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…

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…

[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…

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…

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…

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.+