Q2 2022 First Solar Inc Earnings Call
With the potential to grow with the application of technology sales freight and commodity price adjustors applicable to many of these bookings.
Firstly as it relates to technology Adjustors.
If we are able to realize the achievements within our technology roadmap. The asps is potentially increase to reflect the value associated with the enhanced product and energy profile.
As of June 30, we had approximately 25 gigawatts of contracted volume with these adjusters, which if realized could result in additional revenue of up to approximately $4 billion.
Or approximately <unk> <unk> per watt.
The majority of which will be recognized in 2024 and 2025.
As previously discussed this amount does not include potential adjustments for the ultimate module Ben.
Delivery to the customer, which may adjust the ASP under the sales contract upward or downwards or for those contracts in the United States that include sharing related to potential upside for U S main modules under the extension of the investment tax credit.
Secondly, the ASP may increase to offset incremental costs as it relates to sales right.
Thirdly, the Asps, it's also potentially increase to offset incremental costs as it relates to aluminum.
With regards to our series seven product to be produced at our new factories in Ohio in India featuring.
Featuring a glass area of approximately 14% larger than our series six plus modules and utilizing the steel as opposed to the aluminum frame.
We have also begun to introduce adjusters to offset potential increased steel cost.
As a reminder, not every recent contract includes every adjusted are described here.
To the extent that such adjusters are not included in the recent booked contracts. We believe the baseline ASP reflects an appropriate risk reward profile.
For example, some of these contracts have delivery terms, where the customer is responsible for the cost of sales straight from the factory gate.
In summary, we continue to leverage our value proposition of providing our customer and partners with long term supply certainty lower political and compliance risks and access to our best available technology.
These critical points of differentiation together with our differentiated CAD Tel technology.
It allowed us to continue to expand our record backlog.
On an overall pricing that we believe is both encouraging and competitive and with appropriate risk mitigation.
Turning to slide three.
To review, our highlights and some updates from our second quarter.
Our manufacturing facilities produced two two gigawatts of modules in Q2. The results was benefited by higher throughput due to faster than expected upgrades of certain equipment at our Vietnam manufacturing facilities.
As previously disclosed we have completed the sale of our project development platform in Japan.
As we seek to divest our remaining power plant assets, we are evaluating potential buyers for our <unk> project in Chile.
He will discuss the timing and financial impact of this potential transaction.
Construction of our third manufacturing facility in Ohio, and our first manufacturing facility in India remains on schedule.
To date, we have seen increased associate increases associated with steel and freight cost looking forward as we continue to explore further manufacturing expansion opportunities inflationary pressures on building equipment and freight costs are expected to remain a concern.
Finally, we've entered into a $500 million debt facility with a new for our new manufacturing facility in India with the first dispute disbursements expected in the third quarter.
Before turning to shipments I would like to say a word about the current sales rate environment.
While there are reports that suggest supply chains are beginning to trend towards normalization on a macro basis global sales rate conditions remain challenging.
Although spot rates for ocean freight have fallen quarter over quarter. These benefits were partially offset by increased fuel costs.
In addition, we are approaching the peak period in terms of delivery of goods ahead of the year end holiday season, which represents a potential headwind that may render the recent easing in the shipping rates a temporary phenomenon.
From a logistics perspective, we are still experiencing the impact of port congestion.
In the United States. After a brief reprieve, we have seen a continuous buildup of congestion on the east coast as some shippers divert away from the West coast Port to avoid the potential impacts of ongoing labor negotiations.
For example, the <unk> ships looking to birth at the Port of Savannah has recently increased to 30 vessels up from zero in the previous quarter.
While transit times from Asia to the United States have improved they remain well above the pre pandemic averages.
In fact, combined with challenges such as port congestion and blank sailings has led to an estimated 12% reduction in global shipping capacity.
Notwithstanding these challenges we continue to execute on our strategy of employing.
Freight risk sharing mechanisms in our customer contracts with nearly all of our recent bookings either featuring contractual adjusters designed to offset incremental sales freight costs.
We're allocating all ocean freight responsibility to the customer in either case mitigating gross margin erosion.
As of today, we have $32 seven gigawatts of contracts in our backlog that with either sales straight coverage of neuro sales trade exposure.
As you may expect contracts, where customers take on responsibility for the transport have lower asps than those where we're responsible for shipping my.
By way of example, one such contract which is included in the revenue from contracts with customers footnote in the quarter's 10-Q as.
As of two three gigawatt sale to a highly valued long term partner.
This volume targeted for low band inventory is contracted to supply from our international factories with the customer being responsible for transportation, which is currently estimated to be four to five per watt.
Therefore, the Asps for this transaction is lower than the average of the ASP for other sales contract entered into in the period.
No four nine Gigawatts of the 11 nine gigawatts increasing contract from customers for future sales includes included in the revenue from contracts from customers footnote in this quarters 10-Q requires that customers take on responsibility for shipping.
At first solar has the shipping responsibility, we estimate that the implied ASP of this 10 11 nine Gigawatts volume increase would have risen by approximately <unk> <unk> per watt.
Of note, we expect the majority of our India factory output to be contracted on an ex workspaces with the customer picking up modules at the factory gates and assuming all transportation costs.
Accordingly, we believe headline Asp's in India will be lower than in other markets, where we include an assumption of sales rate within the asps.
That said Alex will address why we expect gross profit per watt for the India factory to be equal or higher than the fleet later in the call.
Turning to slide four we address our recent shipments.
As just mentioned we booked 10 four gigawatts since the April earnings call.
Respect to future shipments after accounting for shipments in the quarter of approximately two five gigawatts, which is in line with our expectation. Our total contracted to date backlog is 44 three gigawatts.
We are sold out for 2022 and 23 as of April earnings call and now sold out for 2024, excluding our new India manufacturing facility.
We have 12 gigawatts for planned deliveries, excluding India in 2025 and have two six gigawatts of planned deliveries in 2026 and beyond.
As it relates to our India factory, we are seeing significant near and longer term demand from domestic customers as we anticipate entering into first contracts for the output of this factory within the coming months.
There are bookings policy signed contracts in India will not be recognized as bookings until we have received full security against the offtake as such deals signed but not fully secured will be reflected with.
Confirm but not booked portion of our pipeline graph and the earnings presentation.
The $10 four Gigawatts booked since April earnings call include an order for two four gigawatts of modules at one of the largest one of our largest standing customers.
U S headquartered intersect powers.
We announced earlier today. These modules are scheduled for delivery in 2025 to 2026 further expanding the horizon for our backlog.
This booking is reflective of a broader trend among longstanding U S based customers to strengthen their commitment to first solar is CAD Tel thin film technology as they seek long term pricing security supply certainty and value for their project pipeline.
We are seeing greater geographical diversity in our bookings and among customers negotiating long term framework supply agreements, notably European developers are increasingly recognizing the risk of relying on supply chains that are concentrated in China.
As just one example, the French developer occur.
<unk> has placed an order for 500 megawatts for its project portfolio and in the U S and in Europe .
Our bookings momentum demonstrates the growing recognition of the risk of pursuing a solar in a cost strategy.
Developers that have built excessive dependencies on China's state subsidized solar industry are grappling with an increasing volatile pricing and supply environment.
A prime example of this increased risk profile as a recently reported lawsuit.
Filed against the top tier Chinese solar manufacturer, alleging breach delivery obligations fraud, fraudulent actions and breach agreements related to product traceability information.
This direct contrast, with the experience of our customers who have benefited from our emphasis on durable partnerships as enable long term growth and our ability to stand behind our contracts and deliver on our commitments. Our customers have also benefited from an industry leading approach to sustainability transparency.
<unk> and traceability.
We believe that our focus on long term partnerships and our focus on basing of an enduring strategic customer that seeks to partner with first solar for large scale multiyear procurements have been key drivers of our success and it enabled a solid foundation for growth. We also believe that these strategies set us.
For enduring success, demonstrating ourself from the highly volatile transactional environment that some of our competitors may operate in and providing longer term stability and visibility not just for our customers, but for our shareholders.
As reflected on slide five our pipeline of potential bookings remained robust.
Even after year to date bookings of $27, one gigawatts we retain.
Long term total bookings opportunities of 52, five gigawatts or.
Our 17 eight gigawatts of mid to late stage opportunities include $9 seven Gigawatts in North America, three nine Gigawatts in India and four two gigawatts in the EU.
In India, we continue to see meaningful potential as it relates to demand from domestic developers foreign owned IPP is operating in the country and the Indian government's efforts to boost demand uncertainty for domestic manufacturers.
In Europe , we are seeing growing demand, where geopolitical risk and the war of Ukraine have led to an urgent effort to deploy more renewables as the EU works to diversify its energy portfolio.
Turning to technology, we are pleased with the progression of our current roadmap.
As previously stated our roadmap provides us with a high level of Optionality.
Allowing us to pursue enhancements to our product design and energy profile.
As well as a path to potentially offer a true next generation solar module for the residential market.
On the last earnings call, we had announced that our R&D teams are continuing to make progress on developing the bifacial attributes of our CAD Tel semiconductor.
As we reaffirm the commercial financial and operational thesis of the byproduct bifacial product.
As a bifacial program evolves from a research level two large preproduction runs our R&D team is working to achieve field validation, including operational and reliability data.
This is necessary to ensure a viable path to large scale commercial manufacturing.
In parallel we are working to stand up the supply chain necessary to help support the eventual introduction of a bifacial CAD Tel module, while we expect manufacturing line modifications to be minor a bifacial CAD Tel module will have different material requirement.
Obtaining adjustments to our supply chain.
I'll now turn the call over to Alex who will discuss Q2 results.
Yes.
Thanks, Bob.
Before reviewing our Q2 results on slide six I'd like to provide an overview of two events, which impact this.
The results as well as our full year outlook.
As it relates to a legacy systems business and impact our non module or other business segment.
The first is the recently completed sale of our Japanese project development platform and the pending sale of our Japanese O&M platform.
The first discussed on our Q4 2021 earnings guidance call in late 2021, we received an unsolicited offer to acquire all Japanese project development and O&M platforms.
And our full year 2022 guidance assumed a gain on the sale of these businesses of $270 million to $290 million.
On our Q1 2020 earnings call in April we indicated that negotiations towards a sale are progressing well.
In may of this year, we entered into definitive agreements to sell these businesses to pag real assets subject to customary closing conditions.
As previously disclosed and mentioned by Mark earlier in the call in June the conditions related to the sale of the project developer platform met and Accordingly, we closed the sale of that business for gross proceeds of 66 billion yen, including a gain on sale 33 billion yen.
These results were in line with the assumptions included in our full year guidance. However, due to the sudden and significant weakening of the Japanese yen relative to the U S. Dollar that has taken place in 2022, largely as a function of the contrast between the bank of Japan's continued commitment to economic stimulus and the tightening of U S. Monetary policy the U S dollar game.
On sale of $245 million was $35 million lower than the midpoint of our previous forecast.
From a cash perspective, we received net cash proceeds in Q2 of $262 million with an additional $164 million forecast it to be received within the calendar year.
And note the remaining conditions precedent to close the sale of the Japanese O&M platform, including regulatory approvals received third party consent and other customary closing conditions are expected in the second half of 2022.
The second event impacting both Q2 results and full year guidance relates to a 141 megawatt <unk> project located in Chile.
As disclosed since last year's second quarter 10-Q filing we continue to evaluate whether to hold or pursue a sale of the project.
We also noted that should we be unable to recover on net carrying value in the project any future sale could result in an impairment charge.
Given that no decision has been made with regards to a sale no impact from any potential sale was included in our 2022 guidance.
In cooperation with the project lenders, we've recently begun a sale process and in Q2 received multiple non binding bids to acquire the Lucedale multi project.
Based on analysis of these bids in Q2, we recorded a pre tax impairment and cost of sales of $58 million in additional tax expense of $23 million associated with the <unk> project.
As it relates to the full year, assuming a sale is completed later this year in line with the bids received to date, we expect revenue of $150 million to $200 million from the sale.
The reduction in gross profit of $40 to $50 million, including the Q2 impairment net of future proceeds from the sale.
The $30 million to $35 million benefit to nonoperating income from debt forgiveness and reduced interest expense and.
And $30 million to $40 million of tax expense due to the generation of net operating losses, which no future benefit we received in logistics and a mix of the income amongst our Chilean entities.
The total net impact from the expected sale of <unk>, which was not previously assumed in our guidance for the year as a $10 million to $15 million loss before taxes, and a 40% to $55 million loss on a post tax basis equivalent to an implied loss per share of 38 to <unk> 52.
Note that given the early stages of sale process and uncertainty around the ultimate structure of any potential sale. Although we believe the forecasted range for revenue pre tax losses tax expense and after tax losses to be appropriate there remains significant uncertainty related to the impact of the gross profit of nonoperating income lines of the P&L.
With this background starting on slide seven I will cover the income statement highlights for the second quarter.
Net sales in Q2 was $621 million, an increase of $254 million compared to the prior quarter.
On a segment basis, our module segment revenue in Q2 was $607 million compared to $355 million in the prior quarter.
The increase in net sales was primarily driven by higher module volume sold were also benefited by sales rate recoveries.
Yes.
Gross margin was negative 4% in Q2 compared to positive 3% in the prior quarter, primarily driven by the impairment of the Lucedale Northern project, which impacted gross margin by nine percentage points.
Q2 module segment gross margin of 5% up from 3% in Q1 was positively impacted by increased volumes sold.
Additionally, sales rate included in our cost of sales reduced module segment gross margin by 16 percentage points in Q2 compared to <unk> 14 percentage points in the prior quarter.
SG&A and R&D expenses totaled $64 million in the second quarter unchanged from the prior quarter.
Production startup, which is included in operating expenses totaled $13 million in the second quarter, an increase of $6 million compared to the prior quarter.
Driven by increased startup costs associated with offset higher factory.
We recorded the aforementioned $245 million gain on sale associated with the closing of the sale of the project development platform in Japan.
Q2, operating income was 145 million, which included depreciation and amortization of $67 million.
On the utilization and production startup expense totaling 17 million shares.
Share based compensation of $6 million.
The gain on the sale of the Japan project development platform of 245 million and an impairment to $58 million associated with the lithium project in Chile.
Okay.
We recorded tax expense of $84 million in the second quarter compared to a tax benefit of $19 million in the prior quarter and.
The increase in tax expense is primarily attributable to an increase in pre tax profit from the sale of our Japan project development platform and an increase in tax expense related to the lithium project.
Combination of the aforementioned items led to second quarter earnings per share of 52.
Compared to a Q1 loss per share of <unk> 41 on a diluted basis.
Next on slide eight to discuss select balance sheet items and summary cash flow information.
Cash flows generated from operations were <unk> $88 million and capital expenditures were $199 million in the second quarter.
Our cash marketable securities and restricted cash balance ended the quarter at $1 9 billion compared to $1 6 billion at the end of the prior quarter.
Module segment operating cash flow and proceeds from the sale of our Japan project development platform were partially offset by other operating expenses capital expenditures associated with our new Ohio in India factories.
Total debt at the end of the second quarter was $175 million a decrease of $77 million from the end of Q1, primarily due to the repayment of a credit facility the forefront sorry, and the associated project with the sale of the Japan project development platform.
All of our outstanding debt is nonrecourse project debt and will come off the balance sheet, if a little north of that project is sold.
Our net cash position, which includes cash restricted cash and marketable securities less debt increased by approximately $372 million to $1 7 billion as a result of the aforementioned factors.
Yes.
Continuing on slide nine our full year 2020 guidance is updated as follows.
Our previous revenue guidance of two four to $2 6 billion was predominantly module segment revenue, which remains unchanged.
We are adding other segment revenue guidance of 150 to 200 million for total revenue guidance of between $2 55, and $2 8 billion to reflect the expected sale of the <unk> project in the second half of the year.
With half the year behind us, we have greater clarity into our fully a module segment performance, whilst the mid point of our module segment gross profit guidance remains unchanged. We've revised the range from 165 to 225 million to $175 million to $215 million.
Our other segment, which previously was forecast to reduce gross profit by $10 million is now forecast to reduce gross profit by $50 million to $60 million due to the anticipated lucedale northeast sale, resulting in total forecasted gross profit of $115 million to $165 million.
Within gross profit assumptions related to underutilization losses of $10 million to $15 million and a sales rate impact of 18 to 20 points of gross margin remain unchanged.
Additionally, our forecast of cost per watt produced reduction from year end 2021 to year end 2022, 4% to 6% and our forecast is flat year over year cost what sold forecast both remain unchanged.
Note the mid point of our fully a module segment gross margin guidance of approximately 8% remains unchanged from our previous forecast.
Following a 3% to 5% module segment gross margin result in the first and second quarters of 2022 module module margin improvement is expected to continue in the second half of the year.
Yes.
SG&A and R&D expenses are forecast to total $270 million to $280 million down from $280 million to $290 million in our previous guidance.
In addition, I'll forecast startup expense of $80 million to $85 million is down from $85 million to $90 million previously the total forecast operating expenses forecast of $350 million to $365 million.
The gain on sale of businesses previously forecast at $270 million to $290 million is now forecast to be $245 million given the aforementioned currency impact.
Okay.
Operating income is estimated to be between 5% and $70 million down from previous guidance of $55 million to $150 million.
It is a function of the reduction in the U S dollar value of the Japan business sale and the inclusion of the expected Lucedale northeast sale and guidance, partially offset by SG&A R&D and startup expenses savings.
Other income and expense guidance moves from 20% to $30 million of expense in prior guidance to $25 million of income in current guidance is a function of increased interest income forecast debt forgiveness. Upon the anticipated sale of the list or not a project.
Full year tax expense increases from 35% to $55 million previously to 55% to $70 million. Following the inclusion of the expected sale of the lithium project this year.
Lastly, offset by a lower than forecast gain on sale of the Japan development platform.
This results in full year 2022 earnings per diluted share guidance range of negative 25 to positive 25.
Capital expenditure guidance at $850 million to $1 1 billion and shipments guidance of $8 nine gigawatts to nine four gigawatts remain unchanged.
Our year end 2020, net cash balance is anticipated to be between one three and $1 5 billion an increase of 200 million following assumed sale of <unk> and the corresponding reduction in project level debt.
Yeah.
Before handing the call back to Mark given our record backlog and significant recent bookings I'd like to provide some insight into our pricing strategy and our vision for gross margin expansion for the next three years and beyond.
The components of this strategy include our approach of contracting alcohol capacity several years in advance of production.
The anticipated reduction of our cost per watt produced.
The expected benefits from capacity expansion, including through scaling a largely fixed overhead structure.
Our agile contracting approach, which provides for the potential realization of both incremental revenue and is expected to mitigate freight and certain commodity cost risk.
Now with respect to agile contracting structure every contract is different every recent contracts include every technology and commodity adjusted we've been describing.
Accordingly, while we anticipate seeing some incremental revenue contribution in gross margin protection from these adjustments in 2023. The majority of these potential revenue and gross margin benefits.
Well to achieve our technology roadmap are expected to be recognized in 2024 and 2025.
Firstly as it relates to asps between the pricing reflected in the current contracted backlog and the pricing to the bookings realized in July we expect the profile of our annual base contracted Asps will.
We'll remain effectively flat and therefore not decline for 2022 through 2025.
Against this pricing backdrop, we anticipate a reduction in cost per watt produced from year end 2021 to year end 2022 between four and 6%.
Even making the highly conservative assumption of no further reductions to cost per watt produced beyond this point.
We expect cost per watt produced exiting 2022 to provide an annual gross margin benefit in 2023 and beyond.
On a cost mitigation basis as it relates to sales freight as well as steel and aluminum costs relative to 2022, we would expect future years to see either a reduced cost profile.
Or should costs remain elevated relative to pre pandemic norms. The inclusion of adjusters would provide for an increase in ISP to offset such costs.
Under either scenario, we would see an expansion of gross profit relative to 2022.
As mentioned on the April earnings call indicative Lee assuming today's sales rate in aluminum environment, a contract with sales rate in aluminum adjusted <unk> is expected to increase asps by approximately <unk> <unk> above the baseline.
Yes.
From a growth perspective relative to today, we expect the announced series seven factories in Ohio in India will add approximately six gigawatts of annual production starting in 2024.
That additional volume is anticipated to provide significant incremental gross profit.
In addition, we see the benefit of scale from a largely fixed operating cost structure as we anticipate adding this capacity with limited incremental opex.
Assuming the midpoint of our current full year 2022, R&D and SG&A guidance of $275 million. This incremental production reduces combined R&D and SG&A cost per watt by approximately one.
So it relates to our Indian manufacturing facility, while asps in that market are anticipated to be lower than those in the U S and other markets. We expect gross profit per watt for the Indian factory to be equal to or higher than the fleet average.
This is due to a combination of factory scale domestic capex incentives and other incentives.
Our labor costs and the elimination of ocean freight to deliver the domestically produced product.
The combined impact of flat Asps.
Cost per watt reduction sales freight and commodity adjustors and capacity expansion against a largely fixed operating cost base provides a compelling case for gross margin expansion over the period, we've been discussing.
Moreover, this potential for gross margin expansion and further enhance to the extent that we're able to make achievements within our technology roadmap.
As described on the April earnings call under our updated contracting approach we forward sell today's technology.
To the extent, we accomplished future module technology improvements, including new product designs and energy related enhancements, we had the opportunity to realize incremental revenue under sales contracts that include technology adjustments.
As Mark noted earlier. This does not include the potential adjustments to the ultimate been delivered to the customer which may adjust the ASP under the sales contract upwards or downwards.
Or for those contracts in the United States include sharing related to a potential upside for U S made modules.
Extension of investment tax credits.
Okay.
And finally, the gross profit opportunity described here is within the context of our current capacity plan additional capacity would be expected to be gross profit accretive to the scenario.
And while we're not making a new additional plant announcement today I'll now turn the call back over to Mark Who'll provide an update on policy and our current thinking with respect to capacity expansion.
Alright, Thanks, Alex to conclude I would like to discuss the rapidly evolving policy environment, both at home and abroad.
Beginning in the United States like many in the energy sector, we were pleasantly surprised by yesterday's joint announcement from Senators mansion and Schumer regarding the inflation reduction Act. We are encouraged that yesterday's announcement made a clear reference to investment and energy security and technology neutral climate change solutions.
And we are supportive of the balanced approach to corporate taxation.
While we are still reviewing the full legislative tax release last night.
We are hopeful that the advanced manufacturing production credit if past helps deliver the incentives required to boost domestic solar manufacturing and secure our nations energy independence.
As the legislative process moves forward.
We urge both chambers to move quickly to pass this critical legislation.
Which represents the first real step to designing our clean energy industrial policy that addresses climate change, while simultaneously Codifying American energy security.
With respect to 45 ex the advanced manufacturing production credit.
We urge Congress to ensure that the manufacturing tax credit designed to incentivize a domestic solar supply chain are fully refundable in order to deliver the intended result.
This legislation is extension of the solar investment tax credit appears to enable crucial demand side policy certainty.
We're hopeful that it passed legislation maintains a domestic content incentives that will help further ensure that U S. Taxpayer dollars are used to help expand manufacturing here at home.
Turning to our considerations to further expand our manufacturing footprint our criteria for investment remains unchanged. These include geographic proximity to solar demand the ability to export cost competitively into other markets access to cost competitive labor low energy and real estate.
<unk>.
Access to or the ability to build a cost competitive supply chain to support the sourcing of raw materials and components.
And as we have repeatedly stated the domestic policy environment.
We agree wholeheartedly with Senator dimension that the United States needs to remain a global superpower through innovation.
As it relates to the potential for our own manufacturing expansion in the U S. We had previously stated that we were evaluating the potential for future capacity expansion, but noted that we first required clarity on domestic solar policy.
In light of these latest developments and should the inflation reduction that get passed with consistent language on solar related tax credits, we plan to pivot quickly to reevaluate U S manufacturing expansion.
Moving ahead, we continue to be optimistic about the policy environment in.
Europe and India.
Over the last 10 months, we have met productively with Prime Minister Modi of India.
And attendant investment conference hosted by President what's wrong.
France in addition to having numerous constructive meetings with members of their cabinets. These.
These governments along with others that are we are engaged with are seeking to diversify and grow domestic capabilities.
As calls for a resilient domestic supply chain grew louder and solar markets around the world. We believe first solar is uniquely well positioned to offer a viable alternative based on our proven repeatable vertically integrated manufacturing template.
Before I turn the call back to Alex to summarize today's key messages I would like to note that we have issued our 2022 sustainability report. The report highlights our continued progress across a range of environmental social and governance metrics.
Detailing among other accomplishments.
How we have successfully lowered our environmental footprint, while advancing our diversity inclusion goals.
These achievements demonstrate this.
Strength of our commitment to the principles of responsible solar place.
Placing at the heart of our business as we invest in innovation and scale.
We are proud of first solar as an example of our solar can be competitive without compromising our principles and purpose.
We have shown that solar technologies can be sustainably scale without people and the planet paying a high price.
Alex will now summarize the key messages from today's call.
Turning to slide 10 from a financial perspective, we're pleased with our Q2 earnings per share of 52.
We've updated our full year guidance reflect the impact of two discrete legacy systems events the.
The midpoint of our full year module revenue and gross margin guidance remains unchanged.
Operationally, we produced two two gigawatts and shipped two five gigawatts of modules.
Additionally series six demand remains extremely robust with $27, one gigawatts with year to date net bookings leading to a record contracted backlog of $44 three gigawatts.
The $10 four gigawatts of new bookings since our prior earnings call in April at a base ASP, excluding adjusted <unk> of 31.
And finally were encouraged by the inflation reduction Act proposed legislation and are currently reviewing this development and its potential impact on our business and capacity expansion plans.
And with that we conclude our prepared remarks and open the call for questions operator.
At this time, if you would like to ask a question. Please press star followed by the number one on your telephone keypad.
I ask that you please limit yourself to one question.
Your first question comes from the line of Ben <unk> with Baird. Your line is open.
Hey, guys.
Good luck.
The results with the bookings.
How do you.
Figure out the optimal.
Manufacturing capacity, just because you've been booking so much.
So moving Paul ill go back to analyst day Longwall go.
It was greater than 2000 gross margin how do I do all the puts and takes.
With that thank you.
Okay.
So.
So <unk> I guess, maybe one way one way to start I think we've guided to a number thats seven or 8% gross margin for the module business.
In the environment that we're in right now okay.
This for 2022, so what Alex has said in his remarks is that.
Obviously, an embedded in that low gross margin is the headwinds that we're dealing with around sales rate and with commodities such as aluminum and eventually still when we introduced series seven.
The impact of that.
The headwind is 11 or 12 percentage points or so of.
Gross margin, so just normalizing for that assuming.
It can come through either one way you could come through as an incremental ASP beyond just assuming that asps stay where they are right now and then we see as the benefits of <unk> that Alex referenced as a lower cost because sales rate normalizes down to two and are central to our contracts anchor too and aluminum comes back to historical levels that we've seen.
Previously so that gets you basically at your threshold of your 20% relative to what we got another Guy who is also for the full year and if you look at our gross margin progression on the gross margin and higher it's higher than the end of the end of the year. So if you use the the exit point, you actually be north of 20% gross margin.
Alex also indicated that we still are even though in this challenging environment. We are seeing a cost reduction. So we are seeing year on year cost reduction.
Of about 5% or 5% to 6%. So there is an incremental margin expansion there.
So when you just layer those together youre solidly into the 20% and then if you capture the value of the technology adjust.
Adjusters, then you are meaningfully better than that right. So.
I think everything that we have right now what we have line of sight to around where we have contracted in terms of our asp's and.
And as we've indicated there relatively flat or slightly increasing as we go across the horizon.
And the other actions that we've taken around our contracting and then capturing the value of our technology roadmap that we should be very comfortable achieving in the minimum threshold of 20% in my mind, we should do much better than that but there's still a lot still in front of us to execute on but I think we've given ourselves a great opportunity to show very strong margin growth.
Margin percent as we move forward.
I mean, as you think through optimal manufacturing capacity, you've always said that we want that to be demand driven and clearly if you look at the backlog. We have today contracts. If you look at the size of the pipeline we have support for the thesis behind growth.
If you think through how we think about expanding we've talked about some of the key drivers being stable policy demand locating manufacturing proximity to demand, having a technology advantage or a.
Stable technology platform from which to grow.
Several other things around competitive labor real estate power markets supply chain et cetera, but if you think about where we've been challenged recently theres been a lot of volatility in the policy side of that equation, which has been a key driver.
Mark mentioned in the prepared remarks, we're obviously hopeful given the news coming out of Washington, and yesterday afternoon, We're still working our way through that document is lot to be read there.
Look we're cautiously optimistic we're very happy that the people are working on that now we've seen a lot of churn in this over the last couple of months. So we want them.
Cautiously optimistic until we see a natural bill signed into law, but if I look through what drives our potential for expansion.
Talk about policy being key driver you look at the backlog and the demand that's clearly that the growth of the macro in terms of solar both in the U S and Europe and in India and all the markets. We've been looking at manufacturing, we've seen a significant opportunity for expansion.
Your next question comes from the line of Philip Shen with Roth. Your line is open.
Hi, everyone. Thanks for taking the questions as a follow up on.
The capacity expansion.
Inflation reduction does get passed.
Could you can you quantify in any way given the demand that you see.
And Thats before the ITC extension, how many new factories, you could actually put up and over what kind of timeframe and then also in the <unk> part of the Bill there is the <unk> per watt CAD Tel cell.
Credits and then Theres a seven cent per watt module credits I know we've talked about this in the past when you go back last year. When this was.
Also active but Ken.
How much of the credit you. Thank you Ken.
Access do you think you can tap into the 11, seven plus four or do you think of the.
It is just access to four cents per watt thanks, guys.
So.
Look bill as it relates to capacity expansion.
Effectively from this point in time.
Something here in the U S from the point in time, its going to take us somewhere around 24 months, maybe slightly less.
We see some relief in some of the supply chain challenges that we've been dealing with over the last couple of years. So maybe we can do something faster, but by the time you put a greenfield with a new building and then the tools. The good thing about it is we've mentioned previously has been working with our vendors that key keep them teed up knowing that it was going to be another factory.
We're actually very pleased with where we are right now in the tool move in schedules that we're seeing in perrysburg.
Paresh for three and then what we have currently lined up for the India expansion. So and we've told our vendors we want to have a cadence of six months after that for the at least one more factory and maybe maybe we go beyond that given the current environment and the options that we have not only here in the U S and EU in India as well.
So it's about a 24 month window.
EU could be a little bit faster because we still do have a facility in eastern Germany that potentially could be utilized for incremental production.
But here in the U S and even in India, it's going to be on a longer timeline timeline accordingly.
Because of the challenge, we're dealing with right now with the supply chain and maybe we will see some some relief but.
Look at it in terms of priority.
If the inflation reduction Act goes forward I think at least one new utility scale factory, we would love to complete our discussion.
Operationalize, our tandem product that we've referenced in our partnership with Sunpower for residential market. So.
That's in the mix as well.
And maybe could we throw another.
Use factoring into the mix there is potential but I'm also trying to make sure. We're looking at every other avenue to get incremental throughput. If this goes through.
For example, our team has done a phenomenal job of driving incremental throughput through the existing factory.
Let's look at additional constraints within the factory, whereas the constraint can we add some capital to the existing production here in the U S of six gigawatts or so that when we get Harrisburg, III up and running to add another tool that can increase throughput at the constraint that allows you to optimize across the entire tool set.
Another path there to drive more more throughput across the platform, which is one thing that we clearly want to continue to look at.
As it relates to the inflation Protection Act in particular.
45 ex provision.
But we believe and again, we still need to go through read everything and to consult with everyone.
To ensure our interpretation is accurate we believe that we have a full entitlement.
Two the <unk>, plus the <unk>, which would be the.
T cell and module B other thing Phil as I think I've said to you in the past is that the spirit of the legislation, which largely is the same as what was originally in prior versions was to ensure thin film was not going to be competitively disadvantaged relative to crystalline silicon.
So the structure and the way it's worded if it were to be passed as is right. Now. We also believe that we would benefit from the wafer and the wafer provision I think is $12 per square meter.
So you take that.
Our module series six today is about two five square meters, which would imply there is about on a module basis model in cents per watt basis, Theres potentially a 30 dollar.
Benefit per module. So that's another lever that we are going to try to make sure. We can go go and capitalize on.
That one.
We believe the intent is to do that but it's another area that we have to work on but we want to make sure that anything that is finally passed into law that we are not at all competitively disadvantaged in that were fully entitled to all the benefits that other technologies, such as crystalline silicon would be able to capture.
Your next question comes from the line of Mohit <unk> with Credit Suisse. Your line is open.
Okay.
Hey, good evening, thanks for taking our questions.
Could you just clarify the base fees assumption.
You made a comment on.
Declining from 'twenty to 'twenty five.
Yes.
What puts and takes should kind of expect that going forward. Thanks.
So as with the last part first part of the question.
It just puts and takes so Todd just with the adjusters and.
Okay.
For aluminum sheet and shipping another thanks again.
So what we've said is if you look at what's in the backlog today, we expect the asps to be roughly flat going from 2022 out of 2025 do you think about.
Where we are now and Youll see in the Q coming out and we've talked about where we were Q1 Q2, you're somewhere in the range of 27% to 28% Asps and we're saying that on a base level, we expect that to be roughly flat out through that 2022 to 2025 horizon, but remember as I said in my comments.
That base ASD is reflective of effectively today's technology. So when you look at puts and takes around the ISP you've got potential upsides to that based on technology adjustments should we achieve within our technology roadmap things that provide more energy or more value to the customer and those are built into contracts to a large extent today. So when you look at the ISP side you have that.
Key adjustment you have to Asps is protection around sales freight and commodity so in the event that commodity prices and sales straight remain elevated relative to the enrollments that we saw pre pandemic and typically the ranges that we assume in our cost structure. Today, we would have an increase to ISP to offset that incremental cost.
So you'd have that adding on as well. So those are the key moving pieces that we see around asps.
I wanted to just make sure it's clear because sometimes people will dismiss well, it's commodities or sales rate normalized then.
There won't be any benefit to the ASP adjusters.
They understand but what it means is our cost per watt will decline and then by the corresponding <unk> a lot so either will come through as a higher ASP. If we stay in an inflated environment that we're in right now or it is going to come through at a core cost per watt reduction.
And I think sometimes people are dismissing the asps as if the realisation won't won't be captured without understanding that would it drives too with a lower cost per watt either way in my mind. It is going to add about <unk> gross margin.
Cros and our capacity plans that are getting up to 15 or 16, gigawatts. So theres, a meaningful benefit one way or the other either incremental ASP or lower CPW across call. It 15, or 16 Gigawatts production as we move forward.
Your next question comes from the line of Joseph Osha with Guggenheim. Your line is open.
Hello, and thanks to everyone. Following up on that previous line of questioning your theres been lots of talk about the cost adders and the technology adders, but I'm wondering.
Is there any sort of apples to apples.
Per watt cost reduction roadmap, you can talk us through.
Technology continues to advance because I remember in the past something you used to communicate about.
So.
One of the things we did say is we're still on target for our cost per watt reduction exit rate is kind of targeted towards 4% to 6% and so we are taking out cost even in a very challenging inflationary environment. This year.
We have not given.
<unk> of that of that roadmap for further cost reductions.
We haven't been up we have an updated that for a period of time, but by definition the cost per watt will decline as we improve the technology. So as we continue to drive the efficiency higher that's going to drive down our CPW plus we have other opportunities through our additional throughput initiatives whether it's.
<unk>.
Bill of material reductions that we're working on as well so.
We will continue on a trajectory and if you wanted to assume.
<unk>.
We will have some modest kind of view of what we would expect over the next several years I would.
I believe that we should be still accomplish at least single digits, maybe upper single digits cost reductions as we move forward and as we've indicated previously the series seven product will actually drive some cost reduction as well because of the design of that product with higher efficiency improved throughput and.
Other issues that will drive.
Crude cost profile. So when you include corporate series seven into the fleet, you're going to see a benefit to the overall cost per watt. So the cost per watt is not going to it's not Pete it's going to continue to move in a positive direction, assuming we don't go into some even crazier inflationary environment and we believe that we've largely protected ourselves.
Most of the exposure in that regard, but some additional headwinds that we'd have to address in the future, but assuming a stable environment that we're in now and just the initiatives that we have in place. We should expect continued cost reduction on our module, yes, Joe If you think about as Mark said, a 4% to 6% cost per watt produced number this year. That's the decline if you go back to the.
The slides that we showed in our Q4 earnings and guidance call back in February .
February early March there's a chart in there that shows you the drivers of cost reduction those still hold true. If you look through where we have watts per module, so efficiency throughput and yield those key drivers silica. So we haven't updated that chart.
New cost perspective.
The same drivers of cost per watt reduction still exist that we also had on that chart bill of materials as Mark mentioned, there a bill of material reductions that we would expect an ordinary course, however, if we're in an inflationary environment also protected against some of those key drivers through the just as we have in our contracts.
So thats another resource you can look to.
Your next question comes from the line of Brian Lee with Goldman Sachs. Your line is open.
Okay.
Hey, guys. Good afternoon, thanks for taking the questions.
And then a lot of focus around the gross margins and the cadence here, So I guess I'll throw.
My question in the ring as well.
The aluminum price steel pricing environment also freight.
It's sort of eased a bit recently per your earlier comments when does it really start to.
Impact the P&L in margins I know you are talking about a 20% baseline for gross margin when things kind of normalize and then on top of that.
You get some of the tech adders that could take gross margins much higher but as we think about.
Let's just say 2023 the cadence.
It doesn't appear all of that is necessarily going to normalize so.
Fair to assume we're going to see a pretty gradual margin cadence.
Through the rest of this year and then most of the next year and then with <unk> and some of the new capacity in Indiana, and Ohio, The real step up starts to happen in 2000, or just trying to get a sense for how we should budget expectations, because there's a lot of moving parts here obviously over the next couple of years for the margin.
Margin trajectory thanks, guys.
Yes, Brian So we've said that youre going to see the majority of the benefits come through in 'twenty. Four on what's you are going to see some benefit to 2023.
Look through the Asps as we set those stay relatively flat across that horizon from a cost per watt perspective, we said were forecasting and that cost reduction this year youre going to get the benefit of that next year, obviously from a sales perspective, we do have some protection next year, it's still not every contract.
The amount of protection varies as we had some different flavors of contracts in the early days before we moved to effectively what it is today, just a straight pass through of excess risk to the customer.
So youre going to see some incremental protection will benefit from sales next year.
Really the big push on that you're going to see in 2020 for from an adjusted perspective, we said before the majority of the benefit of the technology adjusters Youre going to see being out in 2024 and beyond and then from a commodity price basis. We said on the last call that we first started introducing the aluminum adjusted at that point and that the majority of that.
2024 onwards, we've also recently started looking at steel as well for US 37 product that'll be 2024 onwards, as well, so yes, youre going to see a little bit of benefit come through in 2023.
The majority of that's going to come through fully into 2024, Youre also going to see the value of growth coming in mostly in 2024, but I would say that if you look at the timing expectation around operators, but three factory you will see some contribution from that and potentially a little bit from the India factory coming through in 'twenty, three as well so when you're doing your model, you'll get some benefit of growth.
Coming through in 2023 as well.
Your last question comes from the line of Colin Rusch with Oppenheimer. Your line is open.
Thanks, So much guys I mean could you talk a little bit about the progress in Europe from our perspective.
Adding capacity.
The volume demand certainly there is a need there and the two year time horizon, I mean, you've talked about in terms of incremental.
Capacity come online from your vendors, but in terms of site selection.
Wanting to work with you and it seems like that the preparation so.
She.
I'm, giving you the confidence to make those decisions and I'm just curious about an update there.
Yes so.
But one of the things we did highlight if you look if you look at our pipeline as well.
The diversity of our pipeline, especially with near term as well as long term opportunities in Europe are.
Has grown significantly I was actually over in Europe , a few weeks ago.
Talking with a number of different customers.
There is a really significant demand and opportunity for partnering with first solar no different than what we've seen here in the U S and what we've seen in India.
<unk> and we referenced Steven a lawsuit very large litigation against one of the tier one Chinese suppliers.
Their fatigue by that and they want to find someone who they can work with it ensures reliability uncertainty and obviously there is a significant demand in the market in the EU as theyre trying to evolve off of their dependencies of Russian oil and gas and they don't want to reposition that dependency that into.
Another potentially adversarial country for their solar and climate change goals that they have so we're we're in deep discussions with number of Counterparties over there trying to build an offtake agreement and we're working through site selections already to try to figure out if we were to make a decision what would be optimal.
We do have still a site in eastern Germany, yes.
Obviously, the footprint is an ideal for.
Our series seven type product or three three gigawatts of production, but look we're also evaluating what is the right product for the European market I mean could it be a combination of the utility scale are also could it be a smaller form factor, maybe a multi junction tandem product for high efficiency space constrained spaces, I mean, it could be that's the right product to go to market.
In Europe , and then our eastern Europe factory, Eastern Germany factory looks a lot better to accommodate a footprint around that site. So.
I would say I'm very encouraged.
A lot of opportunity I think it's a matter of just making the commitment.
Tractional obligations and off takes and be able to secure multiyear supply agreements to.
To provide a level of confidence we would like to have.
To enable manufacturing in the U I think its pretty promising right now we still would like to see some movement on the policy side, a little bit I think they're doing a number of positive things, there, even including things like <unk> footprint requirements restrictions as it relates to forced labor and some of the other challenges that we're also seeing in the U S trying to deal with theirs.
Hi chains that are dependent upon Chinese production. So a lot of good things happening in the EU and its.
A very important market for us and we're looking at what's the best way to serve it.
Okay.
Yes.
There are no further questions at this time. This does conclude today's conference call. Thank you very much for joining you may now disconnect.
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