First Solar, Inc.

Good afternoon, and welcome to First Solar's first quarter 2020 earnings call. This call is being webcast live on the investor 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 Enos from First Solar Investors Relations. Mr. Enos, you may begin.

Thank you. Good afternoon, everyone, and thank you for joining us. Today, the company issued a press release announcing its first quarter 2020 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, discuss First Solar's response to the COVID-19 pandemic, Alex will then discuss our financial results for the quarter, as well as our outlook for 2020. Following the remarks, we open the call for questions. Please note this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations, including, among other risks and uncertainties, the severity and duration of the effects of the COVID-19 pandemic. We encourage you to review the Safe Harbor statements contained in today's press release and presentation for more complete description. It is now my pleasure to introduce Mark Widmar, Chief Executive Officer. Mark. Thank you, Mitch.

Good afternoon and thank you for joining us today, especially in light of the extraordinary situation that we're all facing. I hope each of you and your loved ones are safe. I want to begin by discussing the country's response to the COVID-19 pandemic. global health crisis, including the impacts we are seeing on our business and the actions we are taking to support our associates, customers, and partners. Turning to slide three, firstly and most importantly, we are committed to our associates, customers, and partners around the world. We are working to navigate this unprecedented challenge together with safety as our top priority. At this time, The majority of our office-based associates are working from home to minimize large concentrations of people at our offices and manufacturing facilities. As a technology manufacturing company, we do require certain associates to be physically present at our production facilities. In these locations, we have implemented stringent health and safety protocols that include, among other measures, temperature screenings at facility checkpoints, a mass requirement for all our manufacturing associates, around-the-clock sanitation of high touch areas, and social distancing. In order to further protect our associates, we have also implemented strict limitations on third-party visitors to our offices and manufacturing sites. Through these practices, we strive to protect the well-being of our global associates and ensure that our technology is safely manufactured and delivered to our customers. In meeting the clean energy needs of the global economy, we will continue to balance our top priority of safety with delivering value to each of our stakeholders. We recognize the challenges that our associates and their families are facing in this period of great uncertainty, and we're very proud of the dedication, focus, and commitment that we witnessed from our associates over the past months. It is during challenging times like these that our culture of agility, collaboration, and accountability and the strengths of our differentiated business model shine through. Turning to slide four, our core operating principle is to endeavor to create shareholder value through a disciplined, data-driven decision-making framework that delivers a balanced business model of growth, profitability, and liquidity. With this guiding principle, we will continue to adapt our business model to remain competitive and differentiated in a constantly evolving market. Through our points of differentiation, which include a competitively advantaged CAD-TAIL thin-film module technology, a vertically integrated continuous manufacturing process, an industry-leading balance sheet strength, and a permanent sustainability ideology, we have created a resilient business model that better enables us to manage through periods of uncertainty, including the current environment. The strength of our business model is reflected in our committed Series 6 roadmap capacity of approximately 8 gigawatts and our multi-year contracted backlog of over 12 gigawatts. We are pleased with the contracted backlog we have built as it provides increased visibility into our future sales, reduces financial exposure to spot pricing, and aligns our capacity plan with future demand. Turning to slide five, I will next provide an update on our module and systems businesses. On March 26, we provided a manufacturing operations update in light of recent developments related to the COVID-19 pandemic. At that time, we indicated our manufacturing facilities in the United States, Malaysia, and Vietnam were permitted to operate under their respective circumstances and government mandates. Through today's earnings call, we continue to manufacture Series 6 under their local government orders, which include the following. Firstly, on March 22nd, the state of Ohio issued a stay-at-home order which was extended to May 29th. Recently, the Ohio government rolled out a plan to gradually reopen other parts of the state's economy while still minimizing the spread of COVID-19. Through today's earnings call, our Ohio facilities have been permitted to operate as an essential business under the stay-at-home order. However, with the closing of schools and the associated daycare needs, as well as other factors, we have experienced a decrease in our production workforce. In March and April, our Ohio 1 site operated at full capacity. However, the temporary decrease in labor availability yielded an approximately 25% reduction in capacity at our Ohio 2 during these months. Starting in May, essentially the entire manufacturing workforce has returned, and we expect Ohio 2 will return to full capacity. During this period of transition, we incurred some incremental costs for overtime and supplemental pay. Secondly, on March 18th, the government of Malaysia enacted a movement control order, which was extended to May 12th, and from which First Solar was exempted as an essential business. Under the order, the workforce at the factory had to be reduced by 50% to improve social distancing while maintaining full pay for all associates. In order to comply with the order, we elected to maintain Series 6 production while halting Series 4. We had anticipated discontinuing Series 4 production during the second quarter of 2020. Prior to the Movement Control Order coming into effect, we had produced approximately two-thirds of our expected 300 megawatts of Series 4 production for the year. Taking into account inventory on hand, future expected warranty requirements, and following engagement with certain customers to replace Series 4 with Series 6 modules, we have elected to accelerate our Series 4 shutdown and will not restart Series 4 module production. However, due to the movement control order, we have experienced some delays in completing the exit process of our impacted associates. However, despite operating under the reduced workforce reduction through labor optimization, and a work-from-home strategy for all non-essential Series 6 manufacturing associates, we achieved Series 6 capacity utilization rates above 100% at our factory in Malaysia during March and April. Thirdly, on April 1st, the government of Vietnam ordered a period of nationwide oscillation, which required compliance with government-mandated safety criteria in order to continue manufacturing operations. We implemented all requirements and continued to operate at over 100% of nameplate capacity during March and April. A significant achievement to highlight, the team's commitment to safety was recognized by government auditors as we achieved the best safety score out of the 15 large manufacturing facilities audited in the Ho Chi Minh City area. Our operational performance to date has been facilitated by our strong supply chain partnerships which has enabled us to minimize disruptions to raw material supplies to the factory. Throughout the crisis, the vast majority of our third-party suppliers have continued to serve us. In cases where we have had challenges in our supply chain, we have substantially mitigated those disruptions through active dialogues with our vendors and implementation of contingency plans. To date, delays related to procurement of raw materials and components have not exceeded a week. From a shipping and logistics perspective, we have seen disruptions in global cargo routes and capacity. Despite sailing cancellation, port congestion, and staffing reductions, the impact on inbound raw material deliveries has so far been limited. We continue to work with our partners and customers to mitigate these disruptions. Finally, with regards to customer deliveries, in several instances, our customers are experiencing delays and they're permitting an EPC process, which is affecting our ability for them to receive our module. In all cases, we continue to collaborate with our customers and provide solutions to challenges they are facing as a result of the current environment. We are committed to meeting the needs of our customers, while the delivery date changes may impact the timing of revenue recognition on our module sales. Turning to the assistance business, with regards To early stage development, the most significant impact of the pandemic is the inability to hold public gatherings, which are often a step required in completing the permitting process. Accordingly, our development team is evaluating the potential to utilize virtual meetings to fully satisfy these requirements. From a PPA standpoint, we have continued to make significant additions to our contracted pipeline in the United States and Japan. Since the prior earnings call, we have been awarded three PPAs for projects located in Tennessee, California, and Texas across a diverse set of utility, CCA, and corporate off-takers. These projects secure system volume in a time period that captures the full value entitlement of our ITC safe harbor strategy and copper replacement program. Additionally, these projects have module shipment dates between 2021 and 2023, which importantly extends our contracted backlog into later years. From a construction standpoint, we are nearing completion of the last remaining projects being constructed in-house by FirstSellers EPC, and the remaining projects currently under construction being financed on our balance sheet and executed by third-party EPC partners. While our construction projects have experienced some combination of constraints related to COVID-19, such as certain balanced system supply delays and schedule impacts related to labor availability, we have been working with relevant stakeholders to remediate any project schedule delays. The majority of these delays at this time have been mitigated. As it relates to project sales, these require input from and coordination with multiple government and private sector counterparties across a variety of development and financing areas, many of which have faced disruptions in business operations. Therefore, we expect to see delays in product sales in the United States, Japan, and India. However, our strong net cash position provides us with financing flexibility and the option to balance sheet finance project construction, as well as temporary hold operating assets through periods of market dislocation or disruption in order to create options to maximize value. Alex will discuss this later in greater detail. With regard to O&M, as one of the world's largest O&M providers, we continue to safely and effectively manage our utility scale portfolio so these power plants can continue to generate reliable clean electricity. Our O&M business is well positioned for the current environment as our strategy emphasizes remote monitoring, analytics, and predictive maintenance to optimize power plant health and minimize on-site presence. In our operations center at our global headquarters in Arizona, we have implemented stringent health and safety measures and seating arrangements in line with recommended social distancing protocols. As a result of these measures, our O&M business continues to efficiently and safely meet the needs of our customers. Turning to slide six, I will next provide a market, technology, and manufacturing outlook. While we are monitoring the near-term impacts of solar procurement, the catalysts for driving increased utility-scale solar penetration continue to grow. Firstly, in many markets, new-built utility-scale solar is economically competitive with fossil fuel generation on both a total and marginal cost basis. In fact, at the start of 2020, the U.S. Energy Information Administration estimated that the United States will see 6 gigawatts of uneconomical coal capacity be commissioned in 2020, while 13.5 gigawatts of new utility-scale solar would be installed. Secondly, our technology's performance and reliability are well understood, with over 600 gigawatts of cumulative capacity installed globally through the end of 2019, solar has transitioned from an alternative to a mainstream energy resource. Finally, while solar experienced a period of significant expansion over the past decade, we are still in the early innings of growth. Although the United States has 80 times more solar installed today than it did a decade ago, the 77 gigawatts of installed solar capacity only accounts for 2% of the country's electricity generation. Against the backdrop of growing demand for cleaner electricity and global commitments to achieve climate goals, we see significant runway for solar installation growth. Our Series 6 capacity plan is well-positioned to capture a rapidly growing global PV market. In this context, I would like to note that our long-term capacity expansion roadmap is essentially unchanged. To date, the only shift in production strategy is delaying the planned 2020 optimization of our Vietnam factories. This elective decision reduces downtime in 2020, and we expect this will partially offset underutilization of our Ohio 2 factory. Shifting to our technology roadmap, our long-term technology roadmap remains unchanged to date. However, if operational limitations at our advanced research lab in Santa Clara, California continue for an extended period, the timing of this roadmap may be delayed. As the only U.S.-based company among the 10 largest PV module manufacturers globally, we are committed to manufacturing and diversifying our supply chain in the United States and supporting U.S. manufacturing jobs within First Solar and externally. A good example of this commitment is a supply agreement with a glass provider that enabled the construction of a new glass float facility approximately 10 miles from our Perrysburg, Ohio, manufacturing site. On a similar note, we are pleased with the decision in April of the Office of the United States Trade Representative supporting the removal of the exclusion of bifacial solar panels from the Section 201 safeguard measures. and are monitoring the resolution of the related litigation in the U.S. Court of International Trade. While we have been able to contract through the iterations of the bifacial exemption, we believe this decision of the U.S. Trade Representative is consistent with the underlying intent of Section 201 measures. It helps promote a level playing field for U.S. solar manufacturing and innovation in an environment of both free and fair trade. Turning to slide seven, I would like to briefly highlight our bookings activity for the quarter. Despite the uncertain economic environment, demand for our Series 6 product remains strong, as evidenced by the 1.1 gigawatts in net bookings since our prior earnings call. Included in this total are approximately 0.4 gigawatts of third-party module sales and 0.7 gigawatts assistance bookings. In addition, 0.7 of the net bookings is for deliveries in 2022 and 2023. This demand for Series 6 and the strength of First Solar as a trusted partner have resulted in a year-to-date net bookings of 1.8 gigawatts. After accounting for shipments of 1.3 gigawatts in the first quarter, our future expected shipments are 12.3 gigawatts. Internationally, we are pleased with approximately 60 megawatts we booked in Japan since our prior earnings call. Although procurement volume has slowed in Europe, India, and Latin America, we are cautiously optimistic that demand will recover after the COVID-19 pandemic. Turning to slide eight, as mentioned previously, the catalyst for increased solar penetration continues to grow. As such, we expect our mid- to late-stage pipeline of opportunities to continue to support the growth of our contracted backlog. In terms of segment mix, the pipeline of 7.5 gigawatts includes 6.3 gigawatts of potential module sales, with the remaining 1.2 gigawatts representing potential systems business. In terms of geographic breakdown, North America remains the region with the largest number of opportunities at 5.2 gigawatts. Europe represents 1.6 gigawatts with the remainder in other geographies. Finally, operationally, I am very pleased with our manufacturing execution, particularly given these extraordinary circumstances. During March and April, megawatts produced per day was 14.8 and 15.3, respectively. Capacity utilization was over 100 percent in both periods. Manufacturing yield was 94.5, and 95.4%. Average watts per module was 433 and 435 watts. The percentage of modules produced with anti-reflective coating was 97 and 98%. And the arc bend distribution from 430 to 440 watt modules was 94 and 96%. From an entitlement perspective, we have demonstrated capacity utilization of 120 percent at each of our factories in Vietnam and Malaysia. Enabling and sustaining this incremental throughput, coupled with our module efficiency roadmap, gives us confidence we can continue reducing our module cost per watt. I'll now turn the call over to Alex, who will discuss our first quarter financial results and outlook for 2020. Alex?

Thanks, Mark. Given the unique circumstances related to the virus, I'll spend only a few minutes discussing first-course financial results. I'll then provide a framework for how we're evaluating our financial and operational outlook and some of the key risks we see in the current landscape. Turn to slide 9 and starting with the income statement. Net sales in Q1 were $532 million. On a segment basis, the percentage of total quarterly net sales Our module segment revenue in Q1 was 74%. Gross margin was 17% in Q1. The system segment gross margin was 11% and was negatively impacted by low overall revenue recognized in the quarter relative to the system segment fixed costs. This was positively offset by the sale of several early stage development assets in the U.S., Module segment growth margin was 19% in Q1, which was negatively impacted by 10 million of severance and Series 4 decommissioning costs, 4 million of Ohio 2 ramp costs, and 4 million of underutilization and excess yield losses driven by temporary declines in capacity utilization. In the aggregate, this impacted module segment growth margin by approximately 5 percentage points. Operating expenses were 89 million in Q1, And of note, this includes approximately 5 million of legal fees associated with the settled class action and active opt-out litigation, 4 million of severance costs related to the February reduction in force, and 3 million of expected credit losses on our accounts receivable as a result of the economic disruption caused by Code 19. In the aggregate, these items increased Q1 operating expenses by 12 million. As a result of the previously mentioned factors, we had operating income of 2 million in Q1, In Q1, we realized a $15 million gain on sale of certain securities associated with our end-of-life recycling program within the other income line on the P&L. This benefit was partially offset by $13 million of credit losses associated with certain notes receivable from one of our investments. During the quarter, we recorded a discrete tax benefit of approximately $89 million related to the Coronavirus Aid, Relief, and Economic Security Act. The discrete benefit will be partially offset by a related rate impact expected over the remainder of 2020, and we therefore expect a full-year net benefit from the CARES Act of approximately $70 million. Additionally, we expect a shift in our jurisdictional mix of income for the remainder of 2020, which we expect to increase the full-year tax rate by approximately two percentage points. The combination of the aforementioned items led to first-quarter earnings per share of 85 cents. So in the slide 10, I'll discuss select balance sheets and cash flow highlights. Our cash, marketable securities, and restricted cash balance ended Q1 at $1.6 billion. Our net cash position, which includes cash, restricted cash, and marketable securities, left debt, ended Q1 at $1.1 billion. Our net cash position decreased relative to the prior quarter, primarily due to the payment of the $350 million class action litigation settlements. Series 6 capital expenditures, which were primarily related to our second Series 6 factory in Malaysia. A decrease in module prepayments following an increase in Q4 2019 associated with ITC's safe harbor module purchase orders. And prepayment for components included in our module bill of materials. Cash flows used in operations were $505 million in Q1, primarily due to payment of the litigation settlement and the previously mentioned decrease in module prepayments. Finally, capital expenditures were 113 million in the first quarter. In terms of financial and operational outlook, we recognize these are truly unique times, and for that reason, we're taking a different approach to our guidance discussion today. Turning to slide 11, in Q1, we were able to mitigate a significant portion of the impact on our business from the COVID-19 pandemic. However, given the location of our manufacturing facilities in the United States, Malaysia, and Vietnam, the location of the majority of our customers' 2020 module sales in the U.S., and the location of the majority of our project asset sales in the U.S. and Japan, the impact was only felt towards the tail end of the first quarter. To date, the company and its financial results have not been materially impacted by COVID-19. However, given the significant uncertainties that are described momentarily and their potential impact on our operations and financial results, as well as on energy and capital markets, we are withdrawing our full year 2020 guidance. These uncertainties include, but are not limited to, firstly, the number, intensity, and trajectory of COVID-19 cases globally. Secondly, the actions of federal, state, local, and foreign governments in response to the pandemic. Thirdly, our third-party suppliers' ability to continue maintaining production and delivery of raw materials and components to our manufacturing sites. Fourthly, volatility in the capital market, including the tax equity market in the U.S., which may affect the value and optimal timing of our asset sales. Fifthly, logistical constraints, including reduced shipping capacity and port congestion. And finally, the results of local and national efforts to gradually reopen economies. We are, however, providing limited guidance to metrics that we believe are largely within our control at this time. This includes a view on full-year 2020 module production, 2020 CAPEX related to our long-term manufacturing capacity expansion, and a view on operating expenses and the efforts we are undertaking to optimize costs as we work through the current pandemic. Beginning with the module business, we anticipate full-year 2020 production of approximately 5.9 gigawatts, which includes 0.2 gigawatts of Series 4 and 5.7 gigawatts of Series 6. From a shipment and sales perspective, whilst we're effectively sold out relative to our 2020 production plan, going forward we could experience delays in shipments, and the purchase of our PV modules could encounter delays in their ability to take receipts of modules or in the development, financing, and or construction of their projects. We're in active dialogue and collaborating with our customers to alleviate COVID-19 constraints where possible. As a result of these efforts, the timing of module revenue recognition has the potential to move within 2020 or shift from 2020 to 2021. From a long-term perspective, our 2020 Series 6 manufacturing capacity plans remain unchanged. We expect to spend 450 to 550 million of capex in 2020, the majority of which is Series 6 related. And we remain on track to bring our second Series 6 factory in Malaysia online in the first quarter of 2021. As it relates to our systems business, I'd like to highlight the risks related to the timing of our contracted asset sales in the US, Japan, and India. Firstly, government shutdowns and restrictions on businesses and operations have resulted in longer lead times for critical steps in the financing, production, and asset sale processes. We're working relentlessly with relevant counterparties to ensure the timely success of the activities required to execute our project sales. Secondly, during the first quarter, a number of prominent financial institutions increased their credit loss reserves as a result of COVID-19. These reserves have the potential to reduce bank profitability. In the U.S., the availability of tax equity is largely driven by the profitability of a discrete set of financial institutions. Several of these institutions also cite its risk of further deterioration in the U.S. macroeconomic environments, namely a decline in GDP and further increases in unemployment. To the extent that these scenarios hold, these institutions may be subject to further loan loss reserves, thus reducing their profitability and tax capacity. To the extent bank profitability is adversely impacted and the availability of tax equity is constrained in the United States, we continue to believe a legislative solution, such as the ability to receive direct payments in place of investment tax credits, is appropriate to alleviate the structural constraints in the tax equity market. This solution would be directly related to COVID-19 pandemic response and efforts to support U.S. employment. We believe such action is critical to support high-quality solar construction jobs many of which are at further risk to the extent the tax equity market is disrupted, and would advocate for the U.S. Congress to consider this as an approach in the next round of legislative responses to the pandemic. Thirdly, project valuations could be impacted by volatility and availability of capital in the equity and debt financing markets. We've seen return expectations of long-term sponsor equity hold flat, although base interest rates have declined since the start of the year. Of note, infrastructure funds achieved a strong fundraising total for Q1. Utility-scale solar fits well into this narrative as a hedge to equity market turbulence with long-term useful lives and cash flow profiles without exposure to input commodity fuel costs. From a debt perspective, while base interest rates have declined since the start of the year, credit spreads across investment and non-investment-grade debt have widened. At the same time, the CARES Act has provided a beneficial temporary increase in interest deductibility. Ultimately, the amount, cost, and tenor of debt and its value to a project will be determined by the overall creditworthiness of the project. Whilst the uncertain scope and duration of COVID-19 has impacted global markets, we continue to prioritize maximizing project valuation. Accordingly, we may elect to hold our project assets on balance sheets for an extended period based on strategic opportunities or market factors. As it relates to operating expenses, while the pandemic has presented new challenges, even before the outbreak, we had already been proactively optimizing our business and long-term sustainable cost structure. For example, in September 2019, we announced the transition to a third-party EPC execution model to enhance project development cost competitiveness and de-risk project execution for the company. And our final project being constructed by our in-house EPC team is advancing towards completion. In February of 2020, as part of a broader business and cost structure review, we affected a reduction in force. In May of 2020, we affected a continuation of this reduction in force to streamline and further optimize each line of business. Although we expect this reduction to lead to $8 million in long-term run rate savings, in 2020, we expect to see severance-related impacts from this action of approximately $2 million. From the combined February and May reductions, severance now totals $12 million, expected long-term run rate savings of $33 to $43 million. In February, during our fourth quarter earnings call, we also announced that we're evaluating strategic options for our U.S. project development business. We continue to work with our financial advisors to determine the optimal path and timing for this process. I would like to note that the current global business and operational impacts from COVID-19 may result in companies focusing more on internal initiatives rather than on pursuing new partnerships or M&A deals. And as a result, this may impact the timing of the process. Each of these proactive and strategic decisions align with our vision to excel in technology, cost, and product leadership, to balance growth, profitability, and liquidity, and to enable us to best position ourselves both during this disruption as well as for the long term. Finally, our $1.6 billion gross and $1.8 billion net cash position remains a strategic differentiator that enables not only stability, but also growth and innovation in periods of both economic prosperity and uncertainty. We intend to vigorously maintain this strong liquidity position, and at this time do not expect to draw on our evolving credit facility. Turning to slide 12, I'll summarize the key messages from today's call. Firstly, we had Q1 earnings per share of $0.85 and quarter end net cash of $1.1 billion. Secondly, we achieved fleet-wide capacity utilization of approximately 100% during March and April, and have demonstrated capacity utilization of 120% at each of our factories in Vietnam and Malaysia, which gives us confidence that we execute on our cost reduction roadmap. Despite challenges relating to the pandemic, we're pleased with both our operational and financial performance, achieving results in line with our pre-COVID-19 expectations. Thirdly, demand for our Series 6 technology remains strong, and we have continued success adding to our contracted pipeline, with net bookings of 1.1 gigawatts since the prior earnings call and 1.8 gigawatts of bookings year-to-date. Finally, given the significant uncertainty posed by the current pandemic, we are withdrawing our previous full-year operational and financial guidance. We are, however, at this time able to provide full-year 2020 production guidance with approximately 5.9 gigawatts. full year 2020 capital expenditure guidance of $450 to $550 million, and full year 2020 operating expense guidance of $340 to $360 million, which includes $50 to $60 million of startup expenses. And with that, we conclude our prepared remarks and open the call for questions. Operator?

And to ask a question during this time, you need to press star and the number one on your telephone keypad. To draw your question, press the pound key. And we have our first question from a Mr. Philip Shin. Mr. Philip, please go ahead.

Hi, everyone. Thanks for the questions. First one is, you guys announced a large 400 megawatt order for modules yesterday, I believe, with the National Grid subsidiary for delivery in 2022. What kind of pricing were you able to secure with that order? And beyond that order, can you talk through how pricing is evolving in general? Our checks suggest module pricing globally could be down an additional 10% to 15% from current levels given oversupply. So to what degree is that impacting your conversations? Thanks.

Yeah, Phil. I guess on the pricing side, again, one of the things I think to continue to emphasize and one of the points I want to continue to make is, again, how we – manage our business and how we continue to try to differentiate ourselves and continue to position our technology to capture that ultimate value in the marketplace. If you look at it on a year-to-date basis on third-party module sales, everything that we've booked year-to-date, so call 1.1, 1.2, somewhere close to that number of the 1.8, the aggregate bookings are... have a three handle on them still. So if you look at the average that we've recognized so far against on a year-to-date basis, it still has a three handle on it. Now, as you go further out, there's two things that will show you a different complexion around the ASPs. One is how far out are we booking into. And some of those model sales, like in particular the one that you referenced, is actually for shipments in 2022 and deliveries, I think, even start to touch into 2023. So that's one thing. So the further out we go, as you would anticipate, the ASPs will have some amount of erosion as you move forward. The other is geographies of which we're recognizing where the models are going to be shifted. So the regions where we have the best value creation, hot human climates in particular, we're going to see higher ASPs. So if I had to give you kind of a, if you looked at the average, you're going to see an advantage of probably to the average a penny, penny and a half above the average when we're in kind of very core sweet markets for us like a Florida or even a Texas, Georgia. If you go north, the further north you go, you're going to see some downward pressure on the ASP, and so you may be a penny or a penny and a half lower than the average if you're in Illinois. as an example. And so the order that we booked with Geronimo, which is, to your point, affiliated with or subsidiary of National Grid, some of that volume, a significant portion of that volume is going to be further up north in markets where we don't have as strong an energy advantage. So that is further out in the horizon, so it sits out into the 22 and even touches 23. So where that volume is going to be north and then further out on the horizon, you're going to see a slightly lower ASP. And so across that average we've booked this year, does some of that volume have a two, a very high end, a two handle on it, but a very high in the two range? It does. The average is still north of three. And even when you go out into further in the horizon, call it out into 22 and 23, if we're in a market or hot, humid environment, we're still seeing three handles. Okay, that's what we're seeing right now. Now, again, we have plenty of time to be patient. I'm not beholden to excess supply. Our book is full for the next year and a half. And so we can be very selective. We can engage with customers who value our technology, value our relationship with First Solar that they know we'll deliver, we'll honor against our contracts, and we'll provide a high-quality product. So as you get into that horizon, and customers are looking to procure in that longer-dated horizon, I think we've got a unique value proposition. Plus, a lot of that volume that we did with Geronimo, I think almost all of it, is for our new copper replacement product that will create different advantages, long-term degradation, even an improved temperature coefficient. So we're happy with that booking. It's a great partnership relationship we've had with them, and we're very happy with being able to secure that volume. And I would say on balance that everything I've seen so far, I'm still happy with the ASP environment that we're in, given some of the numbers that you quoted and, unfortunately, maybe some of our other competitors who have access or an open book is maybe a better way to say, yeah, they're going to see very challenging near-term ASPs.

And we have our second question from Mr. Brian Lee. Mr. Lee, please go ahead.

Questions, and hope everyone is doing well. I guess the first question I had was just on the gross margins in modules. They were up maybe 50 basis points versus Q4, like for like. If we exclude some of the one-time items you highlighted, Alex, I guess I would have expected a bit more improvement with Series 6 volume growing here and Series 4 also lower in the mix and given the ongoing cost reduction. So the question would be just, you know, the 10% decline in module production costs in 2020, is that still on track for the year? And then is there anything else in the quarter? you know, that might have limited the margin expansion versus where you, you know, versus where you ended 2019. And then, you know, second question, if I could just squeeze this in, is on the systems business, just wondering, you know, that seems to be an area where you might have the most COVID-19 risk. So, how much of your original revenue guidance for the systems segment this year was based on projects, you know, that had PPAs but hadn't been sold versus projects that had already been sold and just need to recognize revenue ratably as they're complete this year? So, Just trying to see what's at risk, if it's really about the project sales that you outline or the projects that don't have sales status in the 10K.

Thanks, guys. On the gross margin, we commented on the pieces that are having a negative impact to the quarter. I can't talk much more beyond that. What I can say is that when you talk about the 10% reduction over the year, I'd say we're very pleased with how things are going in the first quarter. If you look at We've had a couple of COVID-related expenses, but stripping those out, I think we are very pleased with the manufacturing performance and the cost performance. I'd say we believe we're on track for that reduction over the year as of Q1. As it relates to the systems business, so when we guided through the year, we said around 30% of the revenue was coming out of the systems business. If you look in the queue, you'll see in the pipeline table, there's very limited assets there that have already been sold while we're continuing to recognize revenue. Those limited assets remain are up in around 90 or above percent complete. So the majority of the systems revenue for the year was coming from assets that have yet to be sold. Those are assets both in the U.S. and in Japan. And so that's what, you know, one of the significant reasons when we looked at on the guidance that we chose to do in terms of not the giving guidance, the significant drive of that was uncertainty around the systems business. And that relates to uncertainty around the timing of financing. And if you look in the US, I think the tax equity and debt markets as they stand are generally open for deals that were begun prior to the pandemic. We have some assets where financing is in place, others where we're still looking to finance those deals. I think capacity for 2020 exists, 2021 tax capacity. is still a lot less certain as institutions are grappling with the impact of the crisis and what it means for their future tax positions. On the debt side, markets are generally open, but although we've seen a surge of issuance on the investment-grade side recently, I think spreads have widened for better credits. So I think there's a piece of it around financing, but there's also significant logistical challenges you ought to remember on the system side. So asset sales involve multiple counterparties and significant logistical challenges to get done. So when we look at our portfolio, I think we believe that even those that aren't financed or sold are well positioned to get the financing they may need. We may sell them under a typical sales structure where the project is sold and the counterparty takes financing construction risk and that becomes a responsibility to purchase it. We may alternatively need it to present better value for us to do that financing and potentially even hold assets for a little bit longer. So I think a lot of what you're seeing is a timing issue. It's not a fundamentals issue. But there are assets we hold that have yet to be sold and some that have yet to be financed, and that's one of the key challenges to the guidance.

Yeah, and the only thing I'll add on the gross margin, Brian, when you look at a sequential, a couple things that are in the mix in there. One is that the sequential ASP is down for both four and six, partly because the ASPs in the fourth quarter were benefited from the safe harbor pricing that was in the market at the time because, as you know, everybody was trying to capture their safe harbor and some of them took delivery of that product by the end of the year. So you saw a little bit better ASPs associated with that. So you see a little bit of that. The other is that there's still a reasonable amount, you know, volume is down pretty significantly. So you see a pretty big drop in volume There's still a reasonable amount of Series 4 that sits in the first quarter. As we move forward, the margin profile will continue to improve. There's about a close to five percentage point difference between Series 4 and Series 6 when you look at it on a normalized adjusted basis. And as we move forward, you're going to see volume shift and move 100% to Series 6 as we get into the second half, for sure. A little bit of Series 4 in the second quarter, but after that, it's all Series 6. And then, as Alex indicated, you've got the benefit of the cost reduction roadmap as we progress through the balance of the year. And the fleet, as Alex said, I think we're pretty happy with where we are with the fleet. There is some headwind that we're dealing with a little bit in Ohio and even Malaysia. Vietnam is performing extremely well. It's really the only factory that has really not been impacted in any way. Both Malaysia and Ohio have seen some impact. What we'll probably most likely see is Vietnam will overperform for the year, and they'll make up for some of the challenges that we've experienced here in Ohio as well as Malaysia.

And our next question comes from a Michael Weinstein. If you please go ahead, sir.

Hi. Thanks for taking the questions. This is Mahim on behalf of Michael. Alex, you spoke about the timing issue with the systems in the previous question, but could you talk about if there are any timing issues on the module side where you might be delaying the shipments on the customer's request, and how should we think about that in relation to any under absorption on production versus shipments and that impact on the cost later this year?

Yeah, so the impacts on the model in some ways are similar. So when I say it's one of the significant reasons for us having lack of clarity in our future guidance is the systems business. The issues we face on the systems business are the same issues our customers who are buying modules from us face on their projects. So a lot of our module volume is going to customers who have projects that have financing, either in place or committed. However, there may be assets where that isn't the case. And if so, we may see customers requesting delays to allow them to close financing. And if that's the case, we'll work with customers so we can to accommodate their schedules. So I think there's definitely some overlap there. There's also some more simple issues on the module side. We may have shipping constraints, getting modules to their final delivery point, be that sea, rail, or road. And we may find the same from customers where they have constraints taking delivery reports from project sites. So from our side, one of the large drivers of lack of clarity around guidance was the systems business, but there are some of those same forces at play as it relates to the module business. Relating to the last question around gross margin, I think we're going to see some of that play out in Q2 as well. We already have a view of some module shipments being delayed out of Q2 into Q3 based on some of those factors I spoke about just now. As it relates to cost, it's not going to have a direct impact on our manufacturing costs, so it will have an impact on timing of rev rec. Gross margin will be impacted with lower revenue. and therefore lower gross margin, you have less absorption of the fixed cost structure that sits across both our module and system business. But otherwise, we see the manufacturing business continues to run. The cost of a base inventory, and we'll just see a timing of rev rec and gross margin shift largely out into the second half of the year.

And our next question comes from a Mr. Ben Callow. Mr. Vinh, please go ahead.

Hey, guys. So my first question, there's a bunch of big projects out there that I'm reading about. Where are you on being on those? So like these gigawatt-type projects, I know you're clear of them before. And then my second question is, you went through all the, I think, four things. about guidance before this. But I calculate maybe like 40 cents of project business. And so I'm just wondering why you pulled guidance. And I think you guys have good visibility, but can you talk to your visibility on that? Thanks.

Yeah, so Ben, on those large projects, I'm assuming maybe you're referencing some of the projects in the Middle East, which, you know, They've been big elephant hunting type of opportunities for module producers for a number of years. We were in early in some of those opportunities. We did the very first DEWA project. We provided the modules for the second one. What's happened ever since then on some of those large opportunities is people are just going extremely aggressive and very low pricing that is uneconomical. I guarantee that whoever's providing those modules, unless they're getting even incremental incentives to what they already have being provided to them, that the model price that they're trying to bid into those projects is that they're probably barely covering variable costs of the product. We've chosen not to participate in that. That's one reason why we have the strength of the contract backlog that we have. We can be selective and We're not looking to entertain and willing to participate in those types of opportunities, but we have many other places that we can go to and capture better value for our technology. As it relates to visibility, the biggest impact that we're having around guidance is the uncertainty of capital markets. There's three large projects. from a revenue and margin contribution standpoint, there's American Kings and Sunstreams II here in the U.S., and then there's the Ishikawa project in Japan. There's a couple of other projects as well, but those are really the three largest revenue and margin contributors. Right now, we don't have great clarity around what's going to happen in the capital market, and also the you know, we have expectations of what we think of value that is embedded in those assets. And I don't want to just go out and sell just to be holding to an earnings or revenue commitment to the year if it means I'm going to get diminished value. We want to be able to optimize that value. And, you know, we've been very selective with doing that in the past. And we may, in this case, end up holding some of those assets longer than we would have otherwise because we can capture better value in markets normalized back. I think there's a lot of uncertainty right now. As Alex indicated, there's some positive indicators in the capital markets and there's potentially issues in the capital markets. Until everyone can see what happens and evaluate from their own perspective, we won't know until we know. we have to get on the market and really get an update. We've got indication of value of assets pre-COVID, and what unfortunately we need to do now is get a better indication of what the valuation of those assets would be post-COVID. So systems business is a piece of it, but the other thing that Alex mentioned is that we do have firm committed contracted backlog and sold out for the year, so we have that. But in a high percentage of our third-party module sales, customers have already gone out and they've closed on financing. There's a difference between us. I mean, we obviously are balance sheet financing. Most of our customers go out and they get construction financing, tax equity, bridge loans, and everything else. So they've already got committed capital. So a good percentage of our backlog has committed capital. But there's other portion of our module shipments that our customers have not closed on their financing yet. So they need to do that. Does some of that delay? Does some of that push their their schedule, and we don't know yet. And so we have to get that insight to have a higher level of conviction around the module business and the contribution from revenue and earnings for the year. We've been in close contact with a number of them. They are still highly confident in their ability to close. They're getting signals. from the banks, whether it's the debt side or the tax equity side, and they feel comfortable, but they're still uncertain. We felt that given where we are right now with all the uncertainty that we have, the right thing to do is to pull guidance. Now, I can, and I think Alex said in his comments, we are very happy with how the year has started. We're very happy with everything that we've seen, and as we move forward, if things return to normal, what the world of the capital market was like in February, then we feel very confident we can still deliver against commitments that were made in February, but I don't know yet. There's so much uncertainty that we feel right now, let's pull the guidance, make sure people understand where we are. and we'll continue to provide the best information when we learn more, especially around, you know, the sell-down of our projects, or if there's any customers that have, for whatever reason, difficulty closing financing for their projects, and then our project, you know, module shipment schedule gets pushed at all.

Yeah, Ben, I just want to reiterate that. I think this is a timing issue more than a business fundamentals issue. So, you know, if you look at the comments you made in the script, underlying demand is strong as shown by the bookings reported, including... 0.8 gigawatts since the end of the quarter, right, after the end of the Q date, which was all during the COVID-19 pandemic. If you look at the other businesses, the underlying manufacturing fundamentals are strong, shown, demonstrated really good throughput capacity at the factories. Efficiency is good. Cost barring COVID-specific impact is good. CapEx capacity plan are on schedule. The OpEx metrics continue to improve. So we have the issues that we just talked around, especially around business, But all this being said, the challenge with guidance is it requires ability to forecast timing, and we just don't have that clarity today. But there's a fundamental difference there.

And our next question comes from a Mr. Colin Rush. Mr. Rush.

Thanks so much, guys. You know, with those customers, can you give us a sense of the order of magnitude of those customers that do not have committed capital at and whether you're willing to step in in terms of being a finance partner with those projects.

Yeah, so, I mean, as you can expect, there's a portion of that. We're a module backlog utility-owned generation, so if something's going in to be rate-based, it's already been approved through the commission and all that, I mean, that's not a risk item, right? If anything, we're being directed aggressively to continue to... to produce and to make sure we deliver against commitments and schedules and everything else, right? So there's a portion of that. It's really the, it's more the PPA for, you know, segmented for, you know, primarily for independent power producers or developers. And, you know, that's really where the risk runs. And I would say the stuff that we're anticipating to deliver through Q2 and Q3 largely is financing is in place. Where you start seeing a little bit more of a gray area is projects that would be delivered in Q4 that really support CODs that start out in, you know, there would be projects that would hit COD into 2021, call it the second half of 2021. So, we're about a year or so out from where those CODs are, and construction hasn't actually started in those places. So and you gotta remember this disruption has been with us now almost two months and so you know people were going to go out sort of hit the capital markets and kind of the end of Q1 beginning of Q2 that largely would have put their construction financing tax equity bridge financing in place that then would have funded their construction and deliver against CODs in the second half middle of 2021. So it's really the volume that sits in our fourth quarter that is our most most exposure. The stuff Q2, Q3, not as much. And again, if anything, more directly tied to the utility-owned generation, which a good proportion is, of that volume is less risk at this point in time. I don't have the exact percentages that I can put you in each bucket, but I just give you some color around where the exposure sits.

Yeah, and I do think we'll see some impact to Q2 and Q3, but those are going to be more related to logistics than they are to financing. It's going to be a function of ability to ship and ability to receive relative to the plan versus financing, which for those projects is typically already in place. As Mark said, the financing challenges are more likely for later in the year deliveries or deliveries out in 2021.

And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.