First Solar, Inc.

Good afternoon, everyone, and welcome to First Solar's third 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'd now like to turn the call over to Mitch Ennis from First Solar Investor Relations. Mr. Ennis, you may begin.

Thank you. Good afternoon, everyone, and thanks for joining us. Today, the company issued a press release announcing its third 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. Alex will then discuss our financial results for the quarter and provide updated guidance 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 past results to differ materially from management's current expectations, including, among other risks and uncertainties, the severity and duration of the effect 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.

Thank you, Mitch. Good afternoon, and thank you for joining us today. I would like to start by thanking the First Solar team for delivering a solid third quarter. Our operational and financial results were strong, and market demand for our Series 6 technology continues to be robust. We had a number of highlights since our last earnings call, including record Series 6 quarterly production of 1.5 gigawatts, solid bookings of 1.6 gigawatts, commercial production of a 445-watt module, and earnings per share of $1.45, bringing our year-to-date earnings to $2.65. Our Q3 financial results were driven by a Module 7 gross margin increase, as well as sales of systems projects. While significant uncertainty remains as a result of the COVID-19 pandemic, we are pleased with our year-to-day performance as a result of the improved visibility provided by the closing of certain systems project sales, we are reinstating financial guidance for the fourth quarter of 2020. Alex will discuss our financial performance and guidance in greater detail. Turning to slide three, I'll first discuss our module segment performance. Year-to-date, we have produced 4.9 gigawatts, including 4.7 gigawatts of Series 6, with each factory averaging over 100% capacity utilization during the third quarter. throughput was led by our international factories, which averaged 118% and 119% capacity utilization September and October month to date. Domestically, our Ohio 1 and Ohio 2 factories are performing well, averaging 109% and 121% over the same period. On a fleet-wide basis, in September and October month to date, megawatts produced per day was 16.9% and 17.9% Manufacturing yield was 96.6 and 97.2%. Average watts per module was 436 and 438 watts. And the arc bin distribution from 435 to 445 watt modules was 92 and 96%. At the time of our third quarter 2019 earnings call, we had recently validated a new world record 447 watt Cattell module. Building on this, we have implemented these learnings and started commercial production of a 445-watt module. Continuing this momentum, over the next few quarters, we expect our top bin to increase further to 455 watts. In September and October month to date, our Vietnam factories achieved a manufacturing yield of 98%. We continue to implement the learnings and best practices across the fleet. with a fleet-wide yield target of 98% for our current manufacturing footprint by the end of 2021. In the future, we see the potential to incrementally improve beyond this target. As noted previously, continued throughput, module watts, and manufacturing yield improvements will help drive down our module costs a lot. Since the previous earnings call, we have not experienced significant disruption to our manufacturing operations from the pandemic. Much of our ability to mitigate the potential impact stems from our vertically integrated manufacturing process, diversified supply chain, and differentiated cattail technology. By contrast, the largest PV module manufacturers globally produce crisp and silicon modules using a batch process technology with multiple process steps. None of these manufacturers are fully vertically integrated and rely to varying degrees on third-party sourcing of polysilicon, ingots, wafers, and cells. Productions of a single crisp and silicon module requires each of these process steps, several factories, and multiple days. During the third quarter, several polysilicon producers experienced significant disruptions that hindered their ability to maintain manufacturing operations. This disruption, coupled with a supply chain largely concentrated among a few Chinese companies, reduced the available supply of polysilicon. The polysilicon price increase that followed resulted in downstream pricing pressures for wafer cells and modules, and consequently for project developers. While the market for polysilicon has since improved, these events highlight the benefits of our vertically integrated manufacturing process, which enables price and delivery time certainty for customer orders within our contracted backlog. From a shipping and logistics perspective, the most significant impact to date remains the challenging global freight market. While limited freight capacity has increased spot rates, our logistics strategy, which primarily relies on forward shipping contracts, has helped reduce this impact. Regarding our capacity roadmap, we have received the major equipment required to commence commercial production at our sixth Series 6 factory in Malaysia. However, as highlighted during our second quarter earnings call, third-party equipment vendors as well as our U.S.-based associates are needed on-site for tool installation. Currently, all non-citizens traveling to Malaysia must have explicit written permission from the Malaysian authorities prior to arrival and are subject to a mandatory 14-day quarantine period. While several vendors have received the necessary travel approvals, we are continuing to collaborate with the relevant agencies to gain approval for the remaining travel in a safe and timely manner. Delays in the approval process and compliance with required isolation procedures have the potential to impact the timing of commercial production and consequently our full year 2021 production plan. Despite this uncertainty, we continue to evaluate opportunities across our existing manufacturing footprint to further increase our production and capacity entitlement. Touching on the system segment, our EPS results were favorably impacted by the sale of three projects in Japan and two in India. With the sale of our American Kings project in Q2, the Japan and India sales in Q3, and with the potential sale of the Sunstream 2 project in Q4 2020, we have a viable path to close each project sale contemplated in our original 2020 guidance from February. Turning to slide four, I'd like to highlight the bookings and shipping activity for the quarter. In September, we were awarded the PPA for 180 megawatt AC solar project, with the option for future energy storage located in Arkansas. This project will support the clean energy needs of three General Motors facilities in the Midwest starting in 2023. Closing off with this and the recent PPAs we have signed with Verizon and Dow, we are witnessing leading corporations taking bold steps to reduce their environmental footprints and doing so supported by technology developed and manufactured in the United States. As the only U.S. headquartered company among the 10 largest PV module manufacturers globally, with a differentiated CAD-TAIL technology using the lowest carbon footprint in water usage, and a leading PV module recycling program that recovers 90% or more of the glass, metals, and CAD-TAIL semiconductor materials, we are well positioned to address this market need. Additionally, it has been an active quarter for our systems business in Japan, as we continue to assess adding to our contracted backlog with the addition of two projects totaling approximately 80 megawatts. From a third-party module sales perspective, Series 6 demand has been robust. Among other bookings, as announced last week, we secured a 0.9 gigawatt of volume from Vistra Energy for delivery scheduled in 2021 and 2022. As part of this deal, our Series 6 technology will support six projects in Texas, a region that leverages our temperature coefficient, spectral response, durability, and quality advantages. As a U.S. solar technology provider, we are proud to play a supporting role in Vistra's commitment to achieving net zero carbon emissions by 2050. As highlighted during our Q2 earnings call, we've had a significant volume of 2021 opportunities that were in late-stage negotiations but were delayed due to uncertainty in the tax equity market. While Alex will provide a more detailed tax equity market update, I would like to note that visibility into 2021 tax capacity has modestly improved, and we secured 0.5 gigawatts of 2021 opportunities since the previous earnings call. Additionally, demand in 2022 and 2023 have been strong, with 0.9 gigawatts of bookings since the previous earnings call. As a result of the recent systems and third-party module wins, net bookings since the previous earnings call totaled 1.6 gigawatts across 1.5 gigawatts of third-party modules and 0.1 gigawatts assistance bookings. Additionally, while not yet meeting all the requirements of a booking, we have contracted 0.6 gigawatts, subject to conditions precedent, for expected deliveries in 2021 and 2023. Note, the project associated with General Motors PPA has been sold in conjunction with a module purse sorter, and has been recognized as third-party module booking. Including these most recent bookings, we have 6.7 gigawatts booked for deliveries in 2021 and 3.6 gigawatts booked for deliveries across 2022 and 2023. Q3, we shipped 1.2 gigawatts, resulting in year-to-date shipments through the end of the third quarter of 3.7 gigawatts. As mentioned during our Q1 earnings call in May, our shipment profile has been back weighted to the second half of the year. Despite this profile, our year-to-date shipments, including the third quarter, have been below our expectations from the start of the year, largely due to the accommodations for COVID-19 driven customer project and financing delays. Before delving into the specifics of our pipeline of bookings opportunities, it is important to highlight that some of the trends we are seeing including the impact of COVID-19 on the near and long-term growth of solar installations globally. In the United States, the EIA forecasts that approximately 14 gigawatts of utility-scale solar capacity will be added in 2020. This strong demand is led by several states, including Texas, California, North Carolina, Nevada, and Virginia, each with near-term development pipelines exceeding 1 gigawatt. The continued growth of utility-scale solar, despite the pandemic-related headwinds, speaks to the relative health of the U.S. market. Internationally, the impacts of the pandemic have varied by market. While China remains the world's largest solar market and installed capacity is expected to increase year-over-year, it has seen project completion timelines slip due to the pandemic. Despite these challenges, the country's 14th five-year plan, scheduled to be launched in 2021, is expected to call for targets of at least 60 gigawatts per year of installed PV capacity, or approximately 300 gigawatts over the duration of the plan. In Europe, we anticipate a contraction in new installed capacity as countries like France extend project COD deadlines by six months to accommodate for COVID-19-related delays. In India, despite a five-month COD extension, delays caused by a combination of the pandemic and the seasonal monsoons are expected to take a toll on the country's aggregate and salt capacity this year. While the global PV industry has clearly not been immune to the pandemic's impact, some developments this year will shape the long-term future of the industry. The first of these is a range of new policies designed to decarbonize electricity and mobility further while powering post-pandemic economic recovery plans. Arguably, The most wide-ranging example is the European Green Deal, which is aimed to transform the bloc into a carbon-neutral economy by 2050 by decarbonizing electricity and transportation. The Green Deal, which could make solar the number one source of electricity in Europe by 2025, is an example of how political leaders are bundling post-pandemic economic recovery with decarbonization commitments. The other comment I would like to note is the growing recognition of the importance of self-reliance and a diversified solar supply chain in some of the world's biggest solar markets. A combination of factors, including governmental policy, increasingly tense bilateral relationships, the pandemic, and pricing and supply volatility in the crystalline silicon industry has reignited the debate around risk posed by allowing a single country to dominate the PV solar supply chain. Responses have been varied, with new rules that favor PV modules with a lower carbon footprint in South Korea, while India and Europe have renewed talks on domestic manufacturing. Earlier this month, the United States, the President issued a proclamation revoking the exemption of bifacial panels from the application of the Selection 201 Safeguard Tariffs. Although this exemption is currently subject to a temporary restraining order preventing the Presidential's bifacial exemption revocation from taking effect. The common thread, however, is an underlying desire to boost supply certainty and security while safeguarding domestic manufacturing from unfair competition. In summary, we believe our investment thesis remains inviting as we are well-positioned to benefit from the current dynamics in the solar industry. As shown on slide five, our mid- to late-stage pipeline of opportunities remains robust, and has increased 0.5 gigawatts despite bookings of 1.6 gigawatts since the prior earnings call. In terms of second mix, this opportunity pipeline of 8.3 gigawatts includes approximately 7.7 gigawatts of potential module sales, with the remaining representing potential systems business opportunities. In terms of geographical breakdown, North America remains the region with the largest number of opportunities at 7.1 gigawatts, Europe represents 0.9 gigawatt with the remainder in Asia Pacific. As a reminder, a mid- to late-stage pipeline reflects those opportunities we believe could book within the next 12 months and is a subset of a much larger pipeline of opportunities, which totals 16 gigawatts of opportunities in 2022 and beyond. From a cost perspective, we indicated during our Q2 earnings call that At our Vietnam factory, we have achieved a 40% reduction relative to our 2016 Series 4 cost per watt. Building on this momentum, as a reflection of our manufacturing execution, we have also achieved this milestone at our Malaysia factory during the quarter. Note, as a reminder, our cost per watt metric includes sales rate and warranty. From a bill of materials perspective, growing solar demand and the emergence of bifacial modules, which generally are dual blasts, have contributed to pressures on the supply and cost of PV glass. Similar to our shipment strategy, our glass procurement strategy largely relies on forward contracts, which has substantially mitigated this impact to date. From a fleet-wide perspective, as a result of our continued manufacturing execution, we remain on track to achieve and potentially exceed our 10% cost per watt reduction target between where we ended 2019 and expect to end 2020. In Ohio, our third quarter core cost-for-watt produce continues to be higher than our international average. Our U.S. manufacturing provides strategic benefits, and over time, we anticipate a reduction in the cost-for-watt through the following initiatives. Firstly, by installing additional tools and optimizing the two Ohio factories into one consolidated platform, we expect to increase nameplate capacity slightly more than 25%. to 2.4 gigawatts by the end of 2021. With this additional capacity, we were able to amortize the fixed cost structure, including labor and depreciation, over more watts produced. We are starting to see this benefit as reflected in our October capacity utilization. Secondly, as previously disclosed, we have contracted a float lab supplier agreement with a producer in Ohio. We anticipate starting to receive the initial benefits of this agreement in Q4 continuing into early 2021 with an expected reduction in the associated variable bill of material costs. Finally, our manufacturing yield in Ohio was approximately two percentage points below the fleet average. Through the implementation of learnings from our international factories, we see a path to achieve similar yields at our Ohio factories. Through the implementation of these key initiatives, among others, we anticipate our Ohio cost per watt premium over time to reduce to two cents, including sales rate. Turning to slide six, I would like to discuss the relative performance of our technology in the lab versus real-world operating conditions. PV module lab testing protocols were developed in the early days of solar using standard test conditions of 25 degrees centigrade at a terrestrial standard spectrum. PV modules in the field, however, are exposed to variable conditions, including heat, humidity, dust, and extreme weather events such as wind and hail. Each of these factors cause deviation from lab performance, with the effects varying by technology. Ultimately, lifecycle energy produced in the field is what drives project economics. And by analyzing the factors that cause divergence from laboratory performance, we can better understand the value proposition of our CAD-TAIL technology. Firstly, as it relates to temperature, Module device operating conditions can exceed 70 degrees centigrade. Module wattage, however, is assigned at a lab standard test condition of 25 degrees. And as panels heat up over the course of the day beyond this threshold, there's a corresponding decline in power. Series 6 has a temperature coefficient advantage relative to Christmas silicon, which is anticipated to increase further with our copper replacement module. meaning Cattail responds more efficiently than Christmas silicon to real-world temperatures. Secondly, due to the unique spectrum of light Series 6 captures, our technology outperforms Christmas silicon on a watt-for-watt basis in humid environments. Thirdly, estimated useful life of PV power plants can exceed 30 years, and as a result, degradation is an important driver of project economics. With the expected implementation of our copper replacement program, we anticipate a reduction in long-term degradation beyond our current warranty of 50 basis points per year. We expect this innovation will enhance our competitive advantage by increasing lifecycle energy and project value for our customers. Finally, as it relates to bifacial technology, while there is a potential for backside energy gain, the ground reflectivity, known as a BETO, varies by geography, climate, and season, and is often inversely correlated with hot and humid climates. Slide 6 depicts the relative life cycle kilowatt hours expected to be produced by our equal watts of our copper-replaced Series 6 modules, which we call Series 6 cure, relative to leading krypton silicon bifacial modules. As a result of the aforementioned advantages, As compared to leading Christmas silicon bifacial modules, we estimate that our Series 6 cure module can produce up to 10% more lifecycle kilowatt hours per kilowatt install in climates with extreme heat and humidity, including Brazil, Central Africa, Southeast Asia, India, and Southern United States. Importantly, when implemented, Our cure product is expected to be well-positioned in other key markets with more moderate requirements, including France, Spain, Japan, and the Midwestern United States. We expect to begin delivering Series 6 cure modules in the second half of 2021. Turning to slide 7, I would like to review a framework that highlights the factors that influence ASPs. Starting with bifacial, well, backside energy gain is accreted to ASP, with only a modest increase to manufacturing cost a lot, the downstream costs related to additional balance of system structures, increased vegetation management, and higher cost of capital associated with albedo uncertainty are partially offset to this ASP benefit. As it relates to crisps and silicon with larger form factors, the potential ASP benefit largely stems from the dilution in the manufacturer's fixed bill of material costs rather than an increase in energy density. This potential cost reduction, which may be passed through to the customer, is partially offset by the downstream cost of additional support structures, physical handling challenges with oversized modules, increased insurance premiums, and risk associated with cell cracking and wind loads. As it relates to our copper replacement Series 6, once implemented, we anticipated ASP accretion due to increased efficiency, improved temperature coefficient, and a significant reduction in long-term degradation. Importantly, this innovation is driven by efficiency improvements, which results in dilution of our variable and fixed bill of material costs. We expect to capture this ASP accretion as the technology does not significantly impact balance of system and development costs or project risks. Finally, it is important to note the opportunities within our technology roadmap, with cell efficiency entitlement in excess of 25%, coupled with the energy advantages of CAD-TEL, we believe the outlook for our technology platform remains strong. In support of our roadmap, over the coming quarters, we anticipate certifying a new world record for CAD sales. I'll now turn the call over to Alex, who will discuss our third quarter financial results and fourth quarter guidance. Alex?

Thanks, Mark. Starting on slide eight, I'll cover the income statement highlights for the third quarter. Net sales in Q3 were $928 million. an increase of $285 million compared to the prior quarter. The increase was primarily driven by the sales of certain Japan and India projects, as well as an increase in the volume of Series 6 modules sold to third parties. On a segment basis, as a percentage of total quarterly net sales, a module segment revenue in Q3 was 46% compared to 58% in Q2. Total gross margin was 32% in Q3 compared to 21% in Q2. The system segment gross margin was 33% in Q3 compared to 21% in Q2. This increase was primarily driven by the aforementioned international project sales and the sale of early stage development assets, including a project entity associated with the General Motors PPA. This is partially offset by 14 million of performance liquidated damages stemming from underperformance of third-party equipment at several of our legacy EPC projects. Module segment gross margin was 30% in Q3 compared to 22% in Q2. There were several positive and negative factors that impacted this Q3 result. Firstly, we recorded a reduction in our product warranty liability reserve, which was primarily due to lower warranty settlements than previously estimated for our Series 2 technology. This resulted in a $20 million reduction of our warranty liability and a corresponding benefit to cost of sale. Secondly, certain of our legacy module sale agreements are covered by a collection and recycling program, where a corresponding expense to the estimated future cost of our obligation was recognized at the time of sale. In Q3, we recognized a $19 million reduction in our module collection and recycling liability due to changes in the estimated timing of cash flows associated with capital, labor, and maintenance costs. This also resulted in a corresponding benefit to cost of sales. Finally, we incurred an impairment loss of $17 million for certain module manufacturing equipment, including framing and assembly tools no longer compatible with our long-term technology roadmap. This resulted in a corresponding increase to cost of sales. On a net basis, these factors increased module segment gross margin dollars and percent by $21 million and 5% respectively. Separately, our module segment gross margin was impacted by negative $6.5 million of Series 4 gross margin, which included 2 million of decommissioning and severance costs. Our Series 4 gross margin reduced overall module segment gross margin by 1.5%. With these facts in mind, we're pleased with our overall module segment gross margin result and our Q3 Series 6 gross margin relative to our previous expectation of 25%. This was exceeded despite lower than expected Q3 volume sold and despite incurring 3.5 million of unforeseen COVID-19 driven logistics costs in the quarter. Additionally, and as a reminder, sales freight and warranty are included in cost of sales and reduced module segment gross margin by 6%. FG&A and R&D expenses total $73 million in the third quarter, a decrease of approximately $1 million compared to the prior quarter. This decrease is primarily driven by lower severance and project impairment, partially offset by higher legal and incentive compensation expenses. Production startup, which is included in operating expenses, totaled $13 million in the third quarter, an increase of $7 million compared to the prior quarter. And this increase is driven by higher startup expense than our second series six factory in Malaysia. Interest income was $2 million in the third quarter compared to $4 million in Q2. This decrease was primarily driven by lower interest rates and investment balance for our marketable securities. Recorded tax expense was $38 million in the third quarter compared to $10 million in Q2. This increase in tax expense is largely attributable to higher pre-tax earnings in Q3. The combination of the aforementioned items led to third quarter earnings per share of $1.45 compared to $0.35 in the second quarter. I'll next turn to slide nine to discuss select balance sheet items and summary cash flow information. Our cash, marketable securities, and restricted cash balance ended the quarter at $1.7 billion, an increase of approximately $29 million compared to the prior quarter. Total debt at the end of the third quarter was $261 million, a decrease from $465 million at the end of Q2 as a result of international project sales. 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, restricted cash, and marketable securities, less debt, increased by approximately $233 million to $1.4 billion. This increase is driven by proceeds from system sales and module segment operating cash flows, which were partially offset by capital expenditures and loan repayments associated with the Ishikawa project sale. Networking capital in Q3, which includes non-current project assets and excludes cash and marketable securities, decreased by $18 million compared to the prior quarter. Net cash provided by operating activities was $208 million in the third quarter compared to $148 million in the prior quarter. As it relates to our Ishikawa project, we repaid the project debt prior to close, which resulted in higher operating cash flows upon transaction close. As it relates to our Miyagi and Animizu project, the associated project debt was assumed by the buyer, which reduced cash outflows from financing activities and operating cash inflows at transaction close. Finally, capital expenditures were $106 million in the third quarter, which brings our year-to-date total to $327 million as we continue our Series 6 capacity expansion. Turning to slide 10, I'll next provide an updated perspective on 2020 guidance. On our Q2 call, we provided guidance metrics that we believed were largely within our control or within reasonable line of sight at the time. This included production, operating expense, and capital expenditure guidance for the full year 2020. While significant uncertainties remain regarding the severity and duration of the COVID-19 pandemic and its impact on our operations and financial results, we believe visibility into our financial performance for the fourth quarter has improved on account of the following. Firstly, at the time of our Q2 earnings call, we cited tax equity market uncertainty for projects set to achieve commercial operation in 2021, which had the potential to impact our module customers and our self-developed Sunstreams 2 project. Although provisions for credit loss have stabilized somewhat in Q3, significant uncertainty remains for Q4 and 2021. Forecasting tax capacity for the second half of 2021 remains difficult due to the uncertain economic outlook, government response, and trajectory of COVID-19. However, some tax equity providers have begun committing to 2021 financings, albeit at conservative volumes. Whilst this is incrementally positive for the US solar market, we remain strongly supportive of a direct pay legislative solution in lieu of the investment tax credit to alleviate potential disruptions in the tax equity market. Secondly, with the sale of our American Kings project in Q2, the previously mentioned sales of the Japan and India assets in Q3, and with the expected sale of the Sunstreams 2 project in Q4 2020 or Q1 of 2021, We have a viable path to close each project sale contemplated in our original 2020 guidance from February. Finally, at the time of the February guidance call, we anticipated full-year module shipments of 5.8 to 6 gigawatts. Shipments through the end of the third quarter have totaled 3.7 gigawatts, which is below our year-to-date expectations, largely due to COVID-19-driven projects, financing, logistics, and customer delays. This has resulted in a shipments profile incrementally weighted to the second half of the year. However, a significant volume of modules that we anticipate recognizing as 2020 revenue are currently in transit or will be shipped in the coming weeks. With the improved visibility for system sales for 2020 and year-to-date progress for module shipments, we are reinstating financial guidance for the fourth quarter that considers this range of outcomes for module revenue recognition timing and closing of the Sunstreams 2 sale. Given the uncertainty around any outcome from the evaluation of strategic options for our U.S. project development business and the sale timing of our North American O&M business, our fourth quarter guidance assumes no change to our existing lines of business. And to date, while we've largely managed the impact of COVID-19 on our business and has not had significant impact on our operations, our guidance assumes we will continue to be able to mitigate any such impact on our supply chain and operations without the incurrence of material costs. I'll now review our fourth quarter guidance ranges with the implied full-year 2020 guidance ranges included on slide 11. Starting with shipment, due to the aforementioned uncertainties, we anticipate volumes of 1.8 to 2 gigawatts in Q4, which implies 5.5 to 5.7 gigawatts for the full year. Production in Q4 is expected to be 1.5 gigawatts with implied full-year 2020 production of 6 gigawatts, including 0.2 gigawatts of series 4. Note that our full year production guidance of 6 gigawatts has increased by 0.1 gigawatts relative to the guidance provided during our Q2 earnings call. Net sales are expected to be between 540 and 790 million in Q4, which accounts for potential delays in the close of our Sunstream 2 project sale and module revenue recognition timing. Total gross margins projected to be 26.5% to 27% in Q4. And note that we anticipate the closing of the Sunstreams 2 project sale will be slightly dilutive to overall gross margin percentage. Module segment gross margins projected to be between 27% and 28% in Q4. We anticipate our module segment gross margin will be supported by an increase in volume sold and continued reductions in our cost pool, partially offset by a modest decline in ASP. And included in this gross margin guidance is an anticipated 40 basis point gross margin percentage drag due to Series 4. Operating expenses are expected to be between 90 and 95 million in Q4. This includes production startup expenses related to our second series six factory in Malaysia of 15 million. We anticipate R&D and SG&A costs excluding startup expenses of 75 to 80 million in Q4. Our current implied full year 2020 operating expense guidance of 351 to 356 million is within the guidance range provided during our second quarter 2020 earnings call. Operating income is estimated to be between $50 and $120 million in Q4. Turning to non-operating items, we expect interest income, interest expense, and other income to net to negative $5 million. Anticipated tax benefit of $45 to $60 million in Q4, which includes a discrete tax benefit of $60 million associated with the closing of the statute of limitations on uncertain tax positions. This results in a Q4 earnings per share guidance range of $1 to $1.50 per share and $3.65 to $4.15 per share implied for the full year 2020. Our 2020 capital expenditure forecast of $450 to $550 million remains unchanged from the prior quarter. Our year-end 2020 net cash balance is anticipated to be between $1.2 and $1.3 billion, which is a decrease relative to our Q3 net cash positions primarily due to capital expenditures and projects then related to our Sunstream 2 project. Turn to slide 12, I'll summarize the key messages from today's call. Firstly, we had Q3 earnings to share of $1.45, increased our quarter end net cash position, improved module segment gross margin quarter over quarter, and reinstated financial guidance for the fourth quarter. Secondly, we had strong manufacturing performance with each factory averaging over 100% capacity utilization in Q3, and that our Malaysia factory achieved our mid-term cost per watt target of a 40% reduction from our 2016 series forecast. Thirdly, demand for our Series 6 product is robust, and we have continued success adding to our contracted pipeline, with net bookings of 1.6 gigawatts since the prior earnings call and 4.1 gigawatts year-to-date. Our contracted backlog remains a pillar of strength with 6.7 gigawatts contracted for expected deliveries in 2021 and 3.6 gigawatts contracted for expected deliveries across 2022 and 2023. And finally, despite ongoing challenges relating to the COVID-19 pandemic, we remain pleased with all operational financial performance. And with that, we conclude our prepared remarks and open the call for questions. Operator?

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. In order to allow time for everyone to ask a question today, please limit yourself to one question. Please stand by while we compile the Q&A roster. Our first question comes from Philip Shen with Roth Capital Partners. Your line is open.

Hi, everyone. Thanks for the questions. I have a few here, so thank you for your patience. The first one is on SIGs. I think we picked up recently that you guys restarted your SIGs research efforts, so I wanted to get a sense for what that might mean relative to CAT-TEL. I think you guys have talked about getting to 8 gigawatts of capacity by year 21. Can you talk about the conditions that need to exist to consider expanding capacity and then what the timing and the locations of that might look like? And then number three here, with the ever-growing importance of security of supply, especially in the face of the Xinjiang risk and the concentration of capacity in China, Can you talk about how the tenor of conversations with customers may have changed over the past month? And then help us understand how much is booked in 21, 22, and 23. Thanks, guys. All right.

I'll let Alex take the last one that's booked in 21, 22, and 23. So I'll try to take the other three because he gathers those numbers. All right. So your question around SIGs and, you know, to the extent that we are looking at that as a technology or really any technology because, you know, at the end of the day, the core we're a module technology manufacturing company. That's what we do. And we need to continue to find ways to to demonstrate ourselves on a technology basis and define ways to be as disruptive as we can with our technology and always create advantages relative to crystal and silicon and whatever the ultimate competition may be. We've looked at SIGs in the past. We've looked at crystal and silicon and monocrystal and silicon. We look at perovskites. We look at everything. And, you know, as it relates to your question, is SIGS somewhat an indication that we don't have confidence in Cattell? That's not anywhere close to the reality. Cattell, in my mind, will always be advantaged relative to SIGS. And we believe it has a roadmap to be advantage relative to chrysanthin and silicon. But the reason that we would look at chrysanthin and silicon or SIGs or perovskites or organic PV or anything else that may be out there is how do you complement the two? And we've mentioned this before that we believe over time that multi-junction type of technology will evolve into the marketplace. And Cattell, in and of itself, it's a very good top cell from a standpoint of having a high band gap. So it captures a significant portion of the overall sun spectrum. And what you need then as a second cell underneath that would be what's complementary to that. And could it be SIGs? Could it be Christmas silicon? Could it be prospects in some form or fashion? And so we're always going to look at that. We believe it's the evolution of technology that will happen in the future. We've highlighted in previous calls, too, that we are reinvigorating our advanced technology team. And so to the extent that, you know, we need to look at different materials, different semiconductors, it could be complementary to to Cattail will continue to do that, but I don't look at the SIGs or really any of those other technologies as replacing Cattail. The core will be of our semiconductor and the overall device will be Cattail. The question is, is there something else that becomes complementary with it, and we need to look at all options that could be out there. As it relates to the expansion and the gigawatts, I mean, yeah, we have, I think, indicated our nameplate be about 8 gigawatts at the end of 21. You know, we are in the last phase of our Series 6 transition. Our second factory in Malaysia will start up as current plans will start up in Q1 of 21. We are looking beyond that. And, you know, as we've always said, we've got a balanced business model between growth, liquidity, and profitability. And we obviously understand the value of growth and the leverage against fixed costs and flow-through contribution margin. And so we are evaluating options, and we will look at where we can create the next disruptive lowest-cost factory. So as we continue down our journey with Series 6, one of the things that we tasked ourselves with probably about nine months or a year ago is what's the factory of the future look like? What's the next generation look like? technology in terms of driving lowest cost for our CATL platform. And so we have been doing that and trying to find a way to create that disruptive lowest cost in the fleet factory, which under that construct most likely would not be in the U.S. for the reasons that we've mentioned. And we believe we have relative representation here with costs almost 2.5 gigawatts in the U.S. But Other markets, you know, we would look to, you know, India could be one. We talked before about potentially our European factory in Germany starting up as, you know, an easy way to get to market quickly and leverage that factory that we closed down almost a decade ago. So those are things that we're looking at. And we also believe that, you know, as we've indicated, I think Alex mentioned in his prepared remarks, that, you know, freight is basically 6% of gross margins right now, 6% of the ASP effectively. And so getting closer to market and driving down your freight costs is an advantage that we continue to look to. So being in a market that can consume 2.5 to 5 gigawatts of volume on a recurring basis would be important. So those are the many different factors that we look to as we think about expansion, but just want to make sure it is clear that that is on the agenda of things that we're looking at at this point in time. Supply of security and any impact with what's happened with China and the latest evolution now being on the potential use of forced labor and implications that that has and potentially product being banned in the U.S., it's one of many different dimensions that a lot of our customers have as it relates to relying on China in long term and the uncertainty around that. I don't know if it has increased meaningfully over the last month. It's just one of many different concerns that they've had. I mean, even with the discussion around bulk power systems and potential locations around that, the modules have been looked at as, you know, is there a risk of that that could be impacted? You know, there's a discussion of extension of the 201 tariffs. You know, there's many different things that come into the mix and a lot of our customers, you know, here in the U.S. in particular, want to do business with an American company. They want to de-risk their supply as it relates to ability to deliver against commitments and any uncertainties that could be imposed upon the Chinese supplier and some of the issues that are coming up, as you mentioned, with forced labor. So I don't know if it's changed significantly in the last month. It clearly is top of mind, and it's just one of many different factors that all of our customers think about when they have to rely upon our Chinese counterparty as a supplier.

Yeah, just to throw the numbers on the end of there. So right now we have 6.7 gigawatts booked for 2021 and 3.6 gigawatts booked across 22 and beyond.

Our next question comes from Brian Lee with Goldman Sachs. Your line is open.

Hey, guys. Thanks for taking the questions. Congrats on a good quarter. A couple of things from my end, I guess. First, I know there's a lot of moving parts here on the module gross margins this quarter. I'm getting to like a 26.5%. clean number for Series 6, which is 150 basis points higher quarter-on-quarter. I guess the first question is, is that the right math? And sort of what happened during the quarter that got you the additional 150 basis points? Because I think last quarter you were talking about sort of a flattish sequential trajectory. And then the second question would be around, I didn't hear it on the call, I might have missed it, but are you still on track to hit that 300 basis point gross margin expansion for Series 6 and Q4 off of this higher run rate, if my math is right? And then maybe just lastly, how should we think about cost reductions in 2021? You said you're running at or above the 10% target for this year. What sort of gross margin expansion potential do you have as you move into 2021, given the cost reduction progress you're making and also the fact that pricing seems to be fairly stable for you guys? Thank you.

Yeah, I'll start on the gross margin. Mark wants to comment on the cost reduction beyond that. So you're doing basically the right math. There's know with the reported module segment gross margins about 29 and a half and you've got three big things that moved in there but a reduction on warranty and liability about 20 million that's a good guy reduction in the end of life recycling about 19 million also a good guy then you have an impairment charge of about 17 million that goes against so you net all of those you've got about 21 million or about five uh percentage points you take that down to about 24 and a half And then we said that within the overall margin, we had about a 6.5 million or 1.5% negative associated with Series 4. So you add that back in, you get to about 26%. And then on top of that, we did have some COVID charges in that number. So there's about 3.5 million of COVID charges. If you back that out again, you're going to be another 50 to 100 basis points. So somewhere around 26.5 to 27 is around the Series 6 clean number. So, yeah, we're a little ahead of where we expect it to be, and part of that is just a function of how well the factories have been running. As I think Mark mentioned in his prepared remarks, we've now managed to get to the cost-reduction target that we expected in our high-volume manufacturing by the end of the year. In Q3, we're already there in our Malaysia site, and we already achieved that last quarter in Vietnam. So running a little ahead there. In terms of where we think we'll be by Q4, we're going to be at that 27.5% to 28% gross margin on Series 6 is the number we're guiding to for Q4. So that one tells roughly the study from where we were last quarter. And then in terms of cost reduction beyond that, you know, we're not giving guidance out through 2021. Mark, I don't know if you want to comment on this.

Yeah, by the way, I guess what I would say just on that is, and it's similar to what I said in my comments, that the things that are continuing to drive improvements to the cost for water is, you know, improved throughput, improved watts, and improve yields. And so what I said in my remarks is that, you know, we just opened up the 445 watt bin. And then, you know, over the next few quarters, we're going to be at the 455 and north of that shortly thereafter. And so that improvement in watts is going to help drive down costs. So that helps. The throughput, as we've already highlighted, is going to continue to increase. So that's another significant lever that is going to help drive down The other one is we highlighted is the glass supply for our Parisburg factory, which will start to take shape in Q4 and we'll see you realize the full benefits starting in Q1. So the bill material cost in Parisburg in particular is going to be helpful, but we're also working on taking significant costs out of the frame, which will help drive costs further. And then we're actually looking at changing the profile of the module such that it is actually thinner. So when you look at the glass plus the frame, we're trying to make the profile of the module thinner, which will also then allow us to add about 10% more modules, a little over 10% more modules per container from a freight standpoint, which will help drive down that cost. So we've got teams that are really multidimensional and looking across all aspects of everything that is associated with the cost of the product and ultimately delivering it to the end customer. So as Alex said, we're not guiding at this point in time for 21, but we are. tracking to be ahead of what we thought, where we thought we were going to be on a cost per watt basis as we exit the year, which is a good place to be. And then we still have a number of other initiatives that will further drive down our cost per watt as we go into 2021.

Our next question comes from Ben Keller with BIRD. Your line is open.

Hey, great quarter, guys. So three or four questions here. So can you talk about, you know, your utilization here above nameplate and how should we expect that going forward? I know, Mark, you just talked about, you know, watts and your yield. But, you know, how much can we go above nameplate capacity? And when we think about, you know, your target for next year, how much is that considered in that? And then you don't talk about efficiency anymore. But, you know, can you talk to us about, you know, the theoretical efficiency of Cattell and where we can go from a 445 watt panel and above? And then the last question, I guess, is, you know, the 2.5 gigawatts, you know, before you place new capacity somewhere, if it's in Oderson, I get to, you know, $400 million of CapEx. Does it take... you selling the assistance business before you make that go, no-go decision? And can you talk about just the incentive to onshore new capacity?

So from, you know, Ben, where we ultimately – what I said in the script was that, you know, where we are on trajectory right now for our two facility plants in Ohio is to drive the nameplate capacity up to – you know, 25% above what we originally launched at. The objective would be to, you know, drive it effectively to about low 30s. So let's say there's another five to about eight percentage points of incremental utilization that we would like to get out of all the factories. So first we've got to get everything up to 25%. We're not necessarily there yet. You can see by what we're running, we're, you know, call it 120. I think it was the best that we highlighted right now. We've got a path to get everything up to around 25% near-term with a goal of getting it up to low 30s, call it around 30 to 33%, which would be another 5 to 8 percentage points above what our near-term objective is. And a little bit of work still to be done there, but I've been very impressed with the team's capabilities of making that happen. On the efficiency side, as you indicated, where are we going with the technology? What I did say in one of my very last comments was the entitlement at the cell level for Cattell is 25% plus. And that would translate into something close to, call it a 23% or so efficient module based on normal conversion between cell to module. We're in the process right now of validating, and hopefully we'll have them in the next few quarters, a new record for efficiency. I don't know if there'll be a cell or a module still looking at what we end up doing on that. There's some items on our roadmap that would really be beneficial to help validate that through demonstrating that either with a cell or a module, which by default will then drive to a record efficiency. So there's still more room to go yet on the core technology and driving to higher level efficiencies. The other one that I mentioned that, again, it's complementary and it's a combination of this multi-junction technology that we talked about, which would take efficiencies even above and beyond kind of that profile, as I mentioned, because now you have two cells that are harvesting the overall efficiency. photons and converting them into electrons, which would say that whatever you can do at the top cell level capability would be further enhanced with the bottom cell. And so the technology on efficiency can go even beyond kind of those numbers that I represented theoretically, right? So there's still a ways to go yet on the technology, and we're working very hard to make sure we can realize those benefits over the next several years. On a CapEx basis, you know, as I mentioned, I alluded to this, you know, kind of what is the factory of the future and what is the most disruptive, lowest cost factory that we can create starting with a blank sheet of paper. That will also drive down the CapEx investment you know, relative to what we initially communicated with Series 6. So that can drive it down probably close to 15% to 20% on a CapEx basis. So we have a roadmap to drive more CapEx out and to be more efficient. So, therefore, we can, you know, obviously the cost to deploy a new factory on a CapEx per watt basis will be lower than what we originally launched at, which is an objective that we've had. And it's tied to, you know, the realization of the systems slash energy services and proceeds. It's not – they're two independent things. I mean, there's not a constraint. You can see by, you know, where our balance sheet is right now, that ability to continue to invest in the capacity and the roadmap that we have in front of us. There's not any linkage, per se, to any proceeds we receive, either from the systems business or the energy services business.

Our final question comes from Michael Weinstein from Credit Suisse. Your line is open.

Hi, guys. Can you talk about what would drive capacity ads in any particular regions or existing locations? You know, in the past few years, you know, this has been driven by a move from the Series 4 to Series 6. Going forward, is it demand growth or something else that drives it?

Whenever we grow, we want to make sure that it's tied to a market indicator. Basically, it has to start with relative competitive advantage and position of the technology. The market has to be there. The good thing about where we are now with with, you know, solar procurement. You know, it used to be policy-led. Now it's economic procurement. People are buying solar from the pure economic standpoint. And so I don't really see any constraints on the market per se. But, you know, we do look to markets where we would have advantages around our technology. So hot humid climates, for example, would be a market that would be attractive to us. Again, being closer to the market or at least driving efficient shipment logistics routes to access the market is important. You know, the reality is, you know, freight cost is 10% north of 10% of the overall cost of the product. And so if you can get that number down, say cut it in half, you get 5% savings just by getting closer to the customer and reducing your overall freight cost to deliver the technology. There's many other factors that we use when we screen a site. Energy is a meaningful component of our overall cost, so we have to have competitive cost of energy. Labor rates have to be competitive from that standpoint as well. While the processes are largely automated, it's still a major component of the overall cost structure that has to be thought through whenever we make decisions of where we're going to manufacture. The reality is that we will grow. Most likely it's probably going to be outside of the U.S. as we currently envision it. It could change. You know, we have the ability just to expand within the footprint and drive more throughput of what we already have here in the U.S. as we think about where our next factory would be. You know, as we currently envision it, it would probably be in an international market somewhere close to China. customers, close to where there's a strong recurring annual demand requirement, and one that we have, you know, our technology is well positioned and competitively advantaged, whether it's hot human climates, whether it's the advantages of our CO2 footprint, environmental aspects around our technology, which more and more markets are starting to value. Those are the types of things that we take in consideration as we would think about any expansion.

We have completed the allotted time for questions. This concludes today's conference call. You may now disconnect.