Q2 2021 First Solar Inc Earnings Call
Yeah.
[music].
Good afternoon, everyone and welcome to the $1st second quarter 2021earnings call.
This call is being webcast live on the investors section of first solar.
Web site at Investor Day, first solar Dot com.
At this time all participants are in a listen only mode.
As a reminder, today's call is being recorded.
I would now like to turn the call over to Mr. Mitch Ennis from first solar Investor Relations Mr.
Anna you may begin.
Thank you good afternoon, everyone and thank you for joining US today the company issued a press release announcing its second quarter 2021 financial results a copy of the press release and associated presentation are available on first solar is web site at Investor Day first of all on Dot Com with me today are Mark Widmar, Chief Executive Officer and.
And Alex Bradley Chief Financial Officer, Mark will begin by providing a business and technology update also then discuss our financial results for the quarter provide updated guidance for 2021 on.
In our remarks, we'll open the call for questions. Please note. This call will include forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations.
Including among other risks and uncertainties, the severity and duration of the effects of the COVID-19 pandemic.
We encourage you to review the Safe Harbor statements contained in today's press release and presentation for more complete description. It is now my pleasure to introduce Mark Widmar, Chief Executive Officer, Mark <unk>.
Thank you Mitch and good afternoon, and thank you for joining us today.
Beginning on slide 3 I would like to start by thanking the first solar team for their passion continue and excellence and there are many achievements in the second quarter.
Operationally, we have started site preparation for the recently announced 3.3 gigawatt factory in Ohio.
Which will further cement our position as the.
Largest PV module manufacturer in the western hemisphere.
Additionally, I am pleased to announce that contingent upon permitting and approval of government incentives that are satisfactory to first solar.
We are intending to invest approximately $680 million to add 3.3 gigawatts of manufacturing capacity in India.
Day. These next generation factories represent a significantly forward in our technology roadmap and we will produce our most competitively advantaged modules with an expected lower cost per watt and environmental footprint compared to our existing fleet.
Commercially market demand for our CAD Tel technology is at a record level.
7 months into the year, we have already booked 9 gigawatts.
Exceeding our prior annual record of 7.7 Gigawatts in 2017.
From a technology standpoint, our production lines are manufacturing record modules.
To illustrate this point.
Samples produced during our regular production process.
<unk> submitted for external verification and confirmed by the National renewable Energy Laboratory.
At a world record 19, 2% glass area efficiency for CAD Tel module.
For reference and in comparison to our previous aperture area record of 19% efficiency.
Our new record.
First were 6.2 a $19.7 aperture area of efficiency.
Additionally, our advanced research team has been creating new optionality in our R&D roadmap.
For example, we recently deployed prototypes of early stage bifacial modules at a test facility and are pleased with the initial results.
In summary, the momentum we have cultivated paired with an increased favorable policy environment represents a compelling growth opportunity in the near to midterm.
However, before discussing these opportunities I will first provide near term COVID-19 supply chain cost and market updates. Please.
Turn to slide 4.
As a global company with a manufacturing operations in the United States, Malaysia and Vietnam.
The health and safety of our associates is our top priority with a steadfast commitment to adhering to applicable COVID-19 protocols.
As part of this effort, we are working with local.
To facilitate onsite testing and vaccination for our associates.
I would also like to express immense gratitude to our Vietnam manufacturing associates.
To date elected to remain on site in order to maintain manufacturing continuity.
While this clearly is a challenging time.
Tim we acknowledge your incredible resiliency ingenuity and leadership to deliver your operational plan commitment.
While we have been permitted enable to maintain manufacturing operations in Malaysia, and Vietnam to date, the rise of Covid, 19 cases, and potential government and other restrictions present risk to our.
Production supply chain and technology implementation plans.
As it relates to our fuel program the factory update and tool implementations that are Vietnam sites requires international travel from both third party equipment installers as well as our U S based associates.
<unk> continued to work with relevant agencies.
Our Vietnam to support this essential travel on a safe manner delays, resulting from government and other COVID-19 related restrictions on.
The increase in case rates may impact the timing of our cure transition in Vietnam.
Despite this uncertainty we continue to execute and navigate the current environment as reflected by.
Seasoned factoring performance metrics on slide 4.
As highlighted previously the global shipping environment remains challenging due to port congestion limited container availability and increase in cancellation of shipments by logistic providers scheduled reliability issues and other events.
Since.
The April earnings call shipping rates have continued to rise and additionally, COVID-19 outbreaks and restrictions have caused disruptions in China and southeast Asia.
The impacts which have reverberated across the global logistics market.
These challenges coupled with strong global demand have led to a significant increase in the cost.
On the transoceanic freight.
We are partially mitigated the effects of higher shipping cost per watt through improvements in our module efficiency.
The limitation of series 6 plus expanse.
Expansion of our distribution network strategy in the United States and forward contracts.
However, we have seen and expect to continue to see.
Into 2021 adverse impacts on our financial results for.
For context spot rates for routes between Asia, and the United States have increased 200% to 300% from Q2.2020 to Q2.2021.
Over this period sales rate reduce.
Our module segment gross margin by 9 percentage points in Q2 of 2021 or 3 percentage points higher year on year.
We continue to facilitate anticipate near term challenges, including.
Including elevated fuel cost.
Average vessel delays of 2 weeks and <unk>.
For the remain container availability impacting our ability to use space secured on on vessels.
Although these factors contributed to lower than anticipated shipments in Q2 and higher freight costs. We have a number of near term and long term strategies intended to improve our competitive position with regards to sales right.
Constrained near term, we are working closely with our customers to limit our exposure to inflated sales freight costs.
In certain situations, we have accommodated request for delayed module shipments, which provide opportunities to mitigate higher freight costs.
Given current vessel schedule reliability.
We are adding scheduled buffers to better.
And meet our customers' commitments and provide greater resiliency in our shipment plan.
Average sales rate from Malaysia, and Vietnam to our U S customers increased <unk> per watt quarter on quarter.
And in Q2 was approximately triple that of shipments from Ohio.
Long term this reinforces the strategic thesis for located in additional manufacturing capacity near term demand.
Contractually for certain new bookings, we have employed structures that mitigates sales freight costs in excess of pre negotiated levels.
As we continue to secure bookings for deliveries 2 to 3 years.
Years in the future. This type of contractual arrangement will help derisk the expected value of our contracted backlog.
I would next like to discuss the key components of our bill of material spent.
Approximately 2 thirds of which is made up with glass and freight costs.
On the glass perspective.
We have.
We hedged the costs through long term fixed price agreements with domestic suppliers that have volumetric pricing benefits as we achieve higher levels of production.
With regards to aluminum in August of 2020, we entered into a commodity slide <unk>.
Contract to hedge a portion of our U S cash flows for purchases of aluminum price.
Largely which ends in Q4.
While we anticipate some impacts of the hedge roll as the hedge rolls off.
We intend to partially mitigate the cost per watt impact through reduced aluminum per module uses firstly by.
Differentiating between interior and exterior modules.
And second.
Secondly by redesigning the frame.
Finally, the cost of lumber, which is used for our shipping and packing process was approximately 70% higher on an index basis in Q2 compared to the start of the year.
This impact our Q2 results by approximately $2 million.
Since then lumber cost.
This has significantly.
Declined and as a result, we are currently not expected to impact our 2021 exit rate cost per watt target.
In summary on cost uncertainties remain on certain bill of material items, we are tracking to achieve a 9% <unk>.
Cost per watt produced reduced.
Between where we ended 2020 and expect to end 2021.
No lock core production costs are largely on track the 2 percentage point decrease on our year over year cost per watt reduction relative to the previous expectation is largely due to the effects of higher inbound.
<unk> cost for raw materials.
On a cost per watt sold basis due to the challenging near term sales trade environment, our revised year over year reduction target to 3%.
Note.
As a reminder, sales trade is included in our cost of sales, whereas many of our module peers report sales rate.
As a separate operating expense.
For comparison purposes, we encourage you to consider this fact when benchmarked in our module gross margin percentages relative to our peers.
Turning to slide 5 I would like to provide some context on the ASP trajectory for the year.
As a reminder, 2 years ago on the Q2.
For a 2019 earnings call.
We indicated approximately 4 gigawatts of our 2021 module supply was booked are contracted subject to conditions precedent.
In other words, a significant portion of the volume sold this year had an <unk> agreed to 2 years prior to module delivery.
Heading into 2020 and to 2000.
'twenty 1 we were largely sold out of our available supply for the forward year.
And as a result, we have limited exposure to the spot market.
We believe there is a strong strategic rationale for forward contracts and deliveries in this manner.
Which provides value for both first solar on our customers from our perspective.
Contracting for future deliveries provides us confidence in our ability to sell through our expected supply.
And visibility into an expected profit per watt in the PV market that is typically highly price competitive.
From our customer's perspective, these arrangements provide value to clarity uncertainty of pricing.
Product availability.
<unk> on delivery timing, enabling them to underwrite ppas from a position of strength with a lower risk to their expected project returns.
Being able to provide that certainty to both buyer and seller is a strategic differentiators for first solar.
From a U S policy perspective, both near and long term pricing for all solar modules.
<unk> is also impacted by uncertainty over legislation.
Related to force flavor and China tariffs.
Manufacturing tax credits invest.
Investment tax credits and other restrictions on incentives.
Given the current lack of clarity over the form structure and duration of potential policy changes.
Changes.
The near term and long term impact of these on both demand and pricing also remain uncertain.
Moreover, this lack of clarity needs to be balanced with the significant passive expansions announced by our competitors.
From first solar perspective, we aim to continue to work with capable well found on finance Counterparties.
That have high certainty on the quality and execution of the projects.
We also look to establish and maintain deep relationships and partnerships with our customers delivering solutions at a fair pricing level that meets their needs and also enables attractive returns for first solar relative to our expected future cost per watt.
At the time of the previous earnings call, we indicated that the ASP across the volume of potential deliveries in 2022 was 11% lower than the volume to be shipped in 2021 <unk>.
Including our incremental bookings since the previous earnings call the year on year decline is largely unchanged.
Looking into 2020.
We are very pleased with the demand and pricing we are seeing for our cash held modules as we continue to drive to higher wattage and efficiency levels.
Although there remains significant on contracted volume to be booked.
Asps across the contracted volume for planned deliveries in 2023 is only 1% low.
Lower than that volume planned for 2022.
Note, while we have yet to commence the sales process for our next generation PV modules to be produced by our recently announced announced factories. They are expected to be ASP advantages through the anticipated higher efficiency and superior balance of system.
3 per watt profile.
In summary, as we have seen a significant increase in desire to work with first solar due to our differentiated value proposition.
While pricing negotiations in the market remained competitive we continue to secure volume with customers that value our points of differentiation with the potential for Asps catalysts in.
Cautious.
Relative to this objective we are very pleased with our record year to date net bookings of 9 Gigawatts, which includes 4.1 gigawatts since the April earnings call.
After accounting for shipments of approximately 1.8 gigawatts during the second quarter, our future expected shipments, which.
The fusion into 2024 or $17.2 gigawatts.
Including a year to date bookings were largely sold out for 2021 and 2022.
I have 3.4 gigawatts for Pan plan deliveries in 2023, and 45 Gigawatts in 2024.
This.
Long term demand further supports the investment thesis behind our third, Ohio factory and our first factory in India.
Additionally, and as reflected on slide 6 from our opportunities perspective, our pipeline of future opportunities also remains robust.
Our capacity expansion in India, and the related increase in available.
Available supply to meet projected domestic demand expands our booking opportunities in the country and accordingly, our potential bookings in India exceeds 7 gigawatts.
We'd also like to take the opportunity to address the reported use of force labor and the crystalline silicon PV manufacturing.
Industry, which.
Which has been highlighted by the recent withhold and release order issued by the U S customs and border protection.
<unk> supply chain business advisory from the U S government and the weaker force labor pretense.
Protection Act, which was passed in the U S Senate with unanimous consent and.
An investor.
By the United Kingdom and other countries.
Hugh.
Climate change is among the most pressing issues facing society today. Unfortunately, the challenges of de carbonization.
The global electric mix can largely be addressed with commercially available technologies, including solar.
Wind energy storage and green hydrogen.
Unfortunately, the crystalline silicon supply chain is tainted by the reported use of force labor and human rights abuses in China, which necessitates urgent action.
However, it must be understood that our global collective response to force labor does not need to conflict.
Negation on long term global climate objectives.
While there are commercial solutions to ensure supply chain continuity.
We acknowledge the near term supply challenges presented by the withholding release issue by the U S customs and border protection.
These challenges are exacerbated by the overly complex and it will take nature.
With the crystalline silicon manufacturing process.
While the issue of forced labor represents an urgent ethical imperative that must be addressed it also presents a strategic opportunity to drive change and an opportunity from the United States and like minded nature nations to achieve energy security and technological.
<unk> from independents to the promotion of our PV domestic manufacturing industry.
Relative to this week.
We strongly support the proposed solar energy manufacturing and Americas Act.
Which was introduced by Georgia, Senator John Asaf and co sponsored by Senators Warren.
<unk> been at in staff now.
We believe that if enacted it will help accelerate the transition to clean energy using domestically produced technology support American energy independence, and create high quality manufacturing jobs.
By creating tax incentives for vertically integrated manufacturers and for each step.
Chris fluids supply chain.
We can establish a level playing field, where all PV technologies compete on their own merits and establish a domestic capacity to support America's climate objectives.
We believe the Biden Harris administration has unique opportunity to adopt a longer.
Long term industry policy for solar which could include a mix of manufacturing tax credits and extension of the investment tax credit where the domestic content requirement among other strategies.
Through our long term strategic approach to policy administration has an opportunity to create an environment that fosters innovation.
For next generation of PV.
While the legislative outcome for the U S infrastructure and solar remains uncertain we.
We are broadly encouraged by the legislators sentiment and willingness to support U S. PV manufacturing to enable energy independence security and climate goal imperatives.
Turning to slide 7 and looking forward, we believe strong demand for series 6 are compelling technology roadmap and strong balance sheet and largely fixed operating expense cost structure and an increasingly favorable policy environment for domestic PV manufacturing in the United States in India are catalysts as we evaluate capacity expansion.
With respect to the United States as announced in June.
We are more than doubling our manufacturing capacity in the United States, adding 3.3 gigawatts at an implied capex per watt of approximately <unk> 20.
This greenfield expansion financed by cash on hand represents an opportunity on.
Unbound by the legacy series 4 constraints to.
To optimize each parameter of the factory and product design.
Accordingly, this enables us to develop a new product at the intersection of efficiency energy yield optimized form factor cost competitiveness and advantage environmental attributes.
<unk> and <unk>.
23. This factory of the future is expected to commence production of our next generation module, which is expected to leave the fleet in terms of in terms of efficiency module wattage cost per watt.
And environmental footprint.
Our next generation module building upon our core programs is expected to push the.
<unk> of our CAD Tel platform in several ways firstly.
In the midterm, we anticipate this module can achieve efficiency in excess of 20%.
And with an optimized form factor enabled model module wattage in excess of our current midterm target.
Secondly, we optimize the form factor.
Patients to benefit balance of system cost per watt and Consequentially module asps.
Thirdly through an optimization of the modules mounting interface and an increase on automation. This factory is expected to achieve a lower cost per watt produced than our existing fleet despite being located in a higher.
Cost of labor market.
Finally by locating this factory domestically, we reduce our reliance on track transient the ocean freight costs.
And anticipated reducing sales rate per watt in the 4 U S deliveries.
Our third factory in Ohio is expected to commence commercial production in the first half.
'twenty 3.
Scaled on over 3 Gigawatts of nameplate capacity by the end of the year and 3.3 gigawatts in 2025.
Internationally, we have been evaluating the expansion of our manufacturing presence in India.
Our technology is uniquely advantaged from the market due to our temperature coefficient and spec.
<unk> sponsor advantages.
Which can result in higher energy per watt installed as compare to crystalline silicon due to the effects of heat and humidity.
As we stated previously we believe cure significantly increases our competitiveness against bifacial modules the.
The India PV market is predominantly mono facial do too.
2 generally low a veto.
And Additionally, the cost of bifacial systems exceeding the benefit the backside energy due to high capital costs.
And the additional real estate needed for bifacial plants.
However, given the expected lifetime energy benefit of our care modules, we can achieve with no increase in balance of system.
Across our other project costs, we are well positioned to capture the value share in the India market.
We also filed the steps India has taken to foster a healthy domestic PV manufacturing industry, which includes a combination of federal and state incentives and national barriers.
This includes among others, a 600 million.
Production link incentive scheme with preference given for vertically integrated PV manufacturers, who produce modules with an advantage temperature coefficient.
In addition to domestic incentives India announced.
Solar tariff policy starting in April 2022, which includes 25%.
And 40% duties on imported and modules respectively.
Through its strategic approach, India has combined its clean energy targets with effective trade and industrial policy designed to enable self sufficient domestic manufacturing and true energy security.
As previously.
Indicated.
The factors in evaluating the future capacity expansion include geographic proximity to solar demand, where first solar has an energy or competitive advantage and which could mitigate freight related costs.
Secondly, the ability to export costs.
Competitively into other markets.
Third.
Thirdly cost competitive labor low energy cost and low real estate cost.
Fourthly, a competitive supply chain to support the sourcing of raw materials and components and finally domestic and international policies to ensure such expansion is well positioned in summary, we believe India meets these criteria.
With the strong demand for our CAD Tel technology, we are eager to grow our manufacturing capacity to meet this market demand.
With our expansion in the United States, and India and optimization of our existing fleet, we anticipate our nameplate manufacturing capacity will double to 16 Gigawatts in 2024.
With a new.
New factories, combining 2 to 3 gigawatts of production in 2023.
Moving on to technology.
There were several noteworthy accomplishments since our previous earnings call.
Firstly following the implementation of series 6 plus at our 2 factories in Ohio.
We are now consistently producing.
250 watt modules in Ohio, and Malaysia.
Increasing our fleet wide average watts per module to $4.49 for July month to date.
Secondly, our commercial production lines are manufacturing record module as previously discussed.
Finally, our share product has been certified.
As meeting UL, and IAC standards, representing an achievement of their robust quality reliability and safety requirements.
As we look to extend our advantages in the utility scale market and recently deployed prototypes of early stage bifacial CAD tell modules.
Is it a test facility and are pleased with the initial results demonstrating real world Bifacial day.
While this is only early stage research. We believe there is a path to increase bifacial performance.
Which has the potential to improve upon our existing temperature coefficient spectral response partial shading and long term.
<unk> patient energy advantages.
As we've previously stated we believe cure significantly increases our competitiveness against bifacial modules.
But potentially unlocking CAD Tel bifacial capabilities, we have the opportunity to further improve our existing energy advantage and ground Mount applications.
<unk> on the residential and C&I markets, we recognize the value of high efficiency vertically pleasing and domestically manufactured product at.
<unk> stated previously we continue to evaluate the prospect of leveraging the high band GAAP advantages of CAD Tel and a disruptive high efficiency low cost tandem or multi junction device.
We strongly believe that a thin film semiconductor is essential to achieving the highest performing tandem PV modules and that CAD tell which benefits from the many innovations of our technology roadmap and has a proven commercially scale track record is ideally placed to enable this leap forward in high performance modules.
And the mid term we believe there is a path to achieve a 25% efficient multi junction PV module as.
As we seek to grow our presence and competitive position in the residential and C&I markets. We believe this type of module has the potential to be disruptive and provide us with a competitive edge.
I'll now turn the call over to Alex.
Who will discuss our second quarter financial results and 2021 guidance.
Thanks Mark.
Before discussing our Q2 results from 'twenty to 'twenty, 1 financial guidance I'd like to reiterate on core operating principle of endeavoring to create shareholder value through a disciplined decision, making framework balancing growth liquidity and profitability.
As it relates to.
The growth, we anticipate doubling on nameplate manufacturing capacity from approximately 8 gigawatts today to 16 Gigawatts from 2020 full through adding additional factories in Ohio in India as well as optimizing on existing fleet.
Beyond that we continue to evaluate the potential for further expansion in the United States as the policy environment develops.
Physicians have been a strategic differentiator in an industry that has historically prioritized growth without regard to long term capital structure.
Importantly, we anticipate we will be able to continue to self fund capacity expansion on strategic investments in our technology, whilst maintaining a strong differentiated balance sheet, which we believe is a meaningful competitive differentiator.
While the strength of our balance sheet provides us flexibility as we expand internationally, we may elect to utilize debt to mitigate currency risk and optimize returns on our international expansion.
As it relates to profitability of technology and capacity Roadmaps are expected to enhance our long term earnings potential.
Despite a long term PV industry trend of declining.
Asps, we anticipate revenue growth through capacity expansions.
From a pricing perspective, although there remains significant on contracted volume yet to book, but pleased with the pricing levels. We've secured to date for 2023 deliveries, which in aggregate are only 1% lower the amount of volume planned deliveries in 2022.
From a margin perspective.
Continued progress towards our midterm cost per watt objective and is expected to enhance our profit pool of potential and.
And Furthermore, we've yet to book 2023 volumes from our next generation PV modules, which are expected to be produced by our recently announced factories.
These modules are expected to give us ASP advantage due to the higher efficiency and optimized form factor.
Which creates value for customers as well as cost per watt advantages.
Combined on the benefits of locating supply near to demand, reducing the cost of sales rates. These factories are expected to increase gross margin per watt by approximately 1% to 3 per watt relative to our existing fleet.
Overall, we believe a combination of capacity.
<unk> growth technology enhancements and reducing our cost per watt, coupled with an operating cost structure that is 80% to 90% fix will drive meaningful contribution margin as we scale.
Before reviewing our overall financial results for the first our first set of legacy systems by some of the benefits of revenue and margin during.
Passenger growth.
2014, we solar project that was eligible for a 30% cash grant payment under <unk> 16 on 3 of the American recovery and Reinvestment Act.
Pursuant to the indemnification arrangement in September of 2017, we are indemnified project push the following the underpayment of anticipated cash gross proceeds by the U S government.
The period on the 18 the project entity commenced legal action seeking full payment of the previously expected cash growth.
In Q2 of this year, a settlement was reached pursuant to which the U S. Government made a payment in Q3 to the project loans T. A portion of which we're entitled to.
Accordingly, we recognized systems segment revenue of approximately $65 million during the quarter.
Which directly benefited gross margin.
Starting on slide 8 to cover the income statement highlights for the second quarter.
Net sales in Q2 was $629 million, a decrease of $174 million compared to the prior quarter.
Decrease in net sales was primarily due to the sale of the sunscreen, 2.4 and 5 projects.
In the prior quarter, partially offset by the aforementioned settlement agreement.
On a segment basis on module segment revenue in Q2 with $543 million compared to $535 million in the prior quarter.
Total gross margin was 28% in Q2 compared to 23% in Q1.
Systems segment gross margin of $65 million was largely driven by the previously mentioned settlement agreement.
Despite the aforementioned delays in certain module deliveries as well as higher than expected logistics costs Q2 module segment gross margin increased to 20% from 19% from the prior quarter.
Whilst we continue to navigate.
And partially mitigate the effects of the dislocated shipping market higher freight costs impacted our financial results for the quarter.
In Q2 sales totaled approximately $50 million on 9 percentage points of module gross margin.
Along with module warranty expense, approximately 2 million sales freight and warranty reduced our module sales and gross margin by approximately.
Percentage points.
And as mentioned we're in the process of implementing series 6 plus and cure in 'twenty, 'twenty, 1 which requires downtime, resulting in lower production and on to utilization.
In Q2, our module segment gross margin was impacted by $7 million on the utilization.
In total sales rate module warranty on Underutilization impacted.
They tend to module gross margin by approximately 11 percentage points.
SG&A and R&D expenses totaled $60 million on the second quarter, a decrease of approximately $12 million compared to the prior quarter.
In Q2, we had a 3 million reduction expected credit losses benefited SG&A expense.
Production startup, which is included in operating.
<unk> expenses totaled $2 million in Q2, a decrease of $10 million the prior quarter.
This decrease was driven by the start of commercial production at our second series 6 factory in Malaysia in Q1.
Q2, operating income was $110 million, which included depreciation and amortization of $66 million.
$65 million a night.
Operating mentioned settlement agreement 9 million relates to Underutilization on production startup expense and share based compensation of $5 million.
We recorded tax expense of $20 million in the second quarter compared to $46 million in Q1.
The decrease in tax expense for Q2 is largely attributable to lower pretax income.
The combination of the aforementioned items, but the second quarter earnings per share of <unk> 77, and.
And $2.73 for the first 2 quarters of 2021 on a diluted basis.
Next turning to slide 9 I'll discuss select balance sheet items and summary cash flow information.
Our cash cash equivalents marketable securities and risk.
From a cash balance ended the quarter with $2.1 billion, an increase of $255 million compared to the prior quarter.
Several factors impacting our quarter end cash balance.
First in Q1, we sold certain restricted marketable securities associated with our module collection and recycling program for total proceeds of $259 million.
We intend to reinvest these proceeds at which point they will be considered restricted marketable securities which are not included on our measure of total cash.
Secondly in early April we received proceeds from the sale of our U S project development business.
Finally on operating cash flow during the quarter were partially offset by capital expenditures.
Total debt at the end of the second growth with $279 million, an increase of $22 million from the end of Q1.
This increase is due to our loan drawdown on our credit facility for Japanese systems project.
As a reminder, all of our outstanding debt continues to be project related and will come off the balance sheet when the corresponding project fold.
Our net cash position.
Which includes cash cash equivalents restricted cash and marketable securities less debt increased by $233 million to $1.8 billion as a result of the aforementioned factors.
Net working capital in Q2, which includes non current project assets and excludes cash and marketable securities decreased by 176 million.
Compared to the prior quarter.
The decrease was primarily driven by the collection of proceeds from the sale of our U S project business and an increase in current liabilities on increase in downpayment from module customers.
Net cash generated by operating activities of $177 million in the second quarter.
Finally capital expenditures were 90.
$1 million on the second quarter compared to $19 million on the Frac water.
Continuing on slide 10 on let's discuss 2021 guidance.
Firstly, starting with our systems business, we recognized a 65 million benefit in Q2 related to previously mentioned the settlement agreement and have incorporated this on our systems.
<unk> revenue and gross margin guidance.
Secondly, we are evaluating whether to continue holding a loose on north asset in Chile or pursue a sale of this project.
<unk> is such a sale would require coordination with the project lenders and could result in an impairment charge in the future. If we are unable to recover on net carrying value on the project.
No impact from.
Many possible sales of this project is included in our guidance for the year.
As it relates to our module business several key updates.
As highlighted on the previous 2 earnings calls, we continue to anticipate elevated shipping costs for the remainder of 2021.
Despite near and long term strategies to mitigate the impact the cost of shipping has continued to rise since the.
Cool.
As a result of elevated rates port congestion limited container availability on schedule reliability issues.
Sales rate is expected to adversely impact on 2021 results by an incremental $60 million relative to our previous expectations.
For the full year 2021, we anticipate sales freight and warranty.
We will reduce our module segment gross margin by 10% to 11 percentage points.
250 basis point increase from the previous earnings call.
First we continue to manage our core manufacturing costs. We also anticipate a shipping related variable cost headwind of approximately $20 million, primarily due to elevated inbound freight costs of raw materials.
April on Additionally, Q2 shipments were lower than expected due to vessel delays constrained customer container availability and accommodating certain customer requests.
We're currently tracking to achieve full year 2021 shipments of 7.6 to 8 gigawatts, which represents a non.
2 gigawatt decrease to the low end of the guidance range.
The knowledge that our current logistics environment presents risk to 'twenty to 'twenty, 1 shipment plan.
As it relates to capacity expansion on recently in our factories and higher on India are anticipated to commence production in 2023 and increased 2021 capital expenditures by approximately $400 million.
Related to this expansion, we anticipate incurring an additional.
We also hundred dollars on a capital expenditures in 2022 with the remainder in 2023.
With these factors in mind rotating on 'twenty to 'twenty, 1 guidance as follows.
Module segment revenue guidance of $2.4 to $2.5.5 billion represents a $50 million decrease to the low end of our guidance range to account for our current expectations.
7 on shipment timing.
Our updated net sales guidance to 875% to $3.1 billion.
This reflects an increase in systems revenue on both the high and low end of the guidance range due to the aforementioned settlement agreement.
Additionally, we've increased the low end of our guidance systems guidance range to account for clarity on project silicone.
Patients are module segment gross margin guidance is $485 million to $535 million.
Well to our previous guidance. This represents an $80 million reduction to the high end of the guidance range due to a $60 million increase in expected sales rate and $20 million increase in expected inbound freight.
Providing low and also represents.
$90 million decrease relative to our previous guidance due to a low 0.2 gigawatt reduction on the low end of our shipments guidance on an increase in expected sales NIM bound freight costs, which are partially offset by risk accounted for in our previous guidance range.
As a result of these factors we anticipate on module segment gross margin will be approximately 20% to 21% per.
Represented here.
For the full year 2021, we anticipate sales rep and warranty will reduce our module segment gross margin by 10% to 11 percentage points.
And in addition, we expect the impact of ramp on the utilization and reduced throughput totaled $41 million.
Projected systems segment gross margin guidance of 210 to 200.
The $45 million, which reflects a $65 million increase due to the aforementioned settlement agreement and a $15 million increase to the low end of the guidance range due to the clarity on project sale economics.
We anticipate the majority of our remaining year remaining fully a systems segment revenue and gross margin we recognized in the fourth quarter per year.
Our revised.
<unk> 'twenty gross margin guidance of 695% to $760 million, which reflects a $15 million decrease in the high end of the range.
SG&A and R&D expenses of 265 million to 275 million production startup expense of $20 million to $25 million on operating expenses of 285 million to 300 million combined.
<unk> <unk>.
Our revised operating income guidance range of $545 million to $625 million and includes anticipated depreciation and amortization of 262 million.
Share based compensation of $20 million.
61% to $66 million related to ramp on utilization reduced throughput and production startup.
R&D and.
And again on the sales of our U S project development in North America, and O&M businesses of $149 million.
Turning to non operating items, we expect interest income interest expense on other income to net negative $15 million, an increase of $5 million compared to our previous guidance due to higher net interest expense foreign exchange losses.
Our tax guidance of 100 per $100 million is unchanged.
Our revised earnings per share guidance is $4 to $4.60 per share.
As a reminder, there are a number of items impacting our EPS guidance for 2021.
Firstly ramp on utilization reduced throughput on production startup expense driven by factory upgrades.
<unk> are expected to contribute about <unk> 50, EPS headwind in 2021.
Secondly, these upgrades will acquire approximately 3 weeks of planned downtime across the fleet, which is expected to contribute to lower production.
And finally sales rates on inbound freight both remains significantly elevated in comparison to historic levels.
Okay.
So expenditure guidance has increased by $400 million driven by our recently announced expansion plan to revised range of $825 million to $875 million.
As a result of additional Capex in 2021 on higher logistics costs. We've decreased our year end 2021, net cash guidance to a revised range of 135 to $1.45.
$5 billion.
And lastly, our shipment guidance of 6768, Gigawatts, which represents a <unk> 2 gigawatt reduction to the low end of the guidance range.
Turning to slide 11, I'll summarize the key message from the call today from.
From a financial perspective, net cash position of $1.8 billion remained strong delivered year to date EPS.
A $2.73.
And we revise US 21, EPS guidance range to account for the current freight market.
Operationally, we started flight preparation for our recently announced factory in Ohio, and announced on manufacturing expansion into India with it.
A result of this expansion and optimization of our existing fleet, we anticipate on nameplate manufacturer.
Capacity will reach 16 Gigawatts in 2024.
And finally, a series 6 demand is at a record high level with 9 gigawatts per year to date net bookings, which includes $4.1 gigawatts since the previous earnings growth.
And with that we'll conclude our prepared remarks and open the call for questions operator.
Thank you Sir as a reminder to ask a question you will need to press star 1 on your dollars willing keypad.
Again that is star 1 to ask a question.
Our first question comes from the line of Philip Shen from Roth Capital Partners. Your line is open.
Hi, everyone. Thank you for taking.
Factories.
The first 1 is on Vietnam and Malaysia.
With the Covid situation there.
I think Mark you mentioned that people are.
Working hard and maybe even low.
Moving at the facility.
Maintain utilization can you talk about.
How are you.
Expect utilization to trend ahead is there risk for a shutdown of production.
And at any point in time in the future and how is this impacting your.
Ability to rollout new.
Updates and so forth and then.
Secondarily.
In terms on bookings you guys have had some nice bookings.
Bookings here.
There is still a bunch available for 2023.
I think you mentioned, maybe 3 gigawatts.
When do you expect that to.
On.
Possibly get both I mean could we see that book later this year or do you think that might carry into 2022.
So I guess on.
So.
Obviously, we've got to comply with all the requirements of what's going on in both those countries and in some cases, they're in there.
There has been over periods of time in Malaysia around movement control orders and Fortunately, we've been in relationship and deemed to be essential.
Continued.
Allow us to operate and we continue to try to make sure we comply with all the local requirements.
We've also on both of our facilities have started the process to already to get our associates on vaccinated. So most of our associates from both the facilities have recently received the first shot and we would expect here in the near term.
Solar and be able to provide the second shop, so that's helping as well.
Vietnam is the 1 I would say thats trending.
More significantly right.
On a relative basis, you could look at Vietnam historical number of cases and fatalities as being relatively low by most standards.
Sanders, but we've seen a pretty significant increase here over the last.
6 weeks or so so the government has.
Nate.
And post other requirements.
Including to.
To the extent that you are going to continue to run your factory there is a requirement to quarantine on site.
So.
So we have made for our accommodations for our associates there too to quarantine.
And we've got a schedule, which would be a place where we'd be able to.
Rotate associates through over periods of times, where the current staff would be quarantine for a period of time than the new.
Number of associated.
Overtime.
So we've been able to manage and the team has done a phenomenal job and as I alluded to that in my prepared remarks, they've continued to hit their operational metrics. So as I sit here today as we look across our supply chain and Thats, both in Malaysia, and Vietnam on our own facilities, we're able to manage the current.
With country, However, if things continue to trend.
First and then we'll have to assess and evaluate our ability to continue to run and operate so.
Clearly a challenging environment of which the team have been able to do an outstanding job to continue to operate and to hit our performance metrics.
The.
Situated as it relates to technology rollouts become a little bit different situation because.
And we highlighted it in terms of Vietnam as it relates to our rollout of cure or sequencing around cure would've been Ohio first Malaysia then.
And then Vietnam.
<unk> already done some of the upgrades that would enable.
For product to be released in Malaysia, when we started KMT too we have some of the upgrades already positioned to enable on pure when we start the rollout and we've just recently completed the rollout.
Both perrysburg 1 in perrysburg, 2 to enable cure, we havent, yet, though to rollout the upgrades that are needed in Vietnam.
And there are restrictions in quarantine requirements and reduce travel and alike. So.
As we alluded to we're working through to try to find a path to keep it on schedule, but there is a significant risk that the rollout of cure and Vietnam given the current situation would be delayed.
But.
<unk> that's the most significant 1 we're still working through at this point in time.
As it relates to bookings, yes, we've got about 3.4 gigawatts of 13 booked.
Now with the 2 new factories will be adding close to 3 gigawatts of incremental volume in.
2030.
<unk>.
Excuse me right to get the right year 'twenty 2023.
Sorry about that.
And there's a lot of volume still to be book debt. So we probably got on the range of 10, gigawatts or something like that.
The engagement with our customers. So we've got a number of very large deals right now here.
<unk> labs as well as in the pipeline for India as we highlighted we got about 7.
Gigawatts right now of a pipeline in India that we're working to execute now that we've made the announcement around the factory.
Subject to final permitting and the incentive programs from the government finalizing that and we will start contracting that volume as well.
So there is no lack of opportunity. The engagement is good I would not expect at least over the next few quarters I don't see a significant slowdown in bookings momentum I think we're going to have a very strong second half of this year to help start booking out 2023 and 2024.
Our next question.
Here in the <unk> from the line of Aric Li from <unk>. Your line is open.
Hi, Thanks for taking the question on.
Congrats on the bookings for the bookings.
Typically could you comment on the average Asps as you book into 'twenty 3 is that still 20 <unk>.
<unk>.
On per watt range on.
Can you talk about where you're booking into that 23 plus timeframe. Thank you.
Yes, so what we said on the call with debt. If you look at our current bookings that we have.
For 2023.
Essentially flat I think we said they are down about a percent.
And so they are essentially flat as we go from 'twenty 2 into 'twenty, 3 and pricing. If you actually look at the profile of what we have booked and what were currently in negotiations with right. Now is pricing has trended up for both 22. If you look at deliveries in 'twenty 2 on the needs and what we're seeing in 'twenty 3.
Right.
So there is a lot of momentum I think what's happening is we continue to book out again, we are still somewhat capacity constrained even with the 2 new factories on that volume does it start to come out on 23, but even if you look at that volume relative to the global market, we are capacity constrained from that standpoint.
And as our book buildup and firmed up in.
It starts to constrain our available capacity to support new customers on it starts to firm up pricing.
In the marketplace. So.
Happy to see that we are as we said, though on our prepared remarks, and we do look at this as a very balance perspective to get.
And ASP.
It is attractive to both parties right. The project economics have to work on our our return requirements has to be met as well.
You have to balance those 2 into consideration on the other thing I would just say around the bookings is that we are and we alluded to this on the.
On the last earnings call and if you look at.
Effectively everything that we book this quarter, we have started to implement the modify our on shipping costs. So we have.
<unk> benefited in terms of the contract structured in a way that that if there is incremental.
Sales freight costs that there would be.
So the mechanism, which that would be.
Variable pricing to the customer to accommodate for that so so that's also an item that we're trying to make sure. It gets properly reflected in our bookings as we go forward.
Our next question comes from the line of Ben Carlo.
From Baird you May ask your question now.
Alright.
A question from.
Alright. Thank you guys could you talk about a little bit about what went into your guidance assumptions.
To bring down book.
The low end, just a little bit like that.
Small so I just want understand what went into there as far as assumptions around.
Sure.
Thank you Jos especially.
And then the timing of the.
Other plant shutdowns or contemplate that.
Then my second question is just on the Asp's.
I heard you to say.
Peter.
From where you talk to us about in your negotiations.
<unk> income can you talk about if that.
Has anything to do what that has to do with it this year.
Polysilicon supply chain.
You also mentioned.
Kicker on Vegas piece with the new technology could add more to that.
Yes, so starting with the guidance on a combined basis youre not seeing.
On to the guidance range.
Change, but what you are seeing is the impact of the.
Settlement agreement that we had on the previous project come through so the 65 million debt within the revenue line and flow straight through to gross margin. So that's that's a benefit to gross margin. If you look at the module side of gross margin.
The low end with basically down about call it $15 million or so on volume is low.
At the lower end of the range on shipment volume and then about $65 million on freight so that impacted in the quarter or about $80 million on freight 60 outbound sales rate 20, inbound we had about $15 million or so in the range of the risk.
Risk so we're having a net impact down to about 65.
But again don't forget that you had the impact coming off of this.
The settlement agreement a 65 minute if thats why on a consolidated basis on the range and I'm seeing it come down significantly.
On the on the Asps.
Yes, we are starting to see the asp's for.
<unk> separate we'll talk next Gen product before our secondly, but first is in terms of our series 6 and series 6 plus and pure product that we are currently negotiating with customers at this point in time, yes. We are seeing the asps are starting to firm up and there is.
What first solar is able to do not only with depreciation we havent on our capabilities on our technology.
There is an element of certainty and given there's so much uncertainty right now that's going on with the crystalline silicon supply chain, whether it's here in the U S or even when you're starting to see some emerging issue start to come up and in the EU and U K and places like that.
Creating anxiety to a customer.
The customer wants to make sure they can have certainty and theres no disruption to their commitment around their module supply chain.
First solar has decoupled from the Chinese crystalline silicon supply chain right. So it enables a different opportunity and engagement with customers and clearly that is playing into some of the opportunities.
Again.
You would ask that you still have to deliver great technology and the evolution of cure in particular and its improving around its long term degradation rate I think is further enhancing our relative competitive position in the marketplace. So it's the product it's kind of the overall market. It's the certainty of contracting with first solar as a key driver and the bookings momentum in the firm.
Permits are the asps.
<unk>.
What we alluded to on on.
Our new for our new product, which will come out of both of our.
Perrysburg free factory in our India factory, both of them will be higher efficiency than our current fleet.
They also will be optimized 1.1 will be on.
Optimized here in the U S for a tracker install and the India on which is largely it is largely a fixed tilt market will be optimized sales of fixed tilt structure, both of them will inherently create incremental value relative to the series 6.
<unk> plus product that we have today.
And I think what Alex.
2 when you and also couple that with both of them will be the lowest cost products in our fleet.
I think there is an entitlement on 1% to <unk> at least what we our initial indications are from <unk> of incremental gross margin realization with the next gen product relative to where we sit today on a comparable basis with series 6 plus cure.
Our next question comes from the line of Brian Lee from.
From Goldman Sachs <unk> Company, you May ask your question.
Hey, guys. Thanks for taking the questions.
And 2 more modeling specific loans I guess first off on the <unk>.
Cash flow trajectory.
The next few years can you.
Give us a sense of.
What net cash balance you're comfortable with and so on.
When you get back to positive free cash flow is that in 2024.
The ratio about a billion for Capex between Ohio in India here, So just wondering kind of what the.
Here for the free cash flow trajectory and needs to be a senior loans.
And then second question just on.
I know Alex you mentioned a lot of your Opex is fixed we've seen that only the age that we typically also seem startup on production ramp costs on new Fabs. So how should we be thinking about those costs in 'twenty, 2 'twenty, 3 for Ohio, and India, respectively.
Alright, thanks, guys.
Yeah sure. So on the cash side. So we are guiding previously to 1.8 to $1.9 year end number that's now down to 135 to 105 to $1.4 midpoint on the Delta. There is the $407 million of Capex, that's going to happen this year associated with that spend so that still leaves.
Another.
Non digital 1 billion on outside of its going to happen on the next couple of years.
We haven't given a minimum number that we're comfortable with I think the business is going to be significantly cash generative over the next couple of years with the 6 factories authority in place accounts.
To give you guidance number, but I'd say that we're going to generate enough cash organic.
That would be comfortable we could.
On the construction of the 2 new factories on balance sheet utilization not dropped to levels that I wouldn't be comfortable with maintaining in terms of price net cash balance.
That said.
For a few reasons, we may look to leverage the factory in India, especially I think there's some optimization of.
Capital structure here, we might do less equity coming into a country, where it can be more challenging to bring money in and out.
There is some benefit to matching some of the revenue and expense stream with the.
With the capital structure I think it was also some beneficial rates, we could get using ECA financing, especially if it's on the equipment.
And I can kind of come out of Europe in terms of the U S as well so on.
Comfortable weaker.
We could with organic cash flow. The next couple of years financed the factories on balance sheet without debt on leave ourselves on levels will be comfortable with but I think there may be optimization around.
On the balance sheet that we'll look to do as well.
And then on the Opex side.
We're still.
Working through numbers, but these factories are going to be significantly larger than the previous factories, you think about historically to put in place a factory that was 1 to now up to about 1516 of nameplate somewhere in the region of 30 to 40 million depending on the location depending on whether it's the first the second factory.
It came down a little bit more for instance, our second Malaysia.
Secondly, a non factor is significantly cheaper than our first so it can be a little higher in the U S. But internationally given labor cost, but on indicative terms you could take that on double at full scale and so you could look at it starts up in the range of probably $60 million to $70 million per.
On a factory.
In terms of timing, you're going to see a significant portion of the U S factory startup hit in 2022 call. It 3 quarters something like that the remainder of 2023, the India factory is going to be a little behind that so you may see more like 25% to 50% hit in 2022 on the other 50%.
75% hit in 2023.
I would say about Opex as we did mentioned that we have about an 80% to 90% fixed operating cost structure. So as we do scale of these factories that will be potentially some slight incremental SG&A, but on a whole as you add that 6.6 gigawatts of capacity and keep the Opex down you do get pretty significant.
Cash and margin and operating margin expansion that we can benefit from.
Okay.
Yeah.
This concludes today's conference call. Thank you again for participating you may now disconnect.
Okay.
Okay.
Okay.
Yes.
[music].
Uh huh.
Okay.
Yes.