First Solar, Inc. (FSLR) Q2 2019 Earnings Report, Transcript and Summary

Good afternoon, everyone, and welcome to First Solar's Second Quarter 2019 Earnings Call. This call is being webcast live on the Investors section of First Solar's Web site at investor.firstsolar.com. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the call over to Adrianna Defranco from First Solar Investor Relations. Ms. Defranco, 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 2019 financial results. A copy of the press release and associated presentation are available on First Solar's Web site 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 2019. Following their remarks, we will open the call for questions. Please note this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. 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?

Thanks, Adrianna. Good afternoon and thank you for joining us today. I'll begin by noting our second quarter loss of $0.18 per share. Despite this result, due largely to increased variable compensation expense associated with the company's short-term and long-term incentive plans, and increased tax expense, which Alex will address, we put a number of wins on the board during the quarter, and are maintaining our full-year earnings per share guidance. The Series 6 program remains on track with improvement across all key manufacturing metrics. Q2 saw the greatest quarterly production run in the company's history. From a bookings perspective, we recorded our largest ever individual order for Series 6 module, and from a shipment perspective we recorded record quarterly shipments. These highlights are a reflection of the team's continued excellence in a very dynamic and changing business environment. Turning to the market, catalysts driving increased PV penetration continue to point to growing global momentum and strong demand. On our last earnings call, we discussed our optimism for utility-scale solar growth driven not just by pure economics, but by the groundswell of communities making strong actionable commitments to renewable energy. The recent uptick in government commitments coupled with growth in corporate activity provide the underpinning for secure and stable growth. In many regions the solar industry has reached a cost inflection relative to coal. In the U.S., the Energy Information Administration has identified a trend of younger and larger coal plants shutting down. And a study by Energy Innovations, released in March, showed that it would be cheaper to replace 74% of U.S. coal with new wind and solar. The study further found that replacing 94 gigawatts of existing coal plants with wind and/or solar would result in a 25% reduction in energy costs. In Europe, the first-half of 2019 saw renewable energy outproduce fossil fuels for the first time. These are just some of the encouraging signs of sustainable growth we see. Shifting to the domestic market, we pointed out during our last earnings call that three states have adopted active mandates to reach 100% clean electricity standards with over a dozen or more committed to nonbinding goals. As of today, eight states enacted a 100% clean and renewable energy goals, and an additional 29 states plus Washington, D.C. are targeting nine binding energy targets. Another trend gaining traction in the U.S. relates to battery storage. Deployment of grid-connected energy storage in the U.S. are expected to hit over 700 megawatts this year, and are projected to reach 2.5 gigawatts by 2023. Moreover, the economics of these projects signal that in certain regions today clean and dispatchable energy can be made available for less than the cost of new natural gas. We also continue to see growing momentum among corporates seeking to decarbonize their electricity. 2018 saw over 13 gigawatts of corporate PPA agreements, doubling 2017 levels, with new buyers and emerging markets tipping the scale. Since our comments last quarter, companies in France and Poland signed corporate power purchase agreement for large-scale solar, making a first for these nations. We continue to solidify our position as a leading global provider of corporate solar solutions by providing clean or eco-efficient solar technology. On Tuesday this week, we just announced jointly with Microsoft, that our Sun Stream 2 solar facility will power Microsoft's new energy-efficient datacenter being built in Arizona. We are thrilled Microsoft values our Series 6 technology, especially given its lower carbon footprint and superior environmental profile compared to crystalline silicate. We look forward to providing Microsoft cleaner solar electricity. Earlier in the quarter, we announced that our Cove Mountain 2 solar power plant would support Facebook's Eagle Mountain datacenter in Utah through a PPA with Rocky Mountain Power. The project will be constructed near the 58 megawatt Cove Mountain power plant, which we announced last year will also support Facebook's operations. Continuing this trend, we announced last week that Kellogg's Australia and New Zealand signed a PPA with the Beryl Solar Farm, developed and operated by First Solar, in New South Wales. Finally, the utility scale market in the United States continues to thrive. Notably, we're seeing an increase in multiyear module sales agreements driven by our customers' need for pricing and technology certainty and our commitment to stand behind our contracts. Starting on slide four, I'll provide an update on our Series 6 production metrics. As a reminder, we began production at our first Series 6 factory in April, 2018, and over the subsequent five quarters we have continued to ramp production in the U.S., Malaysia, and Vietnam. Leveraging our control replication process, we are operating four factories which are matched in terms of key processes, and which have produced 1.9 gigawatts year-to-date. Reflecting on the significant progress we've made over relatively short period of time, we are pleased with the Series 6 in terms of scheduled performance and cost. On a fleet-wide basis, since April, we have seen significant operational improvements. When comparing performance for the month of April to July, meaningful improvement can be seen. Megawatts produced per day is up 16%. Capacity utilization has increased 12 percentage points to 94%. Adjusted for planned downtime the fleet capacity utilization was 96%. Note, in support of our module efficiency roadmap, in July, we increased the volume and engineering test articles which adversely impact the capacity utilization by one percentage point. The production yield is up two percentage points to 91%. The average watt per module has increased three watts. And finally, the percentage of modules produced with antireflective coating has increased by five percentage points to 91%. The combination of our efficiency improvement program and increased arc utilization has led to a significant improvement in the module bin distribution. In July, the arc bin distribution between 420-watt to 430-watt modules represented 87% of production. Our best factory had arc utilization of 95%, with 94% of the production volume at a 420-watt bin or higher. With 893 megawatts produced, Q2 continues our planned production ramp. And we have carried the momentum into July where we are experiencing our best ever production month, with 322 megawatts produced. On an individual plant level, all the factories are performing well. At our second factory in Vietnam, the production metrics are ahead of plan, and within six months of commencing operation consistent with the fleet average. This is a direct result of learnings from prior factory ramps, and the synergies realized by having a multi-factory site, which effectively leverages the width inventory buffers across two factories, and creates additional equipment redundancy. We would expect these similar benefits when we start up our second factory, in Ohio, where construction is continuing according to schedule. The first tools installed in June. Note, as a highlight during our Q1 earnings call, our new Ohio factory will include additional capital which, among other improvements, will target a 5% increase in the nameplate capacity. Depending on our ability to realize the target capacity increase, we will look to roll out this program across the fleet. We anticipate starting the production in early 2020, with the possibility of pre-qualified production in Q4, 2019. The progress we have made ramping our factories has been a key contributor, enabling the achievement of our Series 6 cost per watt objectives for the first-half of 2019. While this is a significant accomplishment, there is tremendous amount of work still in front of us in order to achieve our cost per watt roadmap for the full-year. As we noted in our April's earnings call, our Series 6 cost per watt is expected to drop approximately 30% from Q1 to Q4. Turning to slide five, I'll next discuss our booking activity. In total, we have 4.3 gigawatts of net bookings in 2019, including net bookings of over 2 gigawatts since the last earnings call. After accounting for shipments of 2.2 gigawatts in the first-half of the year, including record quarterly shipments of 1.4 gigawatts in the second quarter, our future expected shipments are 12.9 gigawatts. As it relates to the systems business, we converted two opportunities in Japan from our mid to late-stage pipeline and just 77 megawatts of bookings with expected deliveries through 2022. With these projects, our footprint in Japan has grown to approximately 400 megawatts. We continue to believe in the strength of our portfolio of systems opportunities in Japan and we could double our existing systems bookings there by the end of 2023. The remainder of our net bookings for the quarter were module only bookings essentially all Series 6 product, international markets represented slightly more than 100 megawatts of the bookings. As I noted previously, we are seeing an increase in multi-year module sales agreements driven by our customers need for certainty in terms of the technology they are investing in and the certainty that we will stand behind our contracts. Representative of this, we have secured our largest Series 6 agreement with a new customer to supply 1.7 gigawatts of deployment of projects across the U.S. We've also secured a 0.3 gigawatts booking with another new customer in the United States. Note this is the first phase of the project with a similar sized second phase included in our contracted pipeline and awaiting confirmation of conditions precedent to become a booking. We are particularly pleased with the strength of the bookings in the quarter despite the decision in June at the Office of the U.S. trade representative to exempt bifacial panels from Section 201 tariffs. But we are able to contract through this headwind it's important to note that the disappointing decision which in our view has the effect of undermining the administration's efforts to secure a level playing field for U.S. solar manufacturing introduces a new source of uncertainty going forward. Since the last earnings call related to certain customer and specific events, we have booked 0.3 gigawatts scheduled to be shipped in 2019 and 2020. These events included the combination of a customer's request to support their revised project development schedule and project size as well as settlement of an ongoing dispute with the customer which originated over the potential sale of one of our systems projects. Although these events had an adverse impact to our previously contracted module backlog given our robust pipeline we were able to contract the volume with other customers. More importantly we view the resolution as an investment in long-term customer relationships. Turning to slide six, we show the forecasted supply plan for the second half of 2019 through full-year 2021. As noted in the Q1 earnings call we are effectively sold out through the remainder of 2019 and full-year 2020. With the most recent bookings, 2021 is starting to book up relative to an anticipated supply plan of 6.5 gigawatts. For full-year 2021, we booked and contracted volumes subject to conditions precedent representing approximately 60% of the supply plan. This leaves approximately 2.5 gigawatts to be booked in 2021. Note, approximately half of the remaining volume is anticipated to be needed for our self development systems business, seeing our Systems business demand is level loaded by quarter in 2021, we are largely sold out for third-party module sales in the first half of 2021. We remain pleased with the bookings momentum and have increased confidence in achieving or exceeding our target one to one book to ship ratio in 2019 even as we continue to contract for deliveries over two years in advance. Slide seven provides an updated view over a mid to late-stage bookings opportunities which now totals six gigawatts DC, a decrease of 0.6 gigawatts from the prior quarter when factoring in bookings for the quarter point, 0.6 gigawatts which were included in the opportunities in the prior quarter, our mid to late-stage pipeline remains unchanged. Additionally, the pipeline includes 0.6 gigawatts of confirmed opportunities awaiting satisfaction of outstanding conditions precedence before being booked in the quarter. As a reminder, our mid to late-stage pipeline is reflective of those opportunities, we could fill would book within the next 12 months. And as a subset of a much larger pipeline of opportunities which totaled 13.3 gigawatts DC, which increased 1.6 gigawatts from last quarter. This includes 0.8 gigawatts of opportunities in 2019 and 2020 with revised demand resiliency to our near-term bookings production, while the remaining 12.5 gigawatts of demand would be for modules delivered in 2021 and beyond. In terms of geographic breakdown of a mid to late-stage pipeline, North America remains the region with the largest number of opportunities at four gigawatts DC. Europe represents 1.5 gigawatts with the remainder in Asia-Pacific. In terms of segment mix, our mid-to-late-stage pipeline includes 1.9 gigawatts of systems opportunities across the U.S. and Japan, with the remainder being module only sales. The significant increase in systems opportunities largely attributed to U.S. opportunities associated with the ITC Safe Harbor. We have also had significant success across our energy services business with year-to-date bookings of over 1.6 gigawatts D.C. Approximately 0.5 gigawatts was associated with the sale of development assets. With the remainder 1 gigawatts was contracted with project developed by third parties. This brings our total energy services portfolio of assets under contract to nearly 13 gigawatts globally. Before turning the call of an Alex, I like to discuss recent developments related to the ongoing class action lawsuit, which was filed in 2012. As previously discussed, in August of 2018, we filed a cert petition with the U.S. Supreme Court concerning the appropriate standard to determine loss calculation. We identified various standards across several circuits and did not believe the standard used in the ninth circuit, which is the standard that will apply to this case was appropriate. We were supported by the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association, the Business Roundtable and other groups who filed an amicus brief with the court in support of our position. At the end of last month, the Supreme Court denied the cert petition. Well, we are disappointed with the denial. We continue to believe we have meritorious defenses and are vigorously defending this case. Also, as previous disclosed from following the results of the Supreme Court, the Arizona District Court ordered that the trial begin in January, 2020. I'll now turn the call over to Alex, who will discuss our second quarter financial results and provide updated guidance for 2019.

Thanks, Mark. Before discussing the financial results of the quarter, I'd like to note that as we said in our previous earnings call, we anticipated that Q2 would be a breakeven to last quarter and our second quarter financial performance was in line with those expectations. With the sale of the barrel asset in Australia and the Cove Mountain and Muscle Shoals assets in the U.S. continued progress towards additional system sales, and an increase in third-party module sales during the quarter. We remain on track to hit our financial objectives for the year. With regards to sale of the Cove Mountain and the Muscle Shoals assets, these projects are not anticipated to begin construction until late 2019 and early 2020, respectively. However, as noted on the previous earnings call, given the opportunities to optimize valuations and reduce risk, we've sold these assets prior to notice proceed. In addition, in lieu of our traditional sales structure, whereby we would perform the EPC and recognize revenue on a percentage of completion bases over the life of the contract, we have indeed cases sold to project companies with a module sale agreement, and our customers will engage a third-party EPC provider. The structure has several advantages, including earlier cash collection, and reduction of EPC risk exposure as we continue to evaluate the extent we are offering of this service. Note in our public filings. This also has the effect of removing the sold assets from our systems pipeline table, adding approximately half a gigawatt of volume into the module backlog. With respect to the module backlog, that will be updated in our forthcoming 10-Q, although this metric is always impacted by rounding given it as reported in gigawatts and billions of dollars. This course is also atypical circumstances, which will imply a lower ASP for new bookings within the case. This is a result of two key drivers. Firstly, with regard to the aforementioned Muscle Shoals and Cove Mountain projects, the change in the sales structure results in a great upon margin, and the approximate half a gigawatt of additional module backlog with deliveries in 2020 and 2021 comes at ASPs lower than the previous average. This does not change the overall project economics for these assets that has the impact of lowering the overall average ASP and the module backlog. Secondly, as Mark noted, we had no 0.3 gigawatts of de-bookings with a certain customer since the last earnings call, which resulted in a ASP reduction associated with those volumes. Combined, these changes lower the overall average ASP in the backlog. The implied average ASP for the calendar quarter is not reflective of the pricing associated with new bookings, including the 2 gigawatts of net bookings since the prior earnings call. And to be clear, we're very pleased on our overall ASP for new bookings 2019. Turn to slide nine. I'll stop by covering the income statement highlights for the second quarter. Net sales in Q2 were $585 million, an increase of $53 million compared to the prior quarter. The increase in net sales is primarily resulted in increased module sales, as well as the closing of the sale of fully constructed Beryl project in Australia, and the sale of our Cove Mountain and Muscle Shoals project in the U.S. Although Q2 has a record shipment quarter for us, given the contractual terms associated with certain third-party module bookings, as well as shipments to our systems projects, which have not involved, we only recognize revenue on approximately one-third of those shipments. On the segment basis as a percentage of total quarterly net sales, our systems revenue in Q2 was 61% compared to 63% in Q1. Gross margin was 13% in Q2 compared to breakeven in Q1. The system segment gross margin was 18% in the second quarter and the module segment gross margin was 5%. As a reminder, module segment cost of sales is comprised of all third-party module cost of sale, as well as Series 6 ramp-related costs. With Series 6 ramp-related cost $18 million in the second quarter, which combined with Q1 is put on to the majority of the forecasted ramp charges for the year. Because of the module segment, gross margin increased 18 percentage points from negative 13 in Q1 to positive five in Q2. This was due to a combination of increased shipments driven by increased Series 6 volume, lower ramp costs, and lower cost per watt. Operating expenses were at $86 million in the second quarter, an increase of $9 million compared to Q1. This is driven by increased variable compensation associated with the company's short-term and long-term incentive plans. We have an operating loss of $9 million in the second quarter, compared to an operating loss of $77 million in the prior quarter. This was the result of the increased module and systems revenue and margin referenced earlier partially offset by the increase in operating expenses. With the commodity market charge of $4 million related to the fair value of certain interest rate swap contracts for some our project assets in Japan and Australia. This is a timing impact based on movement of interest rates within the quarter, upcoming half of which was recovered during the quarter through the increased sale value of the Beryl project. We expect the remainder to be recovered in subsequent courses through increase project values recorded at the time of sale. Recorded tax expense of $12 million in the quarter compared to tax benefits of $1 million in Q1. Increase in tax expense of the quarter is attributable to the jurisdictional mix of income as well as a discreet return to provision expense of $7 million. Combination of the aforementioned items led to a second quarter loss per share of $0.18 compared to a loss per share of $0.64 in the first quarter. Next, turn to the slide 10 to discuss select balance sheet items and summary cash flow information, our cash and multiple securities balance ended the quarter at $2.1 billion, the decrease of approximately $170 million from the prior quarter. Total data at the end of the second quarter was $481 million competitive $571 million that the end of Q1. The reduction of debt is primarily due to the sale of the Beryl asset in Australia and the assumption by the buyer of the project level debt. As a reminder, all of our outstanding debt continues to be project related and will come off our balance sheet when projects are sold. Our net cash position decreased by approximately $80 million to $1.7 billion, decrease in our net cash balance is primarily related to capital investments in Series 6 manufacturing capacity. Net working capital in Q2, which includes non-current product assets and exclude cash and marketable securities decreased by $133 million versus the prior quarter. Change was primarily due to collections on receivables for systems projects, partially offset by an increase in our Series 6 module inventories. Cash flow from operations were $13 million in the second quarter. Now finally, capital expenditures were $179 million in the second quarter, compared to $149 million in the first quarter as we continue Series 6 capacity expansion. Continuing on to slide 11, I'll next discuss the updated assumptions associated with our 2019 guidance. Firstly, our guidance continues to assume a back-ended Series 6 module sale profile, as well as a significant Series 6 cost reduction with profile over the next two quarters. As Mark noted earlier, our Series 6 cost per watt is expected to drop approximately 30% from Q1 to Q4. We also continue to expect approximately 60% of our ramp-related and startup charges to have been occurred in the first-half of the year; secondly, while we continue to forecast the closing of multiple project sales, both in the U.S. and internationally in the second-half of the year. Timing between Q3 and Q4 remains uncertain and put out a material impact on the timing of revenue and earnings between the third and fourth quarters. With regards to our U.S. project sales, we continue to be pleased with the progress made in sales processes, for those assets with off-take agreements with FCE. Recent legislative developments in California have been positive, but uncertainty around timing and value remains. As indicated on the previous call, should the market not reflect what we believe to be the appropriate risk for as values for the assets we would look to refinance the assets and hold them on balance sheet for the period of uncertainty, rather than selling at a price below what we believe to be fair value. As a reminder, whilst unlikely, should this occur it could result in full-year EPS approximately below the low-end of the guidance range. Thirdly, we continue to highlight that our guidance is not reflective of potential high legal costs associated with defending the class action lawsuits, but these defense costs may exceed our insurance coverage limits. In addition, our guidance does not take into account the financial impact of any resolution of that lawsuit given the uncertainties of trial. With these facts in mind, we're updating our 2019 guidance as follows. Net sales guidance remains unchanged. Gross margin guidance has increased 50 basis points to a revised range of 18.5% to 19.5% due to higher upfront recognition of margin on the Muscle Shoals and Cove Mountain projects associated with the sale structure discussed earlier, offset by an increase in Series 6 ramp-related costs. Operating expense forecast has been lowered by $10 million to a revised range of $360 million to $380 million as a result of decreased plant startup expense, which is now forecast to be $55 million to $65 million, partially offset by higher variable compensation expense. The operating income guidance has been increased to a revised range of $290 million to $340 million as a result of the above changes. Full-year tax expense is now forecast to be approximately $70 million, up from a previous estimate of $50 million. The increase is primarily due to a shift in jurisdictional mix of income and the previously mentioned returned provision expense. And earnings per share, net cash, capital expenditures, and shipment guidance is unchanged. Finally, I'll summarize the key messages from our call, on slide 12. Firstly, we continue to be pleased with the progress on our Series 6 platform, including the significant progress of key manufacturing metrics. Secondly, our year-to-date bookings of 4.6 gigawatts continues to strengthen our future contractor position. And we're now approximately 60% contract in relation to our 2021 supply plan. And lastly, we have increased our gross margin operating income guidance and maintained our full-year EPS guidance range. And with that, we conclude our prepared remarks and open the call to questions. Operator?

[Operator Instructions] Your first question comes from Philip Shen with ROTH Capital Partners. Your line is open.

Hi, everyone. Thanks for the questions. I have three. The first one is, recall the slide that you guys put out back in Q4 of '18, I think it was slide 12, where you had your average cost per watt in Q1 was 30% above that, Q2 5% above that, and then Q4 in '19 was expected to be 10% below average for the year. Can you guys just give us an update as to where things stand relative to that? I know -- pardon me; that you talked about meeting your objective and so forth, how does things stand relative to that, first? And then secondarily, as it relates to bookings, how are bookings looking into 2022, with this bifacial exemption are customers starting to look more closely at the book bifacial offerings by your peers. And then finally, can you give us an update on your view of -- your latest view on capacity expansion, and in general maybe -- capital allocation in general? So thanks for taking all these questions. Appreciate it.

All right, Phil. On the cost per watt and what I did say in my prepared remarks was that we're happy with where we are right now. We met our first-half commitment on the reduction. And as you remembered, it was a pretty steep reduction from first quarter into the second quarter. So we're happy with the first-half results. Still work to be done yet to get to the second-half, a number of things. If you look at the first-half, I mean a lot of it was driven by -- utilization has come up significantly. We've driven up throughput improvements dramatically. Yields have improved significantly. They're all in the metrics that we reflected in the deck, and I referenced it in my comments. And you can clearly see the benefit of that driving down the cost per watt. As I look across what still needs to happen for the balance of the year to get to our cost per watt, it's -- there's no one silver bullet. It's one of many things. We've got labor that needs to come out when we -- through the ramp process and starting of production. We threw a lot of labor into the manufacturing process that we're now in the process of taking out, so there's a pretty significant reduction of labor that should get down the entitlement, where we expect it to be, but in the early ramp phase we threw labor into the process in order to continue to run operations at the highest throughput levels that we can. We've got some building material opportunity still that we've got to capture. We've got negotiations ongoing right now to realize that benefit. And then on top of that there's still -- we got to get the yields up. Yields are at 91%, we got to get those numbers past 95%, closer to 97%. So there's some work to be done there. We still have a little bit of room to go on utilization, so we've got to see that, and continue to drive throughput as to the highest possible optimization that we can. So there's a lot of levers, not one individual lever, but we feel confident with what we still need to do and our ability to get there, but there's a lot of heavy lifting still to go yet to get to the cost per watt for the second-half of the year. Bookings, we're very happy with bookings and where we are. And you can see from the slide that the bifacial exemption happened, I think it was either June 12th or something along that line, the bookings that we were able to secure with a couple of two key new customers, and both happened after that date. Not to say that there was an inflection point and discussions with the customer around ramifications around bifacial modules. I don't have any concern around our ability to compete with a bifacial module. It's just a discussion around where the economics land. So to me the bigger challenge we have, if the exemption stays where it is, that it ultimately compromises economics and the realization of what we can capture relative to our competition. The spirit of what was put in place under the Tier 1 was to allow companies to scale and to ramp manufacturing and to enhance overall cost competitiveness to deal with imported competitors. We made an investment, a significant investment in our factory in Ohio for that very reason, coupled with the tax reform that was provided. And what we had hoped for will duly allow our ability to ramp our new facility in an environment that wouldn't be under siege by a flood of imports. And I do think there's a risk that that could happen with the exemption as its current written, unless there's some form of a modification to it or either recession or some form of quota. I think it will create some challenges that we'll have to be able to deal with. So, yes, we're disappointed with that decision, as I said in my comments. Capacity expansion, if you look at 2021, as we highlighted in the slide there, the committed supply plan is basically about 6.5 gigawatts. If you look at it coupled with our systems business that we have -- we anticipate to have in 2021, we have about 1-1.25 kind of available capacity still in 2021. And we're focused on what we can do to potentially address that. We're very encouraged to hopefully see positive results with what we're doing in Perrysburg, as I indicated in my prepared remarks that it -- with that plant we'll go into the ground with additional capacity, about 5% to 7% incremental capacity. Which would say that at a name plate basis we could drive somewhere in the range of 60 megawatt to 80 megawatts, somewhere in that range of incremental throughput if we're successful, and what we'd like to be able to do is to then replicate that across the balance of the fleet, and continue to look for other opportunities for throughput. If you look at my prepared remarks, one of the things we highlighted was that the benefit we've seen in Vietnam is to have two factories co-located at one site, and then whether it's the leveraging of the whip [ph] buffers, whether it's the redundancy that you have around the toolset across both factories. So we know we want to leverage that across Malaysia, Vietnam, and the U.S. We've got the U.S. covered now, Vietnam is already addressed, and then we'll end the process by the end of this year we'll start the conversion of Malaysia. But then beyond that we just want to continue to drive throughput, because two things, efficiency and throughput are going to drive to our lowest cost per watt, and so we're very focused on doing that. We're continuing to evaluate options around how we can get additional capacity out of those factories. Plus, we still have the optionality if we choose to convert KLM 1-2, and so that's another 1.2 gigawatts that could be put into the mix. My first choice would be to optimize the efficiency and the throughput levers first, and then look to an expansion or I should say a conversion to KLM 1-2. A lot of different options and things and scenarios that we'll have to evaluate, but very happy with the demand and supply backlog that we currently have in the contract, and now really almost through the next 10 quarters.

Your next question comes from Julien Dumoulin-Smith with Bank of America Merrill Lynch. Your line is open.

Hey, good afternoon everyone. Thank you for the time. Maybe to just pick up where you just left off, in fact, why don't we talk a little bit, if you can, on this cost per watt trajectory, not just heading into 4Q, and I appreciate what a lift that may be already. How do you think about that over time here especially as you think about the scaling the megawatts here too? I mean just -- I want to focus on the cost per watt metric and where we can go from here. And I don't want to preempt too much guidance into '20 specifically, but trajectory-wise, how much more is there to go sort of overall, especially as you see these other products continue to trajectory on cost themselves, be it bifacial or otherwise?

It's hard to go forward with too much detail -- or specifics. But what we said before, even with the commitment when we first launched Series 6 and then obviously a significant cost reduction from Series 4, but that initial indication which was about a 40% reduction relative to our Series 4 cost. But that wasn't necessarily an endpoint of a destination that we still had room to run. And the two most significant levers around that are continuing to drive up our efficiency. And then if we can drive incremental throughput across each of our factories, those will have some significant impacts on the cost per watt, and enable us to continue to drive the cost down to create an advantaged position on a cost position to our competition, which is the ultimate goal that we had. Clearly it is challenging in terms of what we're seeing in the marketplace with some of our competitors and their cost. But we think the final destination still allow us to have an advantage position. There's other things we got to work through though that helps us through that destination. And one is the frame. We've talked before about the frame, and even the design of the frame is actually adding cost to the module. So we've got to optimize against the frame. And it really is an optimization across the frame and the glass, so it's a combination of glass thickness and the associated frame that the packaging, that those three components the two sheets of glass and the frame make up a very significant percentage of the overall build material. So how do we optimize against that and drive that down from where it is right now. And, yes, we've got a number of options around how to do that. And then we just need to continue to drive and improve our yields. I Would say the other one that's a little bit of a headwind right now is your yields, as I highlighted, we're at 90-91, and we need to drive that up. So it's not only driving the yields up, it's also where does scrap occur within the manufacturing process. And the more that we see the scrap loss in the backend of the factory it just drive a higher cost because the majority of the bam is already incurred at that point in time. So there's a lot of things we need to do along those lines, but I don't think there should be a view that there's not additional room still to go and continue to drive to as the lowest optimal cost point. A lot of work though to make it happen, but we got to first figure out second-half of this year, and then carry it forward from there.

If I can just quickly ask on the incremental bookings for ASP, how firm is the market at this point? We saw some uptick in pricing for the first time in a while in the U.S. Obviously bifacial is impacting things now, but just where are we on the incremental bookings. And just if you can talk a little bit on market pricing today, as you've already alluded for bifacial?

Yes, so, look, I'm real happy with the two gigawatts or so, north of 2 gigawatts on a gross basis of bookings. I mean that the ASPs that we're realizing on the incremental volumes is consistent with what we saw in the first-half. So if I look across the north of four gigawatts of bookings that we have year-to-date, that ASP is very firm and consistent really across that entire volume. And really only variation you have is what year are you shipping in, right. So some of the bookings that we had in the first quarter still were at 2020, now we're all into '21, we've got some bookings out in '22, and even some that touch into '23. So the real variation that you see right now around the ASP depends on the year which you're bookings against. But we've been pretty pleased with how firm the market has been.

Yes, Julien, one thing we want to talk about that remark I want to make clear is the difference between what you're going to see in the Q when comes through tomorrow in terms of the backlog reported there, which again is rounded and shown in gigawatts and billions, so there's a lot of error that can happen in that rounding, but that's where we've actually been booking new bookings. There are a couple of atypical events that happened, as we mentioned on the call, that impacted the number you'll see in the Q, and that was this customer dispute accommodation we had and discreet events around Cove Mountain and Muscle Shoals, but relative to where we're seeing in the market now for new bookings, we're seeing booking out with 300 and we are very happy with where we're seeing those.

Yes, and just -- and you got to remember too, just the natural cadence is going to be that as we ship you know, we're shipping 19 volumes and we're replacing them with 21 or later volumes, you're going to see some natural erosion of that metric. But at the same time you'll see margin expansion because the cost profile that we'll have in that horizon is going to be much more advantage relative to what we're -- what our current costs of our Series 6 production is. So you've got to look at it from both perspectives, but the metric in and of itself naturally is going to trend down over time.

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

Hey, guys, thanks for taking the questions. I'm going to try to squeeze in three here as well. I guess first off in the past you've been telegraphing some bookings moderation moving through the year. We're obviously not seeing it yet. So maybe just a quick update on your thinking around bookings trajectory as you move through 2019, has that changed versus what you said before. Second on the gross margins you mentioned Cove Mountain and chose a bunch, Alex and I know that moving around in terms of buckets but was that in the module, gross margin of 5% or was it embedded in the systems gross margin and then can you quantify what that impact was. And then just last one, I squeeze in here on the 5% to maybe 7% nameplate capacity increase at Ohio. Mark can you elaborate a little bit more. Is that a debottlenecking process, what amount of CapEx is involved and then is it a quarter or two if you see success where you could then decide to roll it out to Malaysia and Vietnam? Thanks.

Yes, I do the bookings in the class and I'll let Alex talk to the gross margin but yes. I've been real happy with the ability of our sales team to engage with customers and to get to an opportunity to book volumes that are sitting that far out in the horizon. But one of the things as I said in the prepared remarks is that there is a significant undertone of wanting to lock into multi-year agreements. Having certainty around the technology and ability to deliver the committed band of which they're going to rely on and then design around and the fact that we'll stand behind the contracts and there's not going to be repricing or anything else along those lines. And I think that's playing to our strength. The two large orders that we have for the first half of this year one in Q1 and the other one here and even the one that we said that there is a Phase 1 and a Phase 2 really is reflective of that. And it's really the confidence in developing those types of relationships with our partners and obviously a shared commitment and trust and having gotten in certain situations been put in difficult situations by some of our competitors at various points in times and given safe harbor and other things that are in front of us. Nobody wants to be in that type of position where they have a partner that is unable to supply them or deliver against their commitments. So I think that's playing to our strengths, so yes we have sort of given an indication of second half weighted bookings, we clearly are ahead of where we thought we would be. There's still a lot of opportunity even yet for the balance of this year. As we said we still are confident our ability get to at least a one to one booking ratio which I would say we've got another 1.2 gigawatts or so something in that range. We've got a couple of pretty significant deals that hopefully we can be able to bring across the finish line over the next few quarters. So I think we can get there but have been very pleased with what we're seeing from that standpoint. On the capacity side, it's really it's a debottlenecking, it's also it's basically there is some CapEx that you think about where your constraint is and your production process and then adding a little bit of capacity there or resiliency, redundancy and that creates incremental throughput across the remaining operations. And so there's a little bit of that. It's not a significant CapEx and if we are successful we can roll it out within a matter of a few quarters across the balance of the fleet is the only real lead time issue is just to the extent there's capital requirement is just lead time from the vendor to provide the capital. But it's relatively short time from the point of decision to actually see in the benefit of the throughput.

Brian, to the question on gross margins, if you look at how we've typically structured deals historically when we had an EPC as a profit pool associated with the development of profit pool associated with the module and then piece with EPC, those are all lumped together into one large profit pool which would then be recognized on a percentage completion basis throughout the project life. What we've done here is we've sold the development projects asset and then the fully recouped on development costs and taken a development fee upfront. And remember if you look at the risk profile that we talked about at our Analyst Day year and a half ago, and that is higher margin piece of the business and that's flowing through the system segment. And then now we then have a module agreement with that project company to deliver modules in that module revenue and module flow through the module segment over time. So that's the split you're seeing here, we haven't broken out the exact Delta but that's how it's going to be recognized over time.

Your next question comes from Michael Weinstein with Credit Suisse. Your line is open.

Hi, guys. Can you give your visibility into Safe Harbor demand and pricing, do you expect to extend the Series 4 lines for the first quarter of 2020?

We are looking at Series 4 and opportunities for that, we have gotten requests from customers around availability of Series 4, you got to remember for sure right now we're running two factories in Malaysia excuse me of Series 4. And we've heard them KLM 1-2, and KLM 3-4, 3-4 for sure is closely shutting down, we're going to ramp that up or going to get Series 6 production out of that product most likely by the end of 2020. It's matter what we do with KLM 1-2 and there's a couple of different things, there's someone here domestically in the U.S. and we've got some pull from customers right now to do few things, safe harbor as well as we have some examples which customers are actually having issues with damaged modules, hail damage in particular and asking if there's a way not for solar technology but silicon technology and asking if there's a way that we could probably help support their needs where they may actually replace some of the crystal silicon and use First Solar product. We only have a Series 4 that could actually accommodate that type of request. There's other opportunities we pull through of opportunities internationally for Series 4 in some key markets. So we're looking at that and there's some synergies that we capture think of it as the purchasing power across the glass while the actual form factor of the glasses is not the same between Series 4 and Series 6. There are some synergies along that aggregate purchasing power buying breaks and the like that we could maybe get some additional leverage only for better pricing on cost on Series 4 but potentially better cost on Series 6, so there's a lot of options that are being looked at. We'll have more information around that probably in the upcoming guidance call that we'll do by the end of the year.

Your next question comes from Colin Rusch with Oppenheimer. Your line is open.

Thanks so much. So in last call you talked a little bit about the project business and some inefficiencies there that you were working on fixing. Could you just give us an update on what's happened there and what you're able to accomplish in the last quarter?

Yes, so there is I think what we've highlighted and I think was in the last earnings calls, maybe 1-4 that we have put a new leadership team in place and we are evaluating kind of the long-term relative competitive position of our own EPC offering and trying to determine what is the right strategy and the view is very simple, if we can be best in class as it relates to our EPC execution then similar to what we feel like we're best in class in O&M, we're best in class on our module technology if we can do the same with EPC then that'll be the path that we'll pursue if we can't then we'll have to look at options. As Alex indicated in his remarks that we have structured two deals here recently that were only the sale of development assets with follow-on module sale agreement. We chose not to engage with EPC execution at this point in time just given the uncertainty and the changes that we're going through until we can get our feet back underneath us, it's hard to sort of make additional commitments. As it relates to the existing projects and the execution against the existing projects, I think the team has made some very good progress getting where we need to be on cost and schedule. We still need to go. We still need further to go in terms of our ability to meet and satisfy our customers expectations whether it's third-party EPC for example, I would say that we haven't necessarily lived up to a standard that we want to live up to in terms of customer experience and we've got to do better job from that standpoint. But look there's a lot of moving pieces that we're looking at in evaluating a number of different options and we'll look to give you more color when we have more details.

Great. And just one quick follow-up, just as you look at the mid to late-stage pipeline, how many new customers are in that and how much of that is really existing customers that may try to leverage some of that potential new business into price reductions on existing contracts?

I don't have the two orders that we got for this quarter, were new customers, I don't have that exact mix between, what sits in there that turns into existing customers versus new customers. I would argue, though, that there is a pretty high percentage of that pipeline that the customers that we've done business with that's largely representative of what you see in the marketplaces, you know, the next areas of the world, the ETFs of the of the world and others. I mean, they're going to be key customers. And they'll be not only in our contracts volume, but they'll be in our pipeline volume as well.

Our final question will come from the line of Travis Miller with MorningStar. Your line is open.

Good afternoon. Thank you. You answered most of my questions. But at a higher-level question, you mentioned batteries in your remarks there. And just wondering, how does that impact you guys, is this battery development is something that improves the number of megawatts you can sell or does it change pricing at all? Is it something that you might even eventually be involved in, and in terms of offering full package?

Yes. So I mean, let's be clear. I mean, as it relates to the battery, it clearly enhances the overall solar value proposition. We've talked about this before, as we've moved from energy only contract to -- we refer to as flexible solar generation, which allows you to effectively provide value beyond the energy, which could include ancillary services. And we've been -- without being able to leverage that in some key markets and some opportunities. And we've done a number of studies, whether we've done a study with CAISO and NREL, we've done a study with E3 and TECO around that demonstrates kind of that flexible solar value proposition. And then, it gets into dispatchable energy. And so, that's the evolution that we see. And we do believe that you can get to a relatively high solar penetration in a number of key markets before you ultimately have to get to battery integration, but the market starting to trend that way, we do you think it sort of creates this disruptive opportunity where you can displace the deal that we want with APS and what we refer to as our some strange street project, that was an all resource. We competed solar against gas peaker and other forms of generation, and we were able to win a portion of that RFP. So I think it just, it further enhances the overall value proposition. Now as it relates to technology. I mean, the technology, as it evolves right now is dominated by lithium ion and it's really leveraged off of the scale that's being created through ED. And I see that as kind of the near-term, the most competitive solution that will be in the marketplace. So I wouldn't expect us to get into the battery side of it. Now on the power plant control side and the optimization and dispatching of the energy generation and optimizing that against the -- and for example, when we are done with APS there's a pricing tier structure that determines the energy value that's being generated and how do you optimize charging of the battery versus statute of the battery to capture and to optimize and to capture the highest value, those are the things we'd like to stay close to, we think that fits in. We'll do O&M on that plant; we already have the power plant control. So it's more or less modification of a capability we already have that further enhances the value proposition that we can provide to the customer. So that's how we see, it's an important piece it will evolve. Near-term I think you can see a quite high solar penetration before you have to get into dispatch for generation but in some markets like California; the value proposition is a little bit different and more immediate need potentially and points of time throughout the year. You'll see more battery installations there. You'll see some in the Nevada, you'll see some here in Arizona, but number of other markets are probably way too early in their evolution to really require at this point in time.

There are no further questions at this time. This concludes this conference call. You may now disconnect.