather than an increase in energy density.
This potential cost reduction, which may be passed through to the customer is partially offset by the downstream costs of additional support structures physical handling challenges with lower size modules increased insurance premiums and risk associated with cell cracking in wind modes.
As it relates to our copper replacement series six once implemented we anticipated ASV accretion due to increased efficiency improved temperature coefficient and a significant reduction in long term degradation.
Importantly, this innovation is driven by efficiency improvements, which result in dilution of our variable and fixed bill of material costs.
We expect to capture this AMC accretion as a technology does not significantly impact balance of system and development costs or project risks.
Finally is important to note the opportunities within our technology roadmap with cell efficiency entitlement is in excess of 25% couple.
Coupled with the energy advantages of Cadtel we.
We believe the outlook for our technology platform remains strong.
In support of our roadmap over than over the coming quarters, we anticipate certifying a new world record for catch up.
I'll now turn the call over to Alex who will discuss our third quarter financial results and fourth quarter guidance Alex.
Thanks Mark.
Starting on slide eight I'll cover the income statement highlights for the third quarter.
Net sales in Q3 were $928 million, an increase of 285 million compared to the profit closer.
The increase was primarily driven by the sales of certain Japan, and India projects as well as an increase in the volume of series six module sold policies.
On the second basis as a percentage of total quarterly net sales on module segment revenue in Q3 was 46% compared to 58% in Q2.
Total gross margin was 32% in Q3 compared to 21% in Q2.
The system segment gross margin was 33% in Q3 compared to 21% in Q2.
This increase was primarily driven by the aforementioned international project sale and the sale of early stage development assets, including a potent tends to be associated with the general Mosys EPA.
This is partially offset by $14 million performance liquidated damages stemming from the underperformance of third party equipment as several of our legacy MPC project.
Module segment gross margin was 30% in Q3 compared to 22% in Q2.
So several positive and negative factors that impacted this Q3 results.
First we recorded a reduction in our product warranty liability reserves, which was primarily due to lower warranty settlements than previously estimated fresenius to technology.
This resulted in a $20 million reduction of our warranty liability and a corresponding benefit to cost of sales.
Secondly, certain of our legacy module sale agreement covered by a collection and recycling program, where a corresponding expense the estimated future customer obligation was recognized at the time of sale.
In Q3, we recognized 19 million reduction in our module collection and recycling liability huge changes in the estimated timing of cash flows associated with capital labor and maintenance costs.
This also resulted in a corresponding benefit to cost of sales.
Finally, we incurred an impairment loss of $17 million of module manufacturing equipment, including framing and assembly tools are longer compatible with our long term technology roadmap.
This resulted in a corresponding increase to cost of sales.
On a net basis. These factors increased module segment gross margin dollar than percent, a $21 million and 5% respectively.
Separately, our module seven gross margin was impacted by negative 6.5 million of series for gross margin, which included 2 million, a decommissioning and severance costs.
A series for gross margin reduced overall module segment gross margin by 1.5%.
With these facts in mind, we are pleased with the overall module segment gross margin result, and our Q3 series six gross margin relative to our previous expectation 25%.
This was exceeded despite lower than expected Q3 volumes sold and despite incurring $3.5 million of unforeseen COVID-19, driven logistics costs in the quarter.
Additionally, and as a reminder, sales freight and warranty are included in cost of sales and reduced module segment gross margin by 6%.
Thats DNA and R&D expenses totaled 73 million in the third quarter, the decrease of approximately 1 million compared to the prior quarter.
The decrease was primarily driven by lower severance and project them, partially offset by higher legal and incentive compensation expense.
Production starts up which is included in operating expenses totaled $13 million in the third quarter, an increase of 7 million compared to the prior quarter.
And this increase was driven by higher start up expenses, our second series six factory in Malaysia.
Interest income of 2 million in the third quarter compared to $4 million in Q2.
This decrease was primarily driven by low interest rates and investment balance from ox will secure.
Recorded tax expense of 38 million in the third quarter compared to $10 million in Q2.
The increase in tax expense largely attributable to higher pre tax earnings in Q3.
The combination of the aforementioned items led to third quarter earnings per share of $1.45 compared to 35 cents in the second quarter.
Let's turn to slide nine to discuss select balance sheet items and summary cash flow information.
Our cash marketable securities and restricted cash balance ended the quarter at $1.7 billion, an increase of approximately 29 million compared to the prior quarter.
Total debt at the end of the third quarter was $261 million a decrease from 465 million end of Q2 as a result of international project sales.
As a reminder, all of our outstanding debt continues to project related and will come off our balance sheet. When the corresponding project is sold.
Our net cash position, which includes cash restricted cash and marketable securities less debt increased by approximately 233 million to 1.4 billion.
This increase was driven by proceeds from system sales modules segment operating cash flows, which was partially offset by capital expenditures and loan repayments associated with the Chicago projects there.
Net working capital in Q3, which includes non current project assets and excludes cash and marketable securities decreased by $18 million compared to the prior quarter.
Net cash provided by operating activities was $208 million in the third quarter compared to $148 million in the prior quarter.
As it relates to Chicago project, we repaid the project that prior to the close which resulted in higher operating cash flows upon transaction close.
As it relates to our Miyagi Anatomies you project. The associated project that was assumed by the buyer, which reduced cash outflows from financing activities and operating cash inflows of transaction close.
Finally capital expenditures were $106 million in the third quarter, which brings our year to date totaled $327 million as we continue our series six capacity expansion.
Turning to slide 10 on next provide an updated perspective on 2020 guidance.
On our Q2 call we provided guidance metrics that we believe will largely within our control full within reasonable line of sight at the time.
This included production operating spend capital expenditure guidance for the full year 2020.
While significant uncertainties remain regarding the severity and duration of the COVID-19 pandemic and its impact on our operations and financial results.
We believe visibility into our financial performance for the fourth quarter EPS improved on account of the following.
First we at the time of our Q2 earnings call. We cited tax equity market uncertainty for projects set to achieve commercial operation in 2021, which has the potential to impact our module customers and ourselves developed countries to project.
Well no provisions for credit losses stabilized somewhat in Q3 significant uncertainty remains the Q4 and 2021.
Focusing tax capacity for the second half 2021 remains difficult due to the uncertain economic outlook Governors government response and trajectory of COVID-19.
However, some track record provides happy uncommitted tons 21, financings, albeit a conservative volume.
Whilst it's incrementally positive for the U.S solar market, we remain strongly supportive of a direct paid legislative solution in lieu of the investment tax credit to alleviate potential disruptions in the tax equity market.
Secondly, with the sale of our American Kings project in Q2, the previously mentioned sales of the Japan and India assets in Q3.
With the expected sale of Sun streams to project in the Q4 2020 or Q1 of 2021, we have a viable path to close each project sale contemplated in our original 2020 guidance from February.
Finally, the climate of February guidance call, we anticipated full year module shipments of 5.86 Gigawatts.
Shipments for the end of the third quarter totaled 3.7, Gigawatts, which is below our year to date expectation largely due to COVID-19, driven projects financing logistics and customer delays.
This resulted in a shipment profile incrementally weighted to the second half of the year.
However, a significant volume of modules that we anticipate recognizing the 2020 revenue currently in transit or will be shipped in the coming weeks.
With the improved visibility for system sales to Twentytwenty and year to date progress of module shipments we are reinstating financial guidance for the fourth quarter. The considers this range of outcomes for module revenue recognition timing and closing of the sun streams to sale.
Given the uncertainty around any outcome from the evaluation of strategic options for our US project development business and the sale timing of our North American OEM business, our fourth quarter guidance assumes no change to our existing lines of business.
And to date, while we've largely managed the impacts of COVID-19 on our business and has not had a significant impact on our operations.
Our guidance assumes we will continue to be able to mitigate any such impacts on our supply chain and operations without incurring the material cost.
I will now review, our fourth quarter guidance ranges with the implied full year 2020 guidance ranges included on slide 11.
Starting with shipments due to the aforementioned uncertainties, we anticipate volumes of 1.8 to two gigawatts in Q4, which implies 5.5 to 5.7 gigawatts for the full year.
Production in Q4 is expected to be 1.5, gigawatts of implied full year 2012 production of six gigawatts, including no 0.2 gigawatt to series four.
Note that our full year production guidance six Gigawatts has increased by 9.1 gigawatts relative to the guidance provided during our Q2 earnings call.
Net sales were expected to be between 540 $790 million in Q4, which.
Which accounts for potential delays in the close of our sunscreen to project sale and module revenue recognition timing.
Total gross margin is projected to be 26.5% to 27% in Q4 and note that we anticipate the closing of the sun streams to projects that will be slightly dilutive to overall gross margin percentage.
Module segment gross margin is projected to be between 27 and 28% in Q4 plants.
We anticipate our module segment gross margin will be supported by an increase in volume sold continued reductions in our cost pool Party.
Partially offset by a modest decline in ASP.
And included in that gross margin guidance is anticipated 40 basis point gross margin percentage drag due to serious goal.
Operating expenses are expected to be between 90 and 95 million in Q4.
This includes production started expenses relates to our second series six actually Malaysia, a $15 million.
We anticipate R&D NFC and any cost excluding staff expenses of $75 million to $80 million in Q4.
Our current implied full year 2020 operating expense guidance of $351 million to $356 million is within the guidance range provided during our second quarter 2020 earnings call.
Operating income is estimated to be between 50 and $120 million in Q4.
Turning to non operating items, we expect interest income interest expense and other income to net to negative $5 million.
Anticipated tax benefit of 45 to 60 million in Q4, which includes a discrete tax benefit 60 million associated with the closing of the statute of limitations on uncertain tax positions.
This results in a Q4 earnings per share guidance range of one dollar to $1.50 per share and $3 65 to $4 15 per share implied for the full year 2020.
I was going to any capital expenditure forecast of 450 to 550 million remains unchanged from the prior quarter.
Our year end 2020, net cash balance is anticipated to be between 1.2 and $1.3 billion.
The decrease relative to our Q3 net cash positions, primarily due to capital expenditures and project spend related to our son seems to project.
Turning to slide 12, I'll summarize the key messages from today's call.
So I think we had Q3 earnings per share of $1.45 increased at quarter end net cash position improved module segment gross margin quarter over quarter and reinstated financial guidance for the fourth quarter.
Secondly, we had strong manufacturing performance each factory, averaging over 100% capacity utilization in Q3.
And that our Malaysia factory achieved our mid term cost for target at a 40% reduction from our 2016 cities for costs.
30 demand for series six product is robust and we have continued success, adding to our contracted pipeline, but net bookings of 1.6 Gigawatts is the prior earnings calls and 4.1 gigawatts year to date.
Our contracted backlog remained pillar of strength to 6.7 gigawatt contracted for expected deliveries and Twentytwenty, one and 3.6 gigawatts contracted for expected deliveries across 2022 2023.
We finally, despite ongoing challenges relating to the Coca 19 pandemic, we remain pleased with all operational financial performance.
And with that we conclude our prepared remarks and open for questions operator.
As a reminder to ask a question will need to press star one on your telephone to attract a question press the pound or hash key.
Ladies allow time for everyone to ask the question Ethan yourselves to one question, please and vinyl we compile the changing landscape.
Our first question comes from Philip Shen with Roth Capital Partners. Your line is open.
Hi, everyone. Thanks for the questions I have a few here or there. So thank you for your patience.
The first one is on Sig.
I think we picked up recently that you guys restarted your six research efforts. So wanted to get a sense for what that might mean.
Relative to capital.
Second.
I think you guys have talked about getting to eight gigawatts of capacity by year end 21 can.
Can you talk about the conditions that.
Need to exist to consider.
Consider expanding capacity and then what the timing and the locations of that might look like and then number three here.
With the ever growing importance of security of supply, especially in the face of the changing risk.
And the concentration of capacity in China can you talk about how the tenor of conversations with customers.
May have changed over the past month, and then help us understand.
How much is booked in 21 22 and 23, thanks guys.
All right I'll, let Alex take the last one was booked in 21 22 and 23, so I'll try to take the other three good team has gathered this numbers.
So your question or around around six and.
Were it to the extent that we are looking at that as a technology or really any technology because.
Identity as a core work for module technology manufacturing company, that's what we do and we need to continue to find ways to to differentiate ourselves on a technology basis and to find ways to be as disruptive as as we can with our technology and always accrete advantages relative to Christmas silicon with whatever the ultimate outcome.
Titian may be.
Steve we've looked at things in the past we've looked at the Christian Silicon.
Well, Matt Monocrystalline silicon.
We look at profit guidance, we look at everything and you know as it relate to do if your question is is it six to somewhat watered indication that it will be but we don't have confidence in cadtel, that's not anywhere close to that reality.
CAD Tel in my mind will always be advantage relative to six.
And we believe it has the romance be advantage relative to Chris and Silicon, but the reason that we would look at Chris and silicon or six to a profit guidance or organic TV or anything else that may be out. There is highly you complement the two and we've mentioned this before that we believe over time that.
Multi junction type of technology will evolve into the marketplace and Cadtel in of itself is a very good top so from that from a standpoint of having a high band GAAP.
So captured.
A significant portion of the overall some spectrum.
And.
When you need it as the second sale underneath that would be whats complimentary to that and could it be safe could it be could it be Christmas silicon could it be.
Prospects in some some form or fashion and so we're always going to look at that we believe it's the evolution of technology that will happen in the future. We've highlighted in previous calls too that we are reinvigorating our advanced technology team and so to the extent that you know.
We need to look at different materials different semiconductors can be complementary to two cadtel, we'll continue to do that but I don't look at six or really any of those other technologies as is replacing cat sales of core will be of our semiconductor and overall device will be catch up. The question is there something else that becomes complimentary with it and we need to look at all options.
Could be out there.
As it relates to the expansion in eight Gigawatts of media, we have I think indicated our nameplate.
Your body eight gigawatts at the end of 21, we are.
In the last phase of our son series six transition.
Our second factory in Malaysia will start up as current plant startup and in Q1 of 21, we are looking beyond that and as we've always said, we've got a balanced business model between gross liquidity and profitability.
And we we obviously understand the value growth in the leverage against fixed costs in flow through contribution margin and so we are evaluating options and we will look at.
Where we can create the next disruptive lowest cost factory. So as we continue down our journey with series six one of the things that we task ourselves with probably about nine months or a year ago. So what's what's the factory of the future look like what's the next generation.
Technology in terms of driving lowest cost for our Cadtel platform and so we have been been doing that and trying to find a way to create that disruptive lowers lowest cost from the fleet factory.
Which under that construct most likely would not be in the us for the reasons that we've mentioned and we believe we have relative representation here with cost almost 200 gigawatts in the U.S., but other markets and we would look to India could be one weve talked before about potentially are ripping factory and G.
Germany, starting that up as an easy way to get to market quickly and leverage that factory that we close down almost a decade ago. So those are things that we're looking at and we also believe that you know as Weve indicated I think Alex mentioned in his prepared remarks that freight is basically 6% of gross.
Gross margin right now 6% of the ASP effective.
So getting closer to market in driving down your freight cost is an advantage.
That we would continue to look to him so being in a market that can consume two and a half to five gigawatts of volume on a recurring basis. It would be important. So those are the many different factors that we look to as we think about expansion, but just want to make sure. It is clear that that is.
On the agenda of things that we're looking at at this point in time.
Supply security in any impact with.
What's happened with the.
China and the latest evolution now being on the potential use of force labor and implications of that has and potential product being banned in the U.S.
It's one of many different dimensions that a lot of our customers have.
As it relates to relying on China in long term and the uncertainty around that.
I don't know if that would have increased meaningfully over the.
The last.
The last month, it's just one of many different concerns that they've had I mean, even with the discussion around bulk power systems and potential implications around that.
Modules have been looked at is is there a risk of that that can be impacted this discussion of extension of the two one tariffs.
You know theres, many different things that come into the mix and a lot of our customers here in the us in particular.
Want to do business with with an American company.
They want to de risk their supply as it relates to ability to deliver against commitments in any uncertainties that could be imposed on us.
On the Chinese supplier in some of the issues that are coming up this year as you mentioned with with a forced labor. So I don't know if it's changed significantly in the last month. It clearly is top of mind and it's just one of many different factors that all of our customers think about when they have to rely upon their Chinese are Chinese counterparty as a supplier.
Yeah, just to try to numbers when the engineers. So right now we have 6.7 Gigawatts books, the 2021 and 3.6 Gigawatts books across 22 and beyond.
Our next question comes from Brian Lee Goldman Sachs. Your line is open.
Hey, guys. Thanks for taking the question.
Thats out of the quarter.
A couple of things from my end I guess.
First.
No. There's a lot of moving parts here on the module gross margins this quarter I am getting to like at 26.5% clean number for series six which.
Which is a 150 basis points higher quarter on quarter. I guess first question is that the right Matt.
And sort of what happened during the quarter that got you.
The additional 150 basis points, because I think last quarter, you were talking about sort of a flattish sequential trajectory and then the second question would be around that.
I Didnt hear it on the call I might have missed it but are you still on track to hit that 300 basis point gross margin expansion.
For series six in Q4 offer this higher run rate if my math is right.
And then maybe just lastly, how should we think about cost reductions in 2021, you said, you're running at or above the 10% target for this year, what sort of gross margin expansion potential do you have as you move into 2021.
Given the cost reduction progress, you're making and also the fact that pricing seems to be fairly stable for you guys. Thank you.
Yes, I'll start on the gross margin as Mark wants to comment on the on the cost reduction beyond that you doing basically the right math.
With the reported module segment gross margins are 29, and a half and you've got three big things that moved in a reduction on warranty liability about $20 million, but the good guy.
Actually in the end of life Wi Fi thinking about 19 million also good money on an impairment charge of about $17 million because again when you net all of those you've got about 21 million or about five.
Percentage points, you take that down about 24, and a half and then we said that within the overall margin we had about a six and a half million, 1.5% negative associated with series Force you add that back and you get to about 26% and then on top of that we did have.
Some kind of the charges in that number is about 3.5 million a cobra charges. It back out again, you're going to be another 50 to 100 basis points, so somewhere around 26, and a half to 2007 as around series six clean number.
So yes, we're a little ahead of where we expected to be part of that is just a function of how well the factory is up and running as Mark mentioned in his prepared remarks, we've now managed to get to the cost reduction targets that we expected in our high volume manufacturing by the end of the year in Q3 were already there and our Malaysia site, we already achieved that last quarter in India.
So running a little ahead there in terms of where we think we'll be bye.
For.
We're going to be about 27 off 28 gross.
Gross margin 30, Sixs and I'm only guiding to for Q4, so that one's held roughly steady from where we were last quarter.
And then in terms of cost reduction beyond that you know, we're not giving guidance out through 2021 market and if you want to comment.
Yes.
If I would I guess I would say just on that is it some of the gross profit I said in my in my comments that the things that are continue to drive improvements to the cost for waters through throughput.
Improve bosh and improve yields.
And so.
What I said in my remarks is that we just opened up the 445 watt ban.
And then you know it over the next few quarters, we're going to be at the 455 and north of that shortly thereafter, and so that is prudent in watch is going to help drive down costs. So that helps the throughput as we've already highlighted this is going to continue to increase so thats. Another significant lever that is going to help drive.
Down.
The cost per watt. The other one is we highlighted just be glass supply for our fares for factory, which will start to take shape in Q4 and to realize the full benefit starting in Q1. So the bill of material cost in Paris from particular is going to be helpful. But we're also working on significantly take.
Can submit cost out of.
The frame.
Which will help drive cost further and then we're actually looking at the.
Change in the profile of the modules such that is actually center. So when you look at the glass plus the frame we're trying to make the profiles of modules Center, which will also then allow us to add about 10% more modules.
A little over 10% more modules per container from a freight standpoint, which will help drive down that cost. So we've got teams that are really multi dimensional looking across all aspects of everything that is associated with the cost of the product and ultimately delivering it to the end customer.
So as Alex said, we're not guiding at this point in time for it for 21.
But we we are tracking to be ahead of what we thought where we thought we were going to be on a on a cost per watt basis, as we exit the year, which is a good place to be and then we still have a number of other initiatives that will further drive down our cost per watt as we go into 2021.
Our next question comes from Ben Kallo with Bank. Your line is open.
Hey, great quarter guys.
Three or four questions here. So can you talk about your utilization you're welcome.
Above they equate how should we expect that going forward I know, but good mortgages.
Talk about where your walk you all good.
But you know how much you go above nameplate capacity and when we think about.
Your your target for next year, which is good.
There's a big gap.
And then you don't talk about it too.
Are you more.
But you can you talk to us about.
The reticle tool.
Phil.
Where we can go through before 40 part all of award payroll.
Regarding the last question I guess.
You have a 2.5 gigawatts yield before you placed new capacity so were overseeing.
Good to hear your $400 million of Capex.
Take you so he knows the system will.
Will you go no go decision well.
And could you talk about just yet.
Onshore.
Great.
Yes, so from November where we ultimately maybe what I, what I said in the in the script was that where we are on trajectory right now for our two facilities plants in Ohio is to drive the nameplate capacity up to.
25% above when we written than what we originally launched at the UBS.
Objective would be to drive is effectively to about low thirtys. So theres, a let's say there's another five to about eight percentage points of incremental utilization that we would like to get out of all the factory. So first we had to get everything up to 25 right. We're not we're not necessarily.
Very good you can see by we're running we're called one Twentys I think is the best that we highlighted right now we've got a path to get everything up to around 25% near term with a goal of getting up to low thirtys call. It around 30% to 33%, which would be another five to eight percentage points above but our near term objective is.
And a little bit of work still to be done there, but I've been very impressed with the team's capabilities of making that happen.
On the efficiency side as you indicated.
The where we go with the technology I mean, what I, what I did say somewhat.
To my very last comment was.
The entitlement at the cell level for for Cadtel is 25% plus.
And that would translate into something close to call. It a 23% or so efficient modular based on normal conversion between sell shoot to module.
We're in the process right now of validating.
And hopefully we'll have over the next few quarters.
A new record for efficiency, whether I don't know if it will be a seller module. So looking at what we end up doing on that there are some items on our roadmap that would really be beneficial to help validate that through.
Demonstrating that either with the seller or a record or excuse me selling model, which by default will then drive to a record efficiency. So there is still more room to go yet on the core technology and driving to higher level of efficiencies.
The other one that I mentioned that again, it's complementary and it's in fits.
It's a combination dose multi junction technology that we talked about which would take efficiencies even above and beyond kind of that profile.
As I mentioned, because now you have two cells that are harvesting the overall.
Photons in converting them into electronics would you say that whatever you can do at the top sell level.
Capability would be further enhanced with the bottom so and so the technology and efficiency can go even beyond kind of those numbers that I represented around theoretically right. So there's still still ways to go yet on the technology and we're working very hard to make sure. We can realize those benefits over the next several years.
On a capex.
Basis.
We had just mentioned I alluded to this kind of what is the factory of the future and what is the most disruptive.
Lowest cost factory that we can create starting with a blank sheet of paper that.
That also drive down the Capex investment.
Relative to what we initially communicated with series six so that can drive it down probably close to 15% to 20% on a capex basis. So we have a roadmap to drive more capex out to do.
The more efficient. So therefore, we can obviously the cost deploy a new factory would on capex per watt basis will be lower than than when we originally launched that which is an objective to be fat as it is tied to.
The realization of the systems Slash energy services and proceeds associated it's not they're two independent things I mean, there is not a constraint you can see by our balance sheet is right. Now there is an ability to continue to to invest and in the capacity of the roadmap.
That we have in front of us there's not any linkage per se to.
Any proceeds we received from assistance business or the energy services business.
Our final question comes from Michael line.
Your line is open.
Hi, guys.
Can you talk about what would drive capacity adds in a particular regions or existing locations.
As you know in the past few years you know this has been driven by a move series four to series six going forward is it demand growth or something else that drives it.
So it's it whenever we grow we want to make sure that it's tied to a market indicator item in basically really has to start with relative competitive advantage position of the technology. The market has to be there writing good thing about where we are we are now with with celebrity.
Chairman it used to be policy right now its economic procurement people are buying solar from the pure economic standpoint, and so I don't really see any constraints on the market per se.
So we do look to markets, where we would have.
Advantages around our technology, so hot humid climate for for example would be at market they would be attractive to us again being closer to the market where at least driving efficient shipment logistics routes to access the market is important.
The reality of freight costs is 10% north of 10% of the overall cost of the product and so if you can get that number down say cut it in half to get 5% savings just by getting closer to the customer in reducing your overall freight cost to deliver that deliver the technology. There's many other factors that we use when we when we.
Screen a site.
Energy is it.
Meaningful component of our overall cost. So we have to have competitive cost of energy labor rates have to be competitive from that standpoint as well.
The processes are largely automated still component major component of the overall cost structure that has to be thought through and wherever we make decisions on where we're going to manufacturer.
But you know the.
The reality is that we will grow most likely it's probably going to be outside of the U.S. as we currently envision it could change.
We have the ability just to expand within the footprint drive more throughput of what we already have here in the US as we think about where our next factory would be.
It is we currently envision it would probably be in an international market somewhere somewhere close to two.
Customers close to where there is a.
Strong recurring annual demand requirement and one that we have seen our technology is well positioned in competitively advantaged, whether it's hot humid climate is whether it's the advantages of our COO to footprint environmental aspects around our technology, which more and more markets are starting to value. Those are the types of things that we take in consideration as we would think about any expansion.
We have completed the lottery time for questions. This concludes today's conference call you may now disconnect.
[music].
[laughter].
Yes.
[noise] [laughter].
Yes.
HM.
[music].