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?