FSLR - First Solar - Earnings Call Transcript Q3 2021

Operator: Good afternoon everyone and welcome to First Solar's Third Quarter 2021 Earnings Call. This call is being webcast live on the Investors Section of First Solar's website at investor.firstsolar.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 Mitch Ennis from First Solar Investor Relations. Mr. Ennis, you may begin.

Mitch Ennis: Thank you. Good afternoon everyone and thank you for joining us. Today the company issued a press release announcing its third quarter 2021 financial results. A copy of the press release and associated presentation are available on First Solar's website at investor.firstsolar.com. With me today are Mark Widmar, Chief Executive Officer; and Alex Bradley, Chief Financial Officer. Mark will begin by providing a business and technology update. Alex will then discuss our financial results for the quarter and provide updated guidance for 2021. Following their remarks, we will open the call for questions. Please note this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations 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 a more complete description. It is now my pleasure to introduce Mark Widmar Chief Executive Officer. Mark?

Mark Widmar: Thank you, Mitch. Good afternoon and thank you for joining us today. Beginning on slide three, I would like to start by thanking the First Solar team for their dedication and continuing execution. Operationally, despite the challenging freight and COVID-19 environment, our associates continue to deliver on their commitments. In the third quarter, we produced over two gigawatts of modules and in October, we increased our top production bin to 465 watts, which represents a 19% glass area efficiency. In parallel, we started construction of the building of our third Ohio factory and began ordering equipment for our first factory in India. Commercially, we had a good quarter increasing our record year-to-date bookings to 10.5 gigawatts. From a financial perspective, while Q3 freight costs were higher than anticipated, our full year sales freight expectation is unchanged. Shipments, which we generally define as when the delivering process to a customer commences and the module leaves one of our factories, totaled 2.1 gigawatts in Q3, which was only modestly below our expectations. Despite this total shipment results, the global freight market continues to experience record levels of scheduled delays and reliability issues. As a result, approximately 820 megawatts of modules shipped, remained in transit at quarter end, nearly double that of the preceding four quarters and were therefore not recognized as revenue in the quarter. While we expect extended transit times to continue, we anticipate our in-transit volumes to improve in Q4 as a high percentage of our shipments are expected to come from our Perrysburg factory and US distribution centers. As a result, we iterate our full year 2021 EPS guidance. Turning now to slide four, I'll provide an update on our expansion plans. As it relates to our US expansion, we started construction in mid-August after successful groundbreaking ceremony, which included bipartisan representation from state and federal government including Secretary of Labor, Marty Walsh. As we continue this expansion journey, we're proud to be at the forefront of America's solar manufacturing, supporting domestic energy independence and creating good-paying middle-class jobs that will be here for years to come. Looking forward with a vertically integrated manufacturing process and a differentiated CadTel technology, we are uniquely positioned to expand our leadership role as the largest PV module manufacturer in the United States and support the nation's climate objectives. With construction underway and our schedule on target, we expect to commence initial production at the 3.3 gigawatt factory in the first half of 2023. In September, I had the privilege of meeting Prime Minister Modi in Washington D.C. to discuss India's long-term climate objectives and focus on energy independence and security, as well as opportunities for technology leadership in India. Through an ambitious target of 300 gigawatts of installed solar capacity by the end of this decade, paired with a holistic industrial and trade policy, India has created a supportive environment for companies seeking to manufacture renewable energy in country. We commend the Indian government for its leadership and believe that if every country were to take bold steps like India, our collective ability to achieve the targets within the Paris Agreement would be well within reach. With this backdrop in mind, we are excited to be expanding our manufacturing footprint into India. Overall, the site preparation is complete and we started to order equipment and the schedule is on track with the 3.3 gigawatt factory expected to commence initial production by the end of 2023. Turning to Slide 5. I'll now provide COVID-19, manufacturing, supply chain and cost updates. As a global company, we have demonstrated disciplined execution, agility and a steadfast commitment to health and safety throughout the pandemic. Reflective of this approach we have been able to maintain capacity utilization, excluding planned downtime of over 100%. Despite the challenging COVID-19 environment in Vietnam and Malaysia, our Vietnam-based manufacturing associates have been essential in the success by electing to remain on site in order to ensure manufacturing continuity. While this very challenging period of on-site quarantine ended in late October, we acknowledged our team's resiliency, ingenuity and incredible dedication to the company's mission. Through the strength of our global associates, we continue to execute source our bill of material strategically and navigate the current environment as reflected by the manufacturing performance metrics on Slide 5. While we've delivered against our near-term production commitments travel and other COVID-19 restrictions have added constraints on getting third-party equipment installers as well as our US-based associates into Malaysia and Vietnam to perform the planned product, throughput and efficiency upgrades. We have continued to work with relevant agencies to support this essential travel in a safe manner. However the timing of upgrading our last factory Vietnam to Series 6 Plus is now expected to be completed in Q2 of next year. While I will provide a holistic update on our CuRe program later in the call the aforementioned factors have contributed to impact the implementation timing in Malaysia and Vietnam. Consistent with our expectation as of a prior earnings call, the ocean freight market globally has remained challenging due to ongoing port congestion, limited container availability, historically poor schedule reliability, higher fuel costs and other events. While shipping rates have increased since the July call, we had accounted for this expectation in our previous full year sales rate guidance which remains unchanged. As highlighted on our prior earnings call we continue to partially mitigate the effects of higher sales rate per watt through implementation and module -- improvements in module efficiency implementation of Series 6 Plus, utilization of US distribution network and freight-sharing contractual arrangements with our customers which cover a portion of expected 2022 deliveries. Despite these mitigating factors the challenging freight environment has adversely impacted our financial results. And while we have been able to maintain our global -- our module gross margin guidance for 2021, we expect freight costs to remain at current elevated levels into 2022. I would next like to provide an update on our variable bill of material spend. Although spot prices for aluminum has continued to rise since the July earnings call, we have had a commodity swap contract in place which covers the majority of our US consumption through Q4. Going forward and for our domestic and international manufacturing sites, we have several strategies and process to reduce framing costs in the near to mid-term. Firstly, by differentiating the frame design and reducing cost of modules installed in the interior versus exterior of the array; secondly by optimizing the mounting interface of our next-generation module; and finally evaluating alternative materials for construction of our frame. From a glass perspective we have largely hedged this cost through long-term fixed price agreements with domestic suppliers that have volumetric pricing benefits as we achieve higher levels of production. While cost uncertainty remains for certain bill of material items, our targeted 3% cost per watt sold reduction including sales rate between where we ended 2020 and expect to end 2021 is unchanged from the prior earnings call. As we mentioned while sales rate remains at elevated in excess of pre-pandemic levels, we have accounted for this in our guidance update during the previous earnings call. Regarding our end-of-year cost per watt produced target, we expect to face challenges primarily due to COVID-related delays impacting the start-up of a new glass cover factory to support our Malaysia and Vietnam factories. Additionally, we expect higher adhesive costs due to supply chain disruptions in China and a mix shift of production to higher-cost exterior modules to support projects in high wind zones. As a result of these factors, our revised year-end cost per watt produce reduction target is 5%, when compared to the prior year. Given the majority of modules produced during the fourth quarter are expected to be recognized as revenue next year this cost per watt produced headwind is not expected to impact our 2021 P&L. In aggregate, despite these near-term cost pressures, our multiyear midterm targets to reduce Series 6 bill material costs by 20% to 25% remain on track. In the United States, there are a number of items in the mix as it relates to industrial policy, trade policy and importation. While the outcome of these items remain uncertain, we continue to believe the Biden/Harris administration has a unique opportunity to produce a comprehensive strategy for solar which could include a mix of manufacturing tax credits, an extension of the investment tax credit with the domestic content requirement and enforcement of responsible solar among other strategies. Through a long-term strategic approach to policy the administration has the opportunity to create an environment that not only helps secure America's sustainable energy future in a manner that reflects our country's values and principles, but also fosters innovation for the next generation of PV to be developed and manufactured in the United States. As it relates to trade policy, we continue to monitor developments related to the petition to extend Section 201 tariffs and to investigate whether certain solar manufacturers have circumvented antidumping and countervailing duties. As it relates to importation, we have repeatedly and unequivocally condemn the reported use of forced labor in the crystalline silicon PV supply chain. We continue to do so, as long as it remains an issue. During the previous earnings call we indicated that the issue necessitates swift and resolute action, but also emphasize that it should present an impetus for the United States and like-minded nations to separate their climate goals from the over-reliance on one country and one PV technology. No country should be forced to choose between fighting climate change and standing up for its principles such as, safeguarding human rights and securing this energy independence. While we acknowledge the challenges presented by the withhold release order issued by the U.S. Customs and Border Protection in June of this year, there are practical commercial solutions to reduce the risk of purchasing modules associated with forced labor and uncertain trade policy outcomes. For example, one of our peers has recently established a vertically integrated supply chain from polysilicon to module assembly outside of China without direct or indirect ties to Xinjiang. While this is a small step and only impacts a portion of the overall operation we believe it is a meaningful step in the right direction. Two essential attributes of PV power plants are their environmental benefits and their zero ongoing fuel consumption as compared to thermal generation. While the economic competitiveness of solar continues to drive an acceleration of global adoption many international markets including China rely on coal firepower for the majority of their electricity generation. Due to supply chain challenges and geopolitical factors, China is experiencing a coal shortage that has resulted in higher energy prices and government-mandated power restrictions against parts of the manufacturing sector. Given the majority of global polysilicon capacity is located in Mainland China higher coal costs mandated reductions in energy consumption and reduced operating capacity have further exacerbated the supply and demand imbalance in the polysilicon market, contributing to an ongoing increase in pricing for both polysilicon and solar modules. This coupled with the challenging freight environment has caused many Chinese-based manufacturers to prioritize availability of solar module supply to the local market where the major investors in utility-scale solar are the country's state-owned enterprises. This is yet another potent reminder of the risk of having climate goals tethered to supply chains that lead, a single nation in the PV technology and demonstrates the irony of America's clean energy transition currently being hindered by reliance on coal to produce crystalline silicon solar modules. Turning to slide 6, I'll next discuss our most recent bookings in greater detail. We had a good quarter with bookings of 1.5 gigawatts since the previous earnings call. After accounting for shipments of approximately 2.1 gigawatts during the third quarter, our future expected shipments which extended into 2024 are 16.5 gigawatts. Including our year-to-date bookings we are sold out for 2022 at 4.2 gigawatts of planned deliveries in 2023 and 0.3 gigawatts in 2024. While our energy quality and environmental advantages are all key differentiators, customers have been placing a premium on our vertically integrated manufacturing process, supply chain transparency and zero tolerance for the use of forced labor in our supply chain. We are seeing our value proposition drive interest in multiyear framework agreements. With a robust and several active negotiations with customers in the United States and India for multiyear and multi-gigawatt agreements, we are pleased with the robust demand for our CadTel technology. At the time of our previous earnings call, we had indicated the ASP across our volume for potential deliveries in 2023 was 1% lower than the volume to be shipped in 2022. Including our incremental bookings since the previous earnings call, our 2023 ASP is largely unchanged. In summary, we have seen a significant increase in the desire to work with First Solar due to our differentiated value proposition of more value with less work. While many of our crystalline silicon competitors have reportedly canceled deliveries have prioritized shipments into the domestic Chinese market and have openly requested price increases and delayed shipments we however continue to stand behind our contractual commitments. With this backdrop in mind, we are seeing bookings momentum with customers who value our technology advantages the benefits of domestically produced product and our responsible solar principles. Additionally as reflected on slide 7 our pipeline of future opportunities also remains robust. Our total bookings opportunities is 45 gigawatts with 21 gigawatts in mid to late-stage customer engagement. Note our capacity expansion in India and the related increase in available supply to meet projected domestic demand has increased our bookings opportunity in India to over 17 gigawatts, a 10 gigawatt increase since our Q2 earnings call. Before turning the call over to Alex I would like to provide an update on our technology road map. Looking forward, CuRe represents an anticipated enhancement to our module performance, which is expected to increase efficiency and reduce long-term degradation. On the April earnings call we indicated the CuRe lead line implementation was anticipated by Q4 of 2021 and fleet-wide by the end of Q1 2022. On the July call, we indicated CuRe implementation in Vietnam required international travel from third-party equipment installers as well as our US-based associates. Regarding Malaysia we were in the process of implementing the required CuRe upgrades but not all have been completed as of the end of the July call. In July through September COVID-19 cases began to significantly increase as the Delta variant spread and government restrictions were put in place in parts of Southeast Asia. As it relates to our CuRe development program, we have demonstrated the product's full performance entitlement in a lab setting and are currently working to translate this potential into high-volume production in Ohio. While this trend for improving module wattage and degradation appears favorable we are still working to realize the full performance entitlement in high-volume manufacturing conditions. We are continuing to refine our production parameters in order to bridge this gap relative to the program objectives for CuRe. As a result of the aforementioned challenges, our integration schedule is delayed and we have revised our integration schedule to the lead line implementation by the end of Q1 2022. Fleet-wide replication timing will be determined upon completion of implementation of the lead line and factory equipment upgrades required for CuRe. While CuRe has been delayed this presents a window of opportunity to leverage the optionality in our technology road map and demonstrate the resiliency of our vertically integrated manufacturing process. Through product enhancements to our current Series 6 technology we have increased our top production bin to 465 watts which represents a 19% glass area efficiency and produced over 125 megawatts with 460-watt modules during October. In addition to improved efficiency in module wattage, Series 6 is expected to have a significantly improved long-term degradation rate. Using improved metrology to measure degradation at our test sites and further validate by third-party analytical methods and customer site data, the current Series 6 platform is expected to have a 30-year degradation rate of 0.3% per year, which is 40% below our previous expectation. While the improved Series 6 nameplate wattage is in line with our target to exit 2021 with a top production bin of 460 to 465 watts, its energy performance including a slightly higher long-term degradation rate and higher temperature coefficient is below the expected performance of CuRe. In connection with our CuRe obligation starting in Q1 of next year, we have either amended or will endeavor to amend certain customer contracts utilizing CuRe technology by substituting our Enhanced Series 6 product. In connection with these customer contract amendments we may make certain price concessions. We currently estimate that the price concessions that we will potentially will make across the impact of customer contracts will not exceed approximately $100 million of 2022 revenue. Despite these challenges, we are encouraged by the promise of CuRe technology. Through the relentless focus and persistence of our manufacturing technology teams, we believe CuRe's performance on the manufacturing line will continue to improve. We will discuss the full year 2022 impacts during our fourth quarter earnings call. I'll now turn the call over to Alex, who will discuss our third quarter financial and 2021 guidance.

Alex Bradley: Thanks, Mark. Starting on Slide 8, I'll cover the income statement highlights for the third quarter. Net sales in Q3 were $584 million, a decrease of $46 million compared to the prior quarter. The decrease in net sales was primarily due to lower systems segment revenue, which was partially offset by an increase in module segment revenue. On a segment basis, our module segment revenue in Q3 was $563 million compared to $543 million in the prior quarter. Systems segment gross margin in Q3 was $6 million, which was largely driven by a favorable settlement related to a legacy systems project. Module segment gross margin was 21% in Q3 compared to 20% in Q2. There are several positive and negative factors that impacted this Q3 result. Firstly, we recorded a reduction in our product warranty liability, which was primarily due to lower claims than previously estimated for our Series 2 and Series 6 modules. This resulted in a $33 million reduction of our warranty liability, a corresponding benefit to cost of sales. Secondly, certain of our legacy module sale agreements are covered by a collection and recycling program or a corresponding expense to the estimated future cost of our obligation was recognized at the time of sale. During Q3, we recognized an $11 million increase in our module collection and recycling liability due to changes in the expected value of certain recycling byproducts. Thirdly as mentioned, we're in the process of implementing factory upgrades in 2021, which requires downtime resulting in lower production and underutilization. In Q3, our module segment gross margin was impacted by $6 million of underutilization. On a net basis, these factors increased module segment gross margin dollars and percent by $16 million and three percentage points respectively. Separately, 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 Q3, sales rate totaled approximately $67 million. Along with module warranty expense of approximately $1 million, sales rate and warranty reduced our module segment gross margin by approximately 12 percentage points. And note, as a reminder, many of our module peers report freight cost as a separate operating expense. For comparison purposes, we encourage you to consider this factor when benchmarking our module gross margin relative to our peers. SG&A and R&D expenses totaled $69 million in the third quarter, an increase of approximately $9 million compared to the prior quarter. This increase was primarily driven by a $3 million impairment charge related to a certain project development in Japan, $2 million increase in R&D expense, predominantly related to CuRe testing and a lower net benefit of $2 million from reductions to our expected credit losses in Q3 as compared to Q2. Production startup, which is included in operating expenses, totaled $3 million in Q3 compared to $2 million in the prior quarter. Q3 operating income was $51 million, which included depreciation and amortization of $66 million $9 million related to underutilization and production start-up expense and share-based compensation of $6 million. Recorded tax expense of $1 million in the third quarter compared to $20 million in Q2. Decrease in tax expense for Q3 is driven largely by lower pre-tax income a shift in our jurisdictional mix of income and lower estimated taxes in certain jurisdictions. And the combination of the aforementioned items led to third quarter earnings per share of $0.42 and $3.16 for the first three quarters of 2021 on a diluted basis. Next turn to Slide 9, to discuss balance sheet items and summary cash flow information. Our cash and cash equivalents marketable securities and restricted cash balance ended the quarter at $1.9 billion a decrease of $111 million compared to the prior quarter. There are several factors impacting our quarter end cash balance. Firstly in Q1, we sold certain marketable securities associated with our module collection and recycling program for total proceeds of $259 million, which were presented as restricted cash on our balance sheet and were therefore included in our measure of total cash at the end of Q1 and 2. During Q3, these proceeds were reinvested and are now represented on our balance sheet as restricted marketable securities which are not included in our measure of total cash. Secondly, net cash generated by operating activities was $305 million, which included collection of proceeds from a $65 million settlement agreement related to a legacy systems project that was reached in Q2. Finally this was offset by capital expenditures of $165 million during Q3. Total debt at the end of the third quarter was $279 million, which was consistent with the prior quarter. As a reminder, all of our outstanding debt continues to be project-related and will come off our balance sheet when the corresponding project is sold. Our net cash position which includes cash, cash equivalents restricted cash and marketable securities less debt decreased by $111 million to $1.7 billion, as a result of, the aforementioned factors. Net working capital in Q3, which includes noncurrent project assets and excludes cash, cash equivalents marketable securities decreased by $296 million compared to the prior quarter. And this decrease was primarily driven by a reduction in accounts receivable related to the aforementioned settlement agreement collection of receivables related to prior project sales. Net cash generated by operating activities of $305 million in the third quarter compared to $177 million in the prior quarter and capital expenditures were $165 million in the third quarter compared to $91 million in the prior quarter. Continuing on Slide 10, I'll discuss 2021 guidance. In comparison to our initial expectations coming into 2021 our year-to-date performance reflects the strength of the business model but also tremendous execution during the course of the year. While the effects of higher freight costs were partially offset by the aforementioned settlement related to our legacy systems project, our current earnings per share guidance is largely within the range we provided during the February earnings call. Relative to year-to-date EPS of $3.16 to $4.30 midpoint of our current full-year guidance implies fourth quarter EPS of $1.14 compared to $0.42 in the third quarter. There are several factors driving this quarter-over-quarter increase in earnings per share and our ability to reiterate our full-year 2021 EPS guidance. Firstly, approximately 820 megawatts of modules remained in transit at quarter end and were not recognized as revenue during Q3. While extended transit times impacted our Q3 results, we anticipate a significant portion of these modules will be recognized as revenue in early Q4. Driven by a strong start to the fourth quarter we anticipate an increase in module volume sold during Q4. Secondly, while freight costs in Q4 are expected to remain above pre-pandemic levels, we had accounted for this expectation and the guidance we provided on the July earnings call. As a result, our sales rate guidance for full-year 2021 of 10 to 11 percentage points of gross margin module gross margin remains unchanged. Thirdly, we remain on track to complete the sale of certain Japanese systems projects in Q4 contributing to an expected increase in Systems segment revenue and gross margin compared to Q3. So with that context, I'll next discuss the updated guidance ranges in some more detail. Our revenue gross margin guidance remain unchanged. And note that our gross margin continues to include the impact of $61 million to $66 million of ramp and utilization and reduced throughput costs. SG&A and R&D expenses of $265 million to $275 million production start-up expense of $20 million to $25 million and operating expenses of $285 million to $300 million are unchanged. Our operating income guidance range of $545 million to $625 million is unchanged and includes anticipated depreciation and amortization of $258 million, share based compensation of $21 million, $61 million to $66 million related to ramp on utilization reduced throughput and production start-up expense, and a gain on the sale of our US project development in North American O&M businesses of approximately $150 million. Our full year 2021 EPS guidance also remains unchanged. Our capital expenditure guidance is $675 million to $725 million, which represents a $150 million decrease relative to our previous expectations. And this is primarily related to the expected timing of certain factory upgrades. Our year-end 2021 net cash balance is anticipated to be between $1.45 billion and $1.55 billion. This $100 million increase relative to our previous expectations is primarily due to the reduction in our CapEx guidance. And lastly our shipment guidance of 7.6 to eight gigawatts is unchanged. Turning to slide 11, I'll summarize key messages from the call. From a financial perspective, we delivered year-to-date EPS of $3.16. Our full year 2021 EPS guidance is unchanged and our net cash position of $1.7 billion remains strong. From a manufacturing perspective, we produced over two gigawatts despite the challenging COVID-19 environment, increased our top production bin to 465 watts and have revised our CuRe implementation schedule. And finally Series 6 demand remains at record levels with 10.5 gigawatts of year-to-date net bookings, which includes 1.5 gigawatts since the previous earnings call. With that we conclude our prepared remarks and open the call for questions. Operator?

Operator: Your first question comes from the line of Philip Shen with ROTH Capital Partners.

Philip Shen: Hi, everyone. Thanks for taking my questions. I have three groups of questions. The first one is around bookings and pricing. I was wondering, if you could provide a little bit more color on that. Looking ahead do you expect to accelerate or perhaps slow down bookings to maximize price? And then are you looking to make any changes to the way you structure your contracts, so you can maximize your pricing? Number two here, as it relates to the reconciliation bill, you have the $0.04 per watt thin film sell credit but then there's also the $0.07 module credit for the manufacturing production tax credit. Can you talk about -- do you think you get both added together, or do you think one or the other? And then finally as it relates to capacity expansion maybe talk to us about how you're thinking about it? And do you need that reconciliation bill before you guys think about the next leg of capacity in Ohio or elsewhere in the US and what conditions in general you think you might need to announce another capacity expansion? Thanks guys.

Mark Widmar: All right. Thanks Phil. I'll try to hit on all three of those. In terms of bookings -- and first of all what I'd like to say about the bookings if you look at our pipeline of opportunities that we highlighted in the presentation, we effectively -- if you look at our mid to late stage opportunities have doubled. I think our last quarter we were right around nine gigawatts now we're sitting at 21 gigawatts, so more than double that. And we've almost tripled the opportunities that we have in the US last quarter, we were six and change on the US for mid to late-stage in this quarter we're sitting north of 18. So I feel really good about the robustness and the opportunity for us. And then what's encouraging I somewhat indicated in my prepared remarks is that -- these are multiyear agreements, multi-gigawatt agreements a number of them are. And we are working a framework there that has construct that allows for optionality in our roadmap to make sure that we can be monetized. So we talked on the last call, for example, that we are looking to now enable bifaciality for CadTel. So to the extent that we do that then there's a predetermined value lever that is associated with that bifaciality and then it drives to accretion to the ASP. There's other components in there that are structured such that for domestic content requirements that may evolve with the ITC there's an associated value lever associated with that. So I'm really happy with the engagement that we're seeing right now, not only here in the U.S. but obviously in India. I mean to have a 17 gigawatts of opportunities in India already, just after only a little over a quarter or so since we've announced the factory expansion. It's really nice to see that level of engagement involvement and robustness that we have for our India factory. So we are encouraged. We are also -- I would say that the sales cycle customer engagement is probably a little bit longer, partly because we are looking multi-years out into the horizon and we're also trying to create the optionality and we're also trying to make sure we've got good visibility with all the various levers that could come into the mix, whether it's tariff, trade policies, whether it's industrial policies, we want to make sure that we have clarity around some of those levers as we start to enter into some of these contracts. Encouraged by the pricing. If you look at where we are and how pricing is firming up here in the U.S. And even what we're seeing in India is it becomes more of a domestic manufacturing market, we're encouraged by what we're seeing there as well. So all that, I would say, put us very positive and trending in the right direction. The reconciliation bill and in particular the manufacturing tax credit, the spirit and the intent of that has been to be additive. So the components are additive. We -- there has been some additional clarifying language that I believe was push forward in a manager's amendment yesterday to make sure there is clarity that it is additive. We believe its additive for the cell and module level at a minimum and is being evaluated whether potentially could be additive beyond that. So we're encouraged by that. We think the bill is structured in a way that it will provide the domestic capability that we need to ensure our self-reliance and long-term energy independence and security. So that's obviously moving in the right direction. That's still -- a long way still to go to get it all the way over the finish line, but the way it's constructed right now, we're very encouraged by them. And we think it will enable the long-term strategic objectives we need as a nation. Capacity expansion, Phil, we've already been working with our tool suppliers. We kind of got them on this six-month window. We've got Perrysburg expansion first and then six months later the India expansion and then we've already been working with them to think through another factory within six months after that, which would effectively say that we could bring another factory online sometime early 2024, depending on where it could be, it could be here in the U.S. it could be in India, it could be somewhere else. But we are trying to make sure that we have that forward visibility of what we're looking for in ensuring that that capability will be there if we made the decision to expand beyond our current commitments on capacity.

Alex Bradley: So the only other thing I'd add is that, we talked about the potential for putting some debt on the balance sheet associated with the additional factories we're looking at right now. Given the policy environment we're seeing the ASP environment we're seeing, if we added additional capacity, that would obviously be very cash-generative, but there may be a bridge where that would be helpful in terms of the timing of CapEx, let's say, with those new factories before they came online. So as we think about the balance sheet and how we look at funding the amount of capacity already, that might impact how we look at it, depending on whether we see the possibility for additional capacity beyond currently in our factories.

Operator: Your next question comes from the line of Julien Dumoulin-Smith with Bank of America.

Julien Dumoulin-Smith: Hey, good afternoon. Thanks for the time, guys. Appreciate it. So just to follow up on Phil's questions. First off, just looking at the year, the guidance, just confidence on shipments in 4Q? I know you said there was some already slipping from 3Q to 4Q. But just what are you seeing in port congestion, just the ability to deliver all together. I'll leave it open-ended. I know there's a lot of different pieces there, but clearly you're saying you've got some amount of visibility and confidence there. And then separately, I'll throw them all together here for ease of just going on the list. Coming back to the ability to qualify for certain subsidies here, how are you thinking about PLI in India, just as far as that goes in qualifying specifically for your expansion? And then lastly, any commentary on pricing, specifically on 2023. Again, I know that you just asked a little bit on maximizing it, but just aggregate level how much -- what trends are we seeing here on 2023 and especially 2024, as you start to see some of this backfilled and potentially contemplate ITC, et cetera?

Alex Bradley: Hey, Julien. I’ll start on the shipment fee. So I would say, we're seeing poor congestion and general issues in the shipping market, be as bad today as we've seen them. So I don't see any improvement, if you look at the cost of sales rate we indicated for the quarter, that's still raised. I would say though that absent -- we still see some issues around blank sailings. In general, I have good confidence in our shipment numbers for the year. The delta comes a little bit in how much will that will be put through the P&L in terms of revenue recognized. So if you look at Q3, we managed to hit our expected shipment numbers, but we were low to the tune of somewhere around 300 to 400 megawatts in terms of the expected volume of revenue recognized and that's a function of transit times. So if you go back to pre-pandemic times, we would normally see from factory gate to revenue recognition about two months from product leaving our Asia factories. That's increased by about 50%. So we're seeing closer to 90 days now for product coming from Asia into the US. So I think from a volume shifts, I've got a lot of confidence. And if you think about where we are today effectively for product coming from Asia, if it hasn't left the factory already, it's not going to get to destination, if it's the US by the end of the year. So we have reasonable clarity there. But again, the timing of the rev rec is a little bit different. Now we do expect to catch up a little bit on the rev rec side in the fourth quarter, partly of the mix shift. So we see a little more expected volumes to be revenue recognized coming from either Perrysburg or our US distribution center. There's also a slight mix shift in terms of income terms in there as well. So good confidence on shipments still a bit of uncertainty on revenue recognition.

Mark Widmar: Yeah. And I guess on the PLI Julien, first off, I'd just like to reference again as I said in my prepared remarks, it was a pleasure to get a chance to spend some time with Prime Minister Modi in D.C. And we talked through this a little bit and he's very encouraged that First Solar is making a commitment to India and creates basically a footprint of diversification that they're looking for, right? So we are completely decoupled from a Chinese supply chain. And we're a vertically integrated factory within the four walls. And so to truly enable kind of their focus on concern around overreliance, concern about energy independence and security we're really a strategic enabler of that accomplishing that. His commitment to me was during their conversation was that he would ensure we would get our fair share of the PLI. So I feel encouraged by that statement and that commitment. The PLI is still being worked through. There is some -- the first request for the PLI have been made. If you look at the scoring -- our current scoring would not necessarily indicate we would receive an allocation of PLI, but we are working through that. The -- his administration is also looking to expand beyond what was originally allocated to -- because there was such an overwhelming request to expand the funding requirements for PLI. So -- and there's also potentially another path that we could pursue that would give an equivalent PLI benefit even though it wasn't directly funded through the PLI program. So we're working on different options. As I said before, our business case was not predicated on receiving the PLI. If we received it, it was a benefit and an upside. We have other incentives that are moving forward. We're receiving an incentive for our CapEx that we're spending on the factory which is a 24% credits that we'll receive to offset the cost of that capital. There's other incentives that we're receiving related to labor. There's a 10-year incentive for a 20% rebate against our cost of labor and there are some other incentives that we are pursuing and those are all trending green. So PLI right now is still being managed. I still believe we'll be able to find an outcome that will be a positive outcome for us. But even without it we still are very confident with our business case in India and our relative competitiveness of our new product and our new factory in the India market. Pricing for 2023 what I would say is that where we are marking it currently right now is encouraging. And especially with the value levers that I referenced as potential upside as well. We are encouraged by what we're seeing and we feel very confident in our ability to see a very attractive pricing not only 2023, 2024 and then potentially into 2025 as we enter into some of these long-term agreements.

Alex Bradley: Yeah. The other thing I'd add just on that is its pricing and also risk terms. So there is a view of changing risk profile around sales rate for instance that we're looking at in 2023 relative to historical contracts. So may not necessarily influence the overall ASP but does change the risk shift especially in the market we're seeing sales rate being a higher cost today.

Julien Dumoulin-Smith: You said you're getting a premium ASP for your risk or you're not recognizing a premium for your risk factors?

Alex Bradley: We're looking -- we're changing the allocation of risk and contracts so that we have sharing or pass-through of certain costs to the customers given the uncertainty around shipment.

Mark Widmar: So, if you think of it this way. I mean look freight cost right now is up 70%, 80%, 90%. And so we've kind of created a level of which we're willing to accept but a high percentage of that will now be passed through directly to our customers versus us sharing or carrying that entire risk on our ledger.

Julien Dumoulin-Smith: Excellent. Great to hear that. Congrats again. Speak soon.

Mark Widmar: All right.

Operator: Your next question comes from the line of J.B. Lowe with Citi. Mr. Lowe, your line is open.

J.B. Lowe: Good afternoon. How are you doing?

Alex Bradley: Well. thank you.

J.B. Lowe: My question was on given all the moving parts we have between what you have booked for 2022, the ASPs that you have already locked in and kind of the moving pieces of costs that we have flowing through at this point shipping and otherwise, how do you think gross margin per watt should trend in 2022 versus 2021?

Alex Bradley: So, if you look through the various moving pieces across the year, so Mark in his prepared remarks mentioned that there'll be some impact from our timing around CuRe. There'll be some specific impact related to that timing. We also will see some impact from overall cost per watt. So, the factory upgrades not only impact CuRe, but impact overall cost per watt. Without them we have less watts. Therefore, we have less amortization of fixed costs going across the capacity we have. We've seen commodity price pressures. So, I think in the prepared remarks, we talked about our year-over-year cost watt produced being down about 5% versus our previous expectation of 9%. That's mostly bill of materials issues. On the long-term, we believe that gets resolved but we do see short-term pressure especially on the aluminum side. From a sales rate perspective, I would say that you're going to see the run rate you're seeing in the second half of this year most likely carry forward into next year. So, no sequential increase forecast today, but higher relative to pre-pandemic levels. If you look in 2022 overall as well, it's going to be the first year we don't have the US Systems business, although we will have some contribution from Japan on a company-wide gross margin level you're going to see some impact of that. And then I'd say the other piece you're going to see is the flip side of not having that US Systems business the strategic decision we made to exit was accompanied by a growth decision and you're going to see that come through later. But in 2022, we haven't yet got additional capacity in the US or in India online, but you are going to see the costs associated with that in terms of startup and ramp costs coming through. We talked on the last call about that being somewhere in the range of $60 million to $70 million per factory combined start-up and ramp and you'd see I think a little bit more than half of that total coming through in 2022 with the remainder coming in 2023. So, you're going to see some pressure on -- across the board in 2022. What I would say is if you then look forward and take that through into 2023, most of those short-term challenges don't tell the longer-term story. So, the CuRe delay that we talked about that impact will be felt from 2022 not in 2023. By 2023, you'll have over half of the ramp and start-up for the India and the US factory, which will have been spent sequentially year-on-year. Going 2022 to 2023, you're going to see a decrease in startup and ramp. As we talked about in the prepared remarks, ASPs right now we're seeing 2022 to 2023 are essentially flat in the backlog. And at the time when we have got pretty strong macro tailwinds right now on the bookings. We would expect sea cost per watt come down over the two years. From a volume produced and sold perspective, you're going to see volume come up as the factories come online in 2023. You're also going to see Series 7 come through. Right now we're not booking for that. As we mentioned on our last call, we expect to see about a $0.01 to $0.03 gross margin entitlement advantage associated with Series 7 relative to Series 6 and that's a benefit split across ASP cost per watt in sales rate. And then lastly on the sales rate side, you're going to see a benefit again in 2023 relative to 2022. I just talked about the contractual shift that we're making whereby we are capping effectively the amount of sales risk we take and the passing remainder through to customers. So, you are going to see that by virtue of a lot of those things an impact to gross margin in 2022 a lot of which will reverse out in 2023 and we'll give you more clarity and visibility into that when we give guidance in February.

J.B. Lowe: Awesome. Thanks. My other question was just on -- given all the pricing headwinds we've seen or cost headwinds we've seen, is there any change to the outlook for CapEx required to build the new facilities or timing of such?

Mark Widmar: Yeah. So look, there's a lot of moving pieces in the CapEx right now for both of the factories and some positive and some challenging, right? And one of the unfortunate reality of sales rate or freight in general I should say, carries itself all the way through our tool set and delivering of those tool sets to our factories, right? So we are seeing some higher costs there. We've seen some other benefits relative to our original assumptions around the equipment cost that are more favorable. So, as we review, which we do every month the status of those two expansions and then the relative CapEx relative to the goals and also what we committed externally. The numbers are still lining up. The thing that could impact schedule per se would be long delayed in transit delivery schedule of the equipment set. And so we are trying to get ahead of that and we're trying to move that forward. And we've accommodated for some longer in-transit delivery times. But everything we see as of right now, we're still on target basically within the budget which we've communicated externally as well as the schedule when those factories will be up and operational.

J.B. Lowe: Helpful. Thanks.

Operator: Your next question comes from the line of Ben Kallo with Baird.

Ben Kallo: Thank you. So if we did have the -- I don't know if we call it an as of manufacturing credit, but if we had that how do you guys monetize that is my first question. Can you use that yourself, or do you get a tax equity partner or how does that work? And then, how big do we think that is?

Mark Widmar: So first off, the way it's been structured right now, Ben, it's a refundable tax credit. So we don't have to have sufficient tax capacity to monetize it. To the extent we do have a tax liability then the credit would have offset that portion. And to the extent the credit was in excess of our tax liability then it would be a refundable credit that would be paid back to us by the US government. Ben, it's -- you can do the math, right? And the numbers can be pretty significant at $0.11 a watt. I mean you take $0.11 a watt across our US capacity, call it, three gigawatts for the US without the expansion. And then with the expansion you had another 3.3 gigawatts. So we're a little bit north of 6 gigawatts, in the way that it would work right now again with the module and the cell being additive, then you would be entitled to $0.11 for every watt of which we ship to produce and ship after beginning, let's say, it this way beginning January 1, 2022. So anything that we're producing right now would not be eligible for that even though it would potentially ship next year. But anything that we produce next year and ship then we would be entitled to a credit that as it currently is positioned would be a minimum of $0.11 a watt.

Ben Kallo: Got it. And then, just with the uncertainty with this not shipping costs and financing costs and everything else. But how are customers -- I get this question a lot like how much stuff gets pushed out to next year to wait and see or what have you? And thank you, guys.

Mark Widmar: So the one issue with us is that we're not seeing a lot of stuff moving. And the -- what's happening right now is unfortunately -- obviously not all of our customers are 100%. There are a couple which I do thank them very much. So the fact they're 100% committed to First Solar's technology but not all of them are. And they're getting reneged on or pushed out by our competitors. And so in some cases if they have a commitment with us on the books and the project discretely which that was associated with may be moving they're looking to take that volume and allocate it to another project that they're unable to get module supply for. So for us it's not much of an impact because nobody wants to give up the opportunity that they've got secured right now with us. And so what they're doing is taking delivery of modules and then using them in other projects. So I know others are seeing that impact. I know projects truly are slipping or getting pushed out. We're just not seeing much of that impact yet.

Ben Kallo: Thank you.

Operator: Your next question comes from the line of Maheep Mandloi with Credit Suisse.

Maheep Mandloi: Hi. Thanks for taking my questions. Just on the Japan project could you just talk about how much of EPS sensitivity do you expect from that? And just in terms of certainty what are you thinking about it? And could you just also talk more about the CuRe delay and improvements and how much the impact there is? I think you spoke about $100 million previously. Just wanted to clarify that for 2022. Thanks.

Alex Bradley: Yes, this is Alex. I'll take quickly the -- we've guided to about $55 million to $70 million of gross margin assumption for Q4 associated with Japan assets.

Mark Widmar: Yes. As it relates to CuRe. So where we are with CuRe right now again there's two challenges, right? And one is our ability and the timing to replicate. We were in the process of upgrading our factories Malaysia, Vietnam to enable the CuRe production process which there are certain tools the oven in particular that has to be upgraded. And we have not been able to do that with the restrictions that have been placed on us because of the COVID pandemic and the Delta variant spread in the way that it has over the last several months things are getting better. So that's obviously all positive. But that's been a huge constraint and that delays our ability to roll out. Now before that even as we sit with where the solution development phase is right now we are behind where we want to be as it relates to -- if you think about the attributes of CuRe what's the value of CuRe? Well first and foremost is the improved long-term degradation rate. The other is higher efficiency. And then finally, it's the better temperature coefficient. So we've actually closed the gap between our existing product and the CuRe degradation rate which we highlighted on the call that now we're at a 0.3 annual degradation rate based off of the studies that we've done and further validation with third-party methodologies that we're at 0.3 and we'll go forward with 0.3 right now but that's still higher than our 0.2. It's best-in-class industry, but not to the level that CuRe was going to take us to. The efficiency, at least as we exit this year we're recovered about two bins on efficiency with our existing products. So we've closed a little bit of that gap, but we're slightly off on efficiency from where we want to be. And then, on the temperature coefficient, so we are -- the temperature coefficient is not as favorable with our existing product is where we want to be with CuRe. Now we've been able to validate through our laboratory work as well as individually each one of those attributes through our pilot line. But when we take it into high-volume manufacturing there are certain attributes that are becoming more challenging as we try to take it into high-volume manufacturing. One is the handling of the product. So the -- I would say the film is not as resilient yet, as our current device is and therefore handling becomes much more of a concern. So we've got to work through that, two ways. One is to improve potentially how we handle the product in the production process the other is, to make the film a little bit more resilient to enable that to happen. The other is it is currently the atmosphere and the effects of humidity in particular is a little bit more challenging than what we have with our existing products. So we've got to work through that. So we know we can solve each one of those. It's just a matter of time and to do it in high-volume manufacturing. And that means we're going to have to run. And so that's part of it. We've been doing runs. And we've been doing designs of experiments to validate and learn and evolve. So it's a matter of finalizing that effort. It's not an issue with the viability of the technology, as we've seen demonstrated either through the laboratory work or even the pilot line or we call it a quip line validation of those discrete attributes that we need in order to get to the program objectives for CuRe. And so we're working through each and every one of those. And our current view is right now we'll have our lead lineup and running by the end of Q1 of 2022. And then from there, once we have that validated then we'll make a decision on the replication throughout the balance of the fleet as well as the – hopefully, we're seeing some positive signs of ability to travel and to get in country into Vietnam and Malaysia to start the upgrade process. So once we have that validation through our lead line, we can start the replication process but that is still a constraint. We need to be able to get in country to upgrade the tool sets. And if unfortunately over the winter months, we see a new variant or something else that comes through and we're unable to travel in country then that's going to create further delays that we'll have to manage. What we have right now is the range that we've given to these are all going to be subject to negotiations with customers that we're going to have to work through. And we started them. Some of them have been pretty positive. Some of them have not, been as positive. And so we felt it was prudent to provide some potential impact to the extent that we are delayed in the rollout that we could see some adverse impact to our revenue next year, which if you look at the volume which we're going to ship next year we're talking somewhere around $0.01. But when you take a $0.01 across eight to nine gigawatts of shipments it becomes a pretty material impact pretty quickly. So we just wanted to make sure that it was transparent.

Maheep Mandloi: Thanks.

Operator: And this does conclude our allotted time for questions-and-answers. And this does conclude today's conference call. Thank you for participating. You may now disconnect.