First Solar, Inc. (FSLR) Q1 2020 Earnings Report, Transcript and Summary

Good afternoon, and welcome to First Solar's First Quarter 2020 Earnings Call. This call is being webcast live on the Investors section of First Solar's website at investor.firstsolar.com. At this time all participants are in a listen-only mode. As a reminder, today's call is being recorded. I would now like to turn the call over to Mitch Ennis from First Solar Investor Relations. Mr. Ennis, you may begin.

Thank you. Good afternoon, everyone, and thank you for joining us. Today, the company issued a press release announcing its first quarter 2020 financial results. A copy of the press release and associated presentation are available on First Solar's website at investor.firstsolar.com. With me today are Mark Widmar, Chief Executive Officer; and Alex Bradley, Chief Financial Officer. Mark will begin by providing a business and technology update and discuss First Solar's response to the COVID-19 pandemic. Alex will then discuss our financial results for the quarter as well as our outlook for 2020. Following the remarks, we'll open the call for questions. Please note, this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations, including, among other risks and uncertainties, the severity and duration of the effects of the COVID-19 pandemic. We encourage you to review the safe harbor statements contained in today's press release and presentation for 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, especially in light of the extraordinary situation that we're all facing. I hope each of you and your loved ones are safe. I want to begin by discussing the country's response to the COVID-19 global health crisis, including the impacts we are seeing on our business and the actions we are taking to support our associates, customers and partners. Turning to Slide 3. Firstly, and most importantly, we are committed to our associates, customers and partners around the world. We are working to navigate this unprecedented challenge together with safety as our top priority. At this time, the majority of our office-based associates are working from home to minimize large concentrations of people at our offices and manufacturing facilities. As a technology manufacturing company, we do require certain associates to be physically present at our production facilities. In these locations, we have implemented stringent health and safety protocols that include, among other measures, temperature screenings at facility checkpoints, a mask requirement for all our manufacturing associates, a round-the-clock sanitation of high-touch areas and social distancing. In order to further protect our associates, we have also implemented strict limitations on third-party visitors to our offices and manufacturing sites. Through these practices, we strive to protect the well-being of our global associates and ensure that our technology is safely manufactured and delivered to our customers. In meeting the clean energy needs of the global economy, we will continue to balance our top priority of safety with delivering value to each of our stakeholders. We recognize the challenges that our associates and their families are facing in this period of great uncertainty. And we're very proud of the dedication, focus and commitment that we witnessed from our associates over the past months. It is during challenging times like these that our culture of agility, collaboration and accountability and the strength of our differentiated business model shine through. Turning to Slide 4. Our core operating principle is to endeavor to create shareholder value through a disciplined, data-driven, decision-making framework that delivers a balanced business model of growth, profitability and liquidity. With this guiding principle, we will continue to adapt our business model to remain competitive and differentiated in a constantly evolving market through our points of differentiation, which include a competitively advantaged cad tel thin-film module technology, a vertically integrated continuous manufacturing process, an industry-leading balance sheet strength and a prominent sustainability ideology. We have created a resilient business model that better enables us to manage through periods of uncertainty, including the current environment. The strength of our business model is reflected in our committed Series six road map capacity of approximately eight gigawatts and our multiyear contracted backlog of over 12 gigawatts. We are pleased with the contracted backlog we have built as it provides increased visibility into our future sales, reduces financial exposures to spot pricing and aligns our capacity plan with future demand. Turning to Slide 5. I will next provide an update on our module and systems businesses. On March 26, we provided a manufacturing operations update in light of recent developments related to the COVID-19 pandemic. At that time, we indicated our manufacturing facilities in the United States, Malaysia and Vietnam were committed to operate under their respective circumstances and government mandates. Through today's earnings call, we continue to manufacture Series six under their local government orders, which include the following. Firstly, on March 22, the state of Ohio issued stay-at-home order, which was extended to May 29. Recently, the Ohio government rolled out a plan to gradually reopen other parts of the state's economy, while still minimizing the spread of COVID-19. Through today's earnings call, our Ohio facilities have been permitted to operate as an essential business under the stay-at-home order. However, with the closing of schools and the associated day care needs as well as other factors, we have experienced a decrease in our production workforce. In March and April, our Ohio one site operated at full capacity. However, the temporary decrease in labor availability yielded an approximately 25% reduction in capacity at our Ohio two during these months. Starting in May, essentially the entire manufacturing workforce has returned, and we expect Ohio two will return to full capacity. During this period of transition, we incurred some incremental costs for overtime and supplemental pay. Secondly, on March 18, the government of Malaysia enacted a movement control order, which was extended to May 12, and from which First Solar was exempted as an essential business. Under the order, the workforce at the factory had to be reduced by 50% to improve social distancing while maintaining full pay for all associates. In order to comply with the order, we elected to maintain Series six production while halting Series 4. We have anticipated discontinuing Series four production during the second quarter of 2020. Prior to the movement control order coming into effect, we had produced approximately 2/3 of our expected 300 megawatts of Series four production for the year. Taking into account inventory on hand, future expected warranty requirements and following engagement with certain customers to replace Series four with Series six modules, we have elected to accelerate our Series four shutdown and will not restart Series four module production. However, due to the movement control order, we have experienced some delays in completing the exit process of our impacted associates. However, despite operating under the reduced workforce reduction, through labor optimization and a work-from-home strategy for all nonessential Series six manufacturing associates, we achieved Series six capacity utilization rates above 100% at our factory in Malaysia during March and April. Thirdly, on April 1, the government of Vietnam ordered a period of nationwide isolation, which required compliance with government-mandated safety criteria in order to continue manufacturing operations. We implemented all requirements and continued to operate at over 100% of nameplate capacity during March and April. A significant achievement to highlight, the team's commitment to safety was recognized by government auditors as we achieved the best safety score out of the 15 large manufacturing facilities audited in the Ho Chi Minh City area. Our operational performance to date has been facilitated by our strong supply chain partnerships, which have enabled us to minimize disruptions to raw material supplies to the factory. Throughout the crisis, the vast majority of our third-party suppliers have continued to serve us. In cases where we have had challenges in our supply chain, we have substantially mitigated those disruptions through active dialogues with our vendors and implemented implementation of contingency plans. To date, delays related to procurement of raw materials and components have not exceeded a week. From a shipping and logistics perspective, we have seen disruptions in global cargo routes and capacity. Despite sailing cancellations, port congestion and staffing reductions, the impact on inbound raw material deliveries have so far been limited. We continue to work with our partners and customers to mitigate these disruptions. Finally, with regards to customer deliveries. In several instances, our customers are experiencing delays in their permitting and EPC process, which is affecting our ability to - for them to receive our module. In all cases, we continue to collaborate with our customers and provide solutions to challenges they are facing as a result of the current environment. We are committed to meeting the needs of our customers, while the delivery date changes may impact the timing of revenue recognition on our module sales. Turning to the systems business. With regards to early stage development, the most significant impact of the pandemic is the inability to hold public gatherings, which are often a step required in completing the permitting process. Accordingly, our development team is evaluating the potential to utilize virtual meetings to fully satisfy these requirements. From a PPA standpoint, we have continued to make significant additions to our contracted pipeline in the United States and Japan. Since the prior earnings call, we have been awarded three PPAs for projects located in Tennessee, California and Texas across a diverse set of utility, CCA and corporate offtakers. These projects secure system volume in the time period that captures the full value entitlement of our ITC safe harbor strategy and copper replacement program. Additionally, these projects have module shipment dates based between 2021 and 2023, which importantly extends our contracted backlog into later years. From the construction standpoint, we are nearing completion of the last remaining projects being constructed in-house by First Solar's EPC and the remaining projects currently under construction being financed on our balance sheet and executed by third-party EPC partners. While our construction projects have experienced some combination of constraints related to COVID-19, such as certain balanced system supply delays and schedule impacts related to labor availability, we have been working with relevant stakeholders to remediate any project schedule delays. The majority of these delays at this time have been mitigated. As it relates to project sales, these require input from and coordination with multiple government and private sector counterparties across a variety of development and financing areas, many of which have faced disruptions in business operations. Therefore, we expect to see delays in project sales in the United States, Japan and India. However, our strong net cash position provides us with financing flexibility and the option to balance sheet finance project construction as well as temporary hold operating assets through periods of market dislocation or disruption in order to create options to maximize value. Alex will discuss this later in greater detail. With regard to O&M, as one of the world's largest O&M providers, we continue to safely and effectively manage our utility-scale portfolio, so these power plants can continue to generate reliable clean electricity. Our O&M business is well positioned for the current environment as our strategy emphasizes remote monitoring, analytics and predictive maintenance to optimize power plant health and minimize on-site presence. In our operations center at our global headquarters in Arizona, we have implemented stringent health and safety measures in seating arrangements in line with recommended social distancing protocols. As a result of these measures, our O&M business continues to efficiently and safely meet the needs of our customers. Turning to Slide 6. I will next provide a market, technology and manufacturing outlook. While we are monitoring the near-term impacts of solar procurement, the catalysts for driving increased utility-scale solar penetration continue to grow. Firstly, in many markets, new-build utility-scale solar is economically competitive with fossil fuel generation on both a total and marginal cost basis. In fact, at the start of 2020, the U.S. Energy Information Administration estimated that the United States will see six gigawatts of uneconomical coal capacity decommissioned in 2020, while 13.5 gigawatts of new utility-scale solar would be installed. Secondly, our technology's performance and reliability are well understood. With over 600 gigawatts of cumulative capacity installed globally through the end of 2019, solar has transitioned from an alternative to a mainstream energy resource. Finally, while solar experienced a period of significant expansion over the past decade, we are still in the early innings of growth. Although United States has 80 times more solar installed today than it did a decade ago, the 77 gigawatts of installed solar capacity only accounts for 2% of the country's electricity generation. Against the backdrop of growth in demand for cleaner electricity and global commitments to achieve climate goals, we see significant runway for solar installation growth. Our Series six capacity plan is well positioned to capture a rapidly growing global PV market. In this context, I would like to note that our long-term capacity expansion road map is essentially unchanged. To date, the only shift in production strategy is delaying the plan 2020 optimization of our Vietnam factories. This elective decision reduces downtime in 2020, and we expect this will partially offset underutilization of our Ohio two factory. Shifting to our technology road map, our long-term technology road map remains unchanged to date. However, as operational limitations at our advanced research lab in Santa Clara, California, continue for an extended period, the timing of this road map may be delayed. As the only U.S.-based company among the 10 largest PV module manufacturers globally, we are committed to manufacturing and diversifying our supply chain in the United States and supporting U.S. manufacturing jobs within First Solar and externally. A good example of this commitment is a supply agreement with a glass provider that enable the construction of a new glass-float facility approximately 10 miles from our Perrysburg, Ohio manufacturing site. On a similar note, we are pleased with the decision in April of the office of the United States Trade Representative supporting the removal of the exclusion of bifaced solar panels from the Section 201 safeguard measures and are monitoring the resolution of the related litigation in the U.S. Court of International Trade. While we have been able to contract through the iterations of the bifacial exemption, we believe this decision of the U.S. Trade Representative is consistent with the underlying intent of Section 201 measures and helps promote a level playing field for U.S. solar manufacturing and innovation an environment of both free and fair trade. Turning to Slide 7. I would like to briefly highlight our bookings activity for the quarter. Despite the uncertain economic environment, demand for our Series six product remains strong as evidenced by the 1.1 gigawatts of net bookings since our prior earnings call. Included in this total are approximately 0.4 gigawatts of third-party module sales and 0.7 gigawatts of systems bookings. In addition, 0.7 gigawatts of the net bookings is for deliveries in 2022 and 2023. This demand for Series six and the strength of First Solar as a trusted partner have resulted in a year-to-date net bookings of 1.8 gigawatts. After accounting for shipments of 1.3 gigawatts in the first quarter, our future expected shipments are 12.3 gigawatts. Internationally, we are pretty pleased with approximately 60 megawatts we've booked in Japan since our prior earnings call. Although procurement volume has slowed in Europe, India and Latin America, we are cautiously optimistic that demand will recover after the COVID-19 pandemic. Turning to Slide 8. As mentioned previously, the catalyst for increased solar penetration continues to grow. As such, we expect our mid- to late-stage pipeline of opportunities to continue to support the growth of our contracted backlog. In terms of segment mix, the pipeline of 7.5 gigawatts includes 6.3 gigawatts of potential modules sales with the remaining 1.2 gigawatts representing potential systems business. In terms of geographic breakdown, North America remains a region with the largest number of opportunities at 5.2 gigawatts, Europe represents 1.6 gigawatts, with the remainder in other geographies. Finally, operationally, I am very pleased with our manufacturing execution, particularly given these extraordinary circumstances. During March and April, megawatts produced per day was 14.8 and 15.3, respectively. Capacity utilization was over 100% in both periods. Manufacturing yield was 94.5% and 95.4%. Average watts per module was 433 and 435 watts. The percentage of modules produced with antireflective coating was 97% and 98%. And the ARC bin distribution from 430 to 440 watt modules was 94% and 96%. From an entitlement perspective, we have demonstrated capacity utilization of 120% at each of our factories in Vietnam and Malaysia. Enabling and sustaining this incremental throughput, coupled with our module efficiency road map, gives us confidence we can continue reducing our module cost per watt. I'll now turn the call over to Alex, who will discuss our first quarter financial results and outlook for 2020. Alex?

Thanks, Mark. Given the unique circumstances related to the virus, I'll spend only a few minutes discussing first quarter financial results. I'll then provide a framework for how we're evaluating our financial and operational outlook and some of the key risks we see in the current landscape. Turning to Slide nine and starting with the income statement. Net sales in Q1 were $532 million. On a segment basis, as a percentage of total quarterly net sales, our module segment revenue in Q1 was 74%. Gross margin was 17% in Q1. The systems segment gross margin was 11% and was negatively impacted by low overall revenue recognized in the quarter relative to the systems segment fixed costs. This was positively offset by the sale of several early-stage development assets in the U.S. Module segment gross margin was 19% in Q1, which was negatively impacted by $10 million of severance and Series four decommissioning costs, $4 million of a high O2 ramp costs and $4 million of underutilization and excess yield losses driven by temporary declines in capacity utilization. In the aggregate, this impacted module segment gross margin by approximately five percentage points. Operating expenses were $89 million in Q1. And of note, this includes approximately $5 million of legal fees associated with the settled class action and active of debt litigation, $4 million of severance costs related to the February reduction in force and $3 million of expected credit losses on our accounts receivable as a result of the economic disruption caused by COVID-19. In the aggregate, these items increased Q1 operating expenses by $12 million. As a result of the previously mentioned factors, we had operating income of $2 million in Q1. In Q1, we realized a $15 million gain on sale of certain securities associated with our end-of-life recycling program within the other income line on the P&L. This benefit was partially offset by $13 million of credit losses associated with certain notes receivable from one of our investments. During the quarter, we recorded a discrete tax benefit of approximately $89 million related to the Coronavirus Aid Relief and Economic Security Act. The discrete benefit will be partially offset by a related rate impact expected over the remainder of 2020, and we therefore expect a full year net benefit from the CARES Act of approximately $70 million. Additionally, we expect a shift in our jurisdictional mix of income for the remainder of 2020, which we expect to increase the full year tax rate by approximately two percentage points. The combination of the aforementioned items led to first quarter earnings per share of $0.85. Turning to Slide 10, I'll discuss select balance sheet and cash flow highlights. Our cash, marketable securities and restricted cash balance ended Q1 at $1.6 billion. Our net cash position, which includes cash, restricted cash and marketable securities less debt, ended Q1 at $1.1 billion. Our net cash position decreased relative to the prior quarter, primarily due to the payment of the $350 million class action litigation settlement; Series six capital expenditures, which were primarily related to our second Series six factory in Malaysia; the decrease in module prepayments following an increase in Q4 2019 associated with ITC's safe harbor module purchase orders and prepayments for components included on the module builder materials. Cash flows used in operations were $505 million in Q1, primarily due to payment of the litigation settlement and the previously mentioned decrease in module prepayments. Finally, capital expenditures were $113 million in the first quarter. In terms of the financial and operational outlook, we recognize these are truly unique times. And for that reason, we're taking a different approach to our guidance discussion today. Turning to Slide 11. In Q1, we were able to mitigate a significant portion of the impact on our business from the COVID-19 pandemic. However, given the location of our manufacturing facilities in the United States, Malaysia and Vietnam, the location of the majority of our customers of 2020 module sales in the U.S. and the location of the majority of our project asset sales in the U.S. and Japan, the impact was only felt towards the tail end of the first quarter. To date, the company's financial results have not been materially impacted by COVID-19. However, given the significant uncertainties I'll describe momentarily and their potential impacts on our operations and financial results as well as on energy and capital markets, we are withdrawing our full year 2020 guidance. These uncertainties include but are not limited to, firstly, the number, intensity and trajectory of COVID-19 cases globally. Secondly, the actions of federal, state, local and foreign governments in response to pandemic. Thirdly, our third-party suppliers' ability to continue maintaining production and delivery of raw materials and components to our manufacturing sites. Fourthly, volatility in the capital markets, including the tax equity market in the U.S., which may affect the value and optimal timing of our asset sales. Fifthly, logistical constraints, including reduced shipping capacity and port congestion. And finally, the results of local and national assets to gradually reopen economies. We are, however, providing limited guidance for metrics that we believe are largely within our control at this time. This includes a view on full year 2020 module production, 2020 CapEx related to our long-term manufacturing capacity expansion and a view on operating expenses and the efforts we are undertaking to optimize costs as we work through the current pandemic. Beginning with the module business, we anticipate full year 2020 production of approximately 5.9 gigawatts, which includes 0.2 gigawatts of Series four and 5.7 gigawatts of Series 6. From a shipment and sales perspective, whilst we're effectively sold out relative to our 2020 production plan, going forward, we could experience delays in shipments. And the purchases of our PV modules could encounter delays in their ability to take receipt of modules or in the development, financing and/or construction of that project. We're in active dialogue and collaborating with our customers to alleviate COVID-19 constraints where possible. As a result of these assets, the timing of module revenue recognition has the potential to move within 2020 or shift from 2020 to 2021. From a long-term perspective, our 2020 Series six manufacturing capacity plans remain unchanged. We expect to spend $450 million to $550 million of CapEx in 2020, the majority of which is Series six related. And we remain on track to bring our second Series six factory in Malaysia online in the first quarter of 2021. As it relates to our systems business, I'd like to highlight the risks related to the timing of our contracted asset sales in the U.S., Japan and India. Firstly, government shutdowns and restrictions on businesses and operations have resulted in longer lead times for the critical steps in the financing, function and asset sale proceeds. We're working relentlessly with relevant counterparties to ensure the timely success of the activity is required to execute our project sales. Secondly, during the first quarter, a number of prominent financial institutions increased their credit loss reserves as a result of COVID-19. These reserves have the potential to reduce bank profitability. In the U.S., the availability of tax equity is largely driven by the profitability of a discrete set of financial institutions. Several of these institutions also cited a risk of further deterioration in the U.S. macroeconomic environment, namely a decline in GDP and further increases in unemployment. To the extent that these scenarios hold, these institutions may be subject to further loan loss reserves, thus reducing their profitability and tax capacity. To the extent bank profitability is adversely impacted and the availability of tax equity is constrained in the United States, we continue to believe a legislative solution, such as the ability to receive direct payments in place of investment tax credits, is appropriate to alleviate the structural constraints in the tax equity market. This solution will be directly related to COVID-19 pandemic response and efforts to support U.S. employment. We believe such action is critical to support high-quality solar construction jobs, many of which were at further risk, except the tax equity market is disrupted and what advocates for the U.S. Congress consider this as an approach in the next round of legislative responses to the pandemic. Thirdly, project valuations could be impacted by volatility and availability of capital in the equity and debt financing markets. We've seen return expectations of long-term response to equity holds flat, although base interest rates have declined since the start of the year. Of note, infrastructure funds achieved a strong fundraising total for Q1. Utility-scale solar fits well into this narrative as a hedge to equity market turbulence with long-term useful lives and cash flow profile without exposure to input quality fuel costs. From a debt perspective, while base interest rates have declined since the start of the year, credit spreads across investment and noninvestment-grade debt widened. At the same time, the CARES Act has provided a beneficial temporary increase in interest deductibility. Ultimately, the amount, cost and tenure of debt and its value to a project will be determined by the overall credit worthiness of the project. Whilst the uncertain spoken duration of COVID-19 has impacted global markets, we continue to prioritize maximizing project valuation. Accordingly, we may elect to hold our project assets on balance sheet for an extended period based on strategic opportunities or market factors. As it relates to operating expenses, while the pandemic presented new challenges, even before the outbreak, we had already been proactively optimizing our business and long-term sustainable cost structure. For example, in September 2019, we announced the transition to a third-party EPC execution model to enhance project development cost competitiveness and de-risk project distribution for the company. And our final project being constructed by our in-house EPC team is advancing towards completion. In February of 2020, while we had a broader business and cost structure review, we affected a reduction in force. In May of 2020, we affected the continuation of this reduction in force to streamline and further optimize each line of business. Although we expect this reduction to lead to $8 million in long-term run rate savings, in 2020, we expect to see severance-related impacts from this action of approximately $2 million. From the combined February and May reductions, severance now totaled $12 million with expected long-term run rate savings of $33 million to $43 million. In February, during our fourth quarter earnings call, we also announced that we're evaluating strategic options for our U.S. project development business. We continue to work with our financial advisers to determine the optimal path and timing for this process. I would like to note that the current global business operational impacts from COVID-19 may result in companies focusing more on internal initiatives rather than on pursuing new partnerships or M&A deals. And as a result, this may impact the timing of the process. Each of these proactive and strategic decisions align with our vision to accelerate technology, cost and product leadership, to balance growth, profitability and liquidity and to enable us to best position ourselves both during this disruption as well as for the long term. Finally, our $1.6 billion gross and $1.1 billion net cash position remains a strategic differentiator that enables not only stability but also growth in innovation in periods of both economic prosperity and uncertainty. We intend to vigorously maintain the strong liquidity position, and at this time, do not expect to draw on our revolving credit facility. Turning to Slide 12, I'll summarize the key messages on today's call. Firstly, we had Q1 earnings per share of $0.85 and quarter end net cash of $1.1 billion. Secondly, we achieved fleet-wide capacity and utilization of approximately 100% during March and April and have demonstrated capacity utilization of 120% at each of our factories in Vietnam and Malaysia, which gives us confidence that we execute on our cost reduction road map. Despite challenges relating to the pandemic, we are pleased with both our operational and financial performance, achieving results in line with our pre-COVID-19 expectations. Thirdly, demand for our Series six technology remains strong. And we have continued success adding to our contracted pipeline, with net bookings of 1.1 gigawatts since the prior earnings call and 1.8 gigawatts of bookings year-to-date. Finally, given the significant uncertainty posed by the current pandemic, we are withdrawing our previous full year operational and financial guidance. We are, however, at this time able to provide full year 2020 production guidance of approximately 5.9 gigawatts, full year 2020 capital expenditure guidance of $450 million to $550 million and full year 2020 operating expense guidance of $340 million to $360 million, which includes $50 million to $60 million of start-up expenses. And with that, we conclude our prepared remarks and open the call for questions. Operator?

[Operator Instructions] And we have our first question from Mr. Philip Shen [Roth Capital Partners].

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

Yes, Phil. I guess on the pricing side, again, one of the things, I think, we continue to emphasize and one of the points we want to continue to make is, again, how we manage our business and how we continue to try to differentiate ourselves and continue to position our technology to capture the optimal value in the marketplace. If you look at it on a year-to-date basis on the third-party module sales, everything that we booked year-to-date, call it, 1.1, 1.2, somewhere close to that number of the 1.8, the aggregate bookings are - have a 3-handle on it still. So if you look at the average that we've recognized so far against - on a year-to-date basis, it still has a 3-handle on it. Now as you go further out, there's two things that will show you a different complexion around the ASPs. One is how far out are we booking into in some of those module sales like, in particular, the one that you referenced is actually for shipments in 2022 and deliveries, I think, even starts to touch into 2023. So that's one thing. So the further out we go, as you would anticipate, the ASPs will have some amount of erosion as you move forward. The other is geographies of which we're recognizing the - where the models are going to be shipped. So the regions where we have the best value creation, hot humid climates, in particular, we're going to see higher ASPs. So if I had to give you a kind of - if you look at the average, you're going to see an advantage of probably to the average of $0.01 per $0.015 above the average when we're in kind of various core sweet markets for us like a Florida or even a Texas, okay, a Georgia. If you go north - the further north you go, you're going to see some downward pressure on the ASP. And so you may be $0.01 or $0.015 lower than the average if you're in Illinois, as an example. And so the order that we booked with Geronimo, which is, to your point, affiliated with our subsidiary of National Grid, some of that volume, a significant portion of that volume is going to be further up north in markets where we don't have as strong an energy advantage. So that - and it's further out in the horizon, so it sits out into '22 and even it touches '23. So where that volume is going to be north and then further out on the horizon, you're going to see a slightly lower ASP. And so across that average we've booked this year, does some of that volume have a 2, a very high and - a 2-handle on it, but a very high in the two range, it does. The average is still north of 3. And even when you go out into - further in the horizon, call it out into '22 and '23, if we're in a market or hot humid environment, we're still going to - we're still seeing three handles, okay? That's what we're seeing right now. Now again, we have plenty of time to be patient. I'm not holden - beholden to excess supply. Our book is full for the next 1.5 years. And so we can be very selective. We can engage with customers who value our technology, value our relationship with First Solar that we'll - they know we'll deliver, we'll honor against our contracts, and we'll provide a high-quality product. So as you get into that horizon, customers are looking for CuRe in that longer-dated horizon. I think we've got a unique value proposition, plus a lot of that volume that we did with Geronimo, I think almost all of it, is for our new copper replacement product that will create different advantages, better long-term degradation, even improved temperature coefficient. So we're happy with that booking. It's a great partnership relation we've had with them. And we're very happy with them being able to secure that volume. And I would say on balance that everything I've seen so far, I'm still happy with the ASP environment that we're in, given some of the numbers that you've quoted. And unfortunately, maybe some of our other competitors who have excess supply or an open book is maybe a better way to say, yes, they're going to see very challenging near-term ASPs.

And we have our second question from Mr. Brian Lee [Goldman Sachs].

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

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

Yes. And the only thing I'll add on the gross margin, Brian, when you look at it sequentially, a couple of things that are in the mix in there. One is that the - sequentially, the ASP is down for both four and 6, partly because the ASPs in the fourth quarter were benefited from the safe harbor pricing that was in the market at the time. Because, as you know, everybody was trying to capture their safe harbor and some of them took deliveries in - of that product in - by the end of the year. So you saw a little bit better ASPs associated with that, so you see a little bit of that. And the other is that there's still a reasonable amount - volume is down pretty significantly. So you see a pretty big drop in volume sold. And then there's still a reasonable amount of Series four that sits in the first quarter. Now as we move forward, the margin profile will continue to improve. There's about close to five percentage point difference between Series four and Series six when you look at it on a normalized adjusted basis. And as we move forward, you're going to see volume shipments move towards 100% from 36% as we get into second half, for sure, a little bit of Series four in the second quarter. But after that, it's all Series 6. And then as Alex indicated, you've got the benefit of the cost reduction road map as we progress through the balance of the year. And the fleet, yes, as Alex said, I think we're pretty happy with where we are with the fleet. There is some headwind that we're dealing with a little bit on - in Ohio and in Malaysia. Vietnam is performing extremely well. It's really the only factory that has really not been impacted in any way. Both Malaysia and Ohio have seen some impact. So what we'll probably most likely see is Vietnam will overperform for the year, and then they'll make up for some of the challenges that we've experienced here in Ohio as well as Malaysia.

And our next question comes from Michael Weinstein [Credit Suisse]. Q –Unidentified Analyst: This is Maheep on behalf of Michael. Alex, you spoke about the timing issue for the systems that comes from the previous question. But could you talk about any timing issues on the module side, where you might be delaying shipments on the customers' request? And then how should we think about that in relation to any underabsorption on production versus shipments and that impact on the cost later this year?

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

And our next question comes from Mr. Ben Kallo [Baird].

So my first question, there's a bunch of big projects out there that I'm reading about. Where are you on being on those? So like these gigawatt-type projects. I know you stayed clear of that before. And then my second question is, you went through all the, I think, four things about guidance before. But I calculated maybe like $0.40 of project business. And so I'm just wondering why you pulled guidance? And I think you guys have good visibility, but can you talk to your visibility on that?

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

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

And our next question comes from Mr. Colin Rusch.

With those customers, can you give us a sense of the order of magnitude of customers that did not have committed capital and whether you're willing to step in, in terms of being a finance partner with those projects?

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

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

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