First Solar, Inc.

Good afternoon, everyone, and welcome to First Solar's second 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 Mr. Ennis from First Solar Investor Relations. Mr. Ennis, you may begin.

Thank you. Good afternoon, everyone, and thank you for joining us. Today, the company issued a press release announcing its second quarter 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 Alice Bradley, Chief Financial Officer. Mark will begin by providing a business technology update. Alice will then discuss our financial results for the quarter as well as our outlook for 2020. Following the 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 when 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. We continue to hope each of you are managing well as the pandemic continues. As we emphasized during our May earnings call, our COVID-19 response centers on balancing our top priority of safety with meeting our commitments to our customers. This approach, together with our associates' dedication and the strength of our differentiated business model, enabled us to deliver solid financial results for the second quarter and year-to-date with earnings of $0.35 per share and $1.20 per share respectively. Alex will discuss our results in greater detail. Starting on slide three with our module business, we remain pleased with our operational performance with strong metrics across the board. Year-to-date, we have produced 3.5 gigawatts, including 3.3 gigawatts of Series 6 modules. Fleet-wide capacity utilization has remained over 100% for the month of May, June, and July. The fleet-wide capacity utilization is led by our international factories in Vietnam and Malaysia, which are progressing towards their previously demonstrated capacity utilization peak of 120% of initial design nameplate. Domestically, our Ohio 1 and 2 factories experienced two and a half days of idle production in June, but still achieved respective utilization rates of over 100% and 94% during June. The unplanned downtime was caused by railway logistics constraints, which resulted in a delivery delay of certain bill of materials supply. As a result, we accelerated previously planned factory upgrades from the third quarter to minimize any impact to our full-year production plan. On a fleet-wide basis in July, megawatts produced per day was 15.9 megawatts. Manufacturing yield was 96.4%. Average watts per module was 435 watts, and the arc then distribution from 430 to 440 modules was 98%. Vietnam had a particularly strong start to the quarter with capacity utilization of 114% and manufacturing yield 100 basis points above the fleet average. We are encouraged by the operational start to the quarter and the momentum it provides to further improve our cost per watt. Regarding our capacity roadmap, we remain on track to commence commercial production at our second Series 6 factory in Malaysia in the first quarter of 2021. However, third-party equipment installers, as well as our U.S.-based associates, are subject to international travel restrictions as a result of COVID-19. While we continue to work with relevant agencies to support this essential travel in a safe manner, incremental delays resulting from these restrictions may impact the timing of initial production. Since the previous earnings call, we have not experienced any significant operational disruption from our suppliers' inability to maintain manufacturing operations. Much of our ability to mitigate this impact today stems from our supply chain strategy, which emphasizes corporate and geographic diversity of supply. In certain situations where we source critical raw materials from a single vendor, we ensure the product can be manufactured in multiple geographies. From a shipping and logistics perspective, the most significant impact to date is the consolidation of shipping routes, which has resulted in constrained capacity. We have factored this into our logistics strategy and are working to mitigate these impacts. Separately, port congestion has recently improved in Europe and the United States, although we continue to monitor this risk. Turning to our assistance business on slide four. Our EPS results were favorably impacted by a successful sale of our 123-megawatt American Kings project. We are pleased with this result, capturing competitive market value for this project despite capital market dislocation. From an EPC perspective, in July, we declared substantial completion on the last remaining project being constructed by First Solar EPC. This project has experienced the culmination of unforeseen weather and COVID-19-related delays and incurred significant additional costs during the quarter, which unfortunately weighed on our Q2 results. Alex will later discuss the P&L impact as well as provide an update on the capital markets for system projects. With regards to our U.S. project development business, as discussed on our Q1 earnings call, COVID-19 had affected the timing of our evaluation of strategic options for the business. In June, however, in collaboration with our financial advisors, we made the determination that the market is now in a better position to evaluate potential partnerships, sales, or other transactions. Accordingly, in June, we formally launched this process. We do not intend to discuss further developments except to the extent the process is concluded or is otherwise deemed appropriate. With regards to our O&M business, during the third quarter of 2019 earnings call, we indicated that we were evaluating the long-term cost structure, competitiveness, and risk-adjusted returns of the business. In addition, during our fourth quarter 2019 earnings call in February 2020, we discussed that we were continuing to evaluate our O&M strategy to ensure that this business is able to achieve its full enterprise value potential and continued market leadership. Our original entrance into and continued presence in the O&M market was a natural extension of our utility-scale solar development and EPC capabilities. It helped create a vertically integrated systems platform which allowed us to capture an additional profit pool. However, with our transition to a third-party EPC execution model, the increase in maturity of the U.S. solar O&M market, and our evaluation of strategic opportunities for our U.S. project development, development business, the strategic thesis behind our O&M business has changed. From a financial perspective, as we indicated during our December 2017 analyst day, our contracted O&M gross margin at the time was above 30%, largely as a function of legacy contracts. We also indicated that as we expected gross margin for new O&M business to decline to a range of 10% to 30%, depending on the risk profile and the contract tenor. Relative to this expectation, with increased competitive pressure and declining PPA prices, we have seen new contracts trend towards the lower end of this range. While we have been able to partially offset the impact of this gross margin percentage decline by increasing the scale of our O&M portfolio, in order to further optimize the business and maintain our market-leading position, we would need to continue increasing the business scale as well as enhancing the range of O&M product and service offerings. To gentrify incremental capital investment in O&M, the financial returns would need to exceed those available from further investment in our module business. Earlier this year, we received a compelling unsolicited offer to acquire our North American O&M business from NovaSource Power Services, a portfolio company of Clarivis Group, a strategic investor who is scaling a market-leading solar O&M platform following their recent acquisition of SunPower's utility-scale O&M business. We believe their strategy for scaling and growing the business will enable the O&M enterprise to reach its full potential. Accordingly, this week we signed an agreement to sell our North American O&M business. We believe this transaction captures compelling value, will maintain our history of high-quality customer service, and with additional scale and capital, will further enhance the capabilities of the business. Upon closing of this transaction, which is expected by year-end, Approximately 220 first solar O&M associates are expected to join another solar O&M platform. Turning to slide five, I would like to highlight our bookings and shipment activity for the quarter. In this challenging economic environment, demand for our Series 6 product remains strong. Since the prior earnings call, our net bookings are 0.8 gigawatts. These new bookings include approximately 0.3 gigawatts of third-party module sales and 0.5 gigawatts of systems bookings. In addition, 0.4 gigawatts of these bookings are for delivery in 2022. Despite our success in booking these additional volumes in the U.S., we believe the current uncertainty of tax equity availability for projects scheduled for completion in 2021 and beyond as well as the uncertain status of a legislative solution, such as the ability to receive direct cash payments in place of direct investment tax credits to alleviate this tax equity availability constraint, is a headwind impacting our ability to book certain opportunities in late-stage negotiations. We currently have approximately 0.9 gigawatts of opportunities in late-stage negotiations with terms, pricing, and conditions near final agreements. We believe the current uncertain tax equity environment has contributed to the delays in finalizing these negotiations and accordingly has delayed our ability to book these volumes. Note, although not booked, these volumes are reflected in our late-stage opportunity pipeline. Strong Series 6 demand, coupled with First Solar's strength as a trusted partner, underlines our current bookings and late-stage opportunities, which, when combined, total 1.7 gigawatts. During the second quarter, we shipped 1.2 gigawatts, which was approximately 300 megawatts below our expectations. Delays in shipments were due to a combination of previously mentioned port congestion, project site labor constraints, and interconnection and financing delays. After accounting for second quarter shipments, our contracted backlog remained strong with future expected shipments of 11.9 gigawatts. Our ability to forward contract module supply creates a position of strength. which enables pricing discipline and helps to mitigate the financial impact of variable spot pricing for solar modules. We remain effectively sold out through 2020 with only two gigawatts left to sell of our expected 2021 supply with a 21 mid to late stage pipeline of 3.8 gigawatts, which includes the previously mentioned 0.9 gigawatts in late stage negotiations. we have a path to fully contract our 2021 supply plan over the next few quarters. With regards to our systems booking in July, we awarded two PPAs for projects located in Ohio and North Carolina that support the clean energy needs of a Fortune 500 company starting in 2023. Separately, the building of the recent PPA we signed with Dow prior to the first quarter earnings call, we continue to see strong demand from corporate customers who are becoming increasingly proactive in reducing their carbon footprints. As America's solar company, we're proud to support the renewable energy objectives of corporations with our Series 6 technology, which has the lowest carbon and water footprints available in the market today. As a reflection of this sustainability leadership, we are pleased to announce earlier today our commitment to the RA100 initiative, joining the likes of Apple, Facebook, Kellogg, and Microsoft, all customers of clean energy generated by First Solar Technology. In joining this initiative, we are targeting powering all of our U.S. operations with 100% renewable energy by 2026 and our global operations by 2028. As shown on slide 6, Our mid to late stage pipeline of opportunities remains robust and has increased by 0.3 gigawatts despite bookings of 0.8 gigawatts since the prior earnings call. In terms of segment mix, this opportunity pipeline of 7.8 gigawatts includes approximately 7.3 gigawatts of potential module sales with the remaining represent potential systems business opportunities. In terms of geographical breakdown, North America remains the region with the largest number of opportunities at 5.9 gigawatts. Europe represents 1.7 gigawatts and the remainder in Asia Pacific. As a reminder, amid the late stage, pipeline reflects those opportunities we feel could book within the next 12 months and is a subset of a much larger pipeline of opportunities which total 15 gigawatts of opportunities in 2022 and beyond. Turning to slide seven, I would like to provide an update on manufacturing costs and technology outlook. Overall, I'm very pleased with our manufacturing execution, especially in light of the current environment. Much of our ability to thus far mitigate the operational impact of COVID-19 stems from our proprietary manufacturing technology, which enables us to produce a cattail module within a single factory in a matter of hours. Our fully integrated manufacturing process is a competitive advantage relative to Krypton silicon technology, which is manufactured over the course of several days across multiple sites. While we have largely mitigated supply chain disruptions to date, the impact of the pandemic experienced in other industries underscores the importance of supply chain diversity. As the only U.S.-based company and only alternative to Krypton silicon technology among the 10 largest solar module manufacturers globally, First Solar provides a domestic supply security and enables the United States and global markets to reduce their over-reliance on imported and government-subsidized panels from China. As we look to the future, we believe a differentiated technology, an advantage cost structure, and a balanced perspective on growth will enable us to continue succeeding in the global marketplace. By the end of 2021, we expect to have 8 gigawatts of Series 6 mainplate capacity across factories in the United States, Malaysia, and Vietnam. Note, this capacity is over 120% higher than the original mainplate envisioned when we launched Series 6. As we evaluate the potential for future capacity expansions, we may seek to further diversify our manufacturing presence, although we have made no decisions at this time. Several factors in this evaluation include, firstly, geographic proximity to solar demand, where first solar has an energy or competitive advantage, and which could mitigate freight-related costs. Secondly, the ability to export costs competitively to other markets. Thirdly, cost competitive labor, low energy costs, and low real estate costs. And finally, a cost-competitive supply chain to support the source of raw materials and components. From a cost perspective, we previously indicated during our December 2017 Analyst Day that we expect to reduce our 2020 lead line cost per watt by 40% relative to the Series 4 2016 cost per watt. We have achieved this target at our Vietnam manufacturing sites and are on track to do so in Malaysia by the end of the year. Our Series 6 factory in Vietnam, which to date have been largely unaffected by the COVID-19 pandemic are a strong leading indicator for the full potential of the entire manufacturing fleet. Secondly, we indicated that despite an increase in the proportion of module volume coming from our higher-cost Ohio factories relative to where we ended up in 2019, we expect our fleet-wide cost for Watt to decline approximately 10% over the year. Despite the unforeseen challenges posed by the pandemic, We remain on track to achieve this objective. We continue to believe there is significant headroom and further enhance our competitiveness of our Series 6 technology and we relentlessly challenge ourselves on commercializing the next generation of disruptive thin film technology. Simply put, we continually strive to accelerate our pace of innovation in pursuit of our near and mid-term technology objectives. In the near term, we are focused on successfully implementing our copper replacement program in our lead line during the second half of 2021 and fleet-wide during 2022. This implementation is expected to further increase the Series 6 energy advantage due to increased wattage, significantly reduce long-term degradation, and improve temperature coefficient. Each of these improvements is expected to create value for our customers. which will facilitate Series 6 bookings in 2022 and 2023, with the module bins increasing from 460 watts to 480 watts over this period. Of note, in July, we produced the first copper-replaced Series 6 modules, which will be utilized for initial preliminary testing and validation. While we remain largely on track for our implementation, COVID-19 and technical challenges remain as a risk to the project completion timeline. In the mid-term, we remain focused on achieving our goal of a 500-watt module, which is at a standard test condition glass area efficiency of 20.8%. This technology enhancement will further increase the customer value proposition and cost competitiveness of Series 6. It is important to note, unlike recently announced increases in Christmas silicon wattage made possible through module size increases, the planned series 6 wattage increase is expected to be driven by a 15% increase in energy density without changing our model form factor. In other words, we do not see increasing our customers' balance of system or design costs in order to achieve the 500 watt goal. Additionally, the benefits of improved temperature coefficient and significantly reduced long-term degradation, coupled with our continued spectral response advantage, will amplify the benefits of increased energy density and are expected to increase lifecycle energy beyond 15% without adding cost to the module device. As shown on slide 8, in support of our near, mid, and long-term goals, we have recently announced a series of changes in our technology and manufacturing senior leadership. Firstly, Marcus Gluckler has been appointed Co-Chief Technology Officer alongside Rafi Garabedian, our CTO since 2012, and will join First Solar's executive leadership team. Markets will drive our Series 6 platform, device, and efficiency improvement roadmap. This will enable Rafi to focus on advanced research and development to create the next disruptive CAD cell technology beyond Series 6. A particular area of focus will be to evaluate moving beyond a single junction device and leverage the high bandgap advantage of Cattell into a multi-junction device. The objective would be to create a market-leading high-efficiency technology that remains energy advantage. Secondly, as recently announced, Timon Dijon, our chief operating officer, has decided to retire effective April 2021. Timon has played an essential role in establishing the company's international Series 6 module manufacturing footprint with five announced factories currently in production and a sixth on track to commence production during the first quarter of 2021. I'm appreciative of Tymon's invaluable leadership and his many significant contributions to First Solar over the years. Tymon will continue to serve as COO during his eight-month transition period overseeing certain priority projects. In addition, during this transition, Tymon will transfer the majority of his responsibilities Harlewski, Chief Manufacturing Officer, Kunta Kumar Verma, Chief Manufacturing Engineering Officer, and Pat Buehler, Chief Quality and Reliability Officer, each of whom will join First Solar's Executive Leadership Team. We believe the addition of Marcus, Mike, Kunta, and Pat to the Executive Leadership Team will enhance our manufacturing, technical, and commercial capabilities and set the company up for continued growth. I'll now turn the call over to Alex, who will discuss our second quarter financial results and outlook for 2020.