First Solar, Inc. (FSLR) Q3 2020 Earnings Report, Transcript and Summary

Good afternoon, everyone and welcome to First Solar's Third 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 third quarter 2020 financial results. A copy of the press release and associated presentation are available on First Solar's website at investor.firstsolar.com. With me today are Mark Widmar, Chief Executive Officer; and Alex Bradley, Chief Financial Officer. Mark will begin by providing a business technology update. Alex will then discuss our financial results for the quarter and provide updated guidance for 2020. Following the 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, 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. I would like to start by thanking the First Solar team for delivering a solid third quarter. Our operational financial results were strong, and market demand for our Series 6 technology continues to be robust. We had a number of highlights since our last earnings call, including record Series 6 quarterly production of 1.5 gigawatt, solid bookings of 1.6 gigawatt, commercial production of 445 watt module, and earnings per share of $1.45 bringing year-to-date earnings to $2.65. Our Q3 financial results were driven by a modest second gross margin increase, as well as sales assistance projects. While significant uncertainty remain as a result of the COVID-19 pandemic. We are pleased with our year-to-date performance. As a result of the improved visibility provided by the closing a certain systems project sales. We are reinstating financial guidance for the fourth quarter of 2020. Alex will discuss our financial performance and guidance in greater detail. Turning to slide 3, I'll first discuss our Module segment performance. Year-to-date, we have produced 4.9 gigawatts, including 4.7 gigawatts of Series 6, with each factory averaging over 100% capacity utilization during the third quarter. Throughput was led by our international factories, which averaged 118% and 119% capacity utilization, September and October month to date. Domestically, our Ohio one and Ohio two factories are performing well, averaging 109% and 121% over the same periods. On a fleet wide basis in September and October month to date, megawatts produced per day were 16.9 and 17.9. Manufacturing yield was 96.6% and 97.2%. Average watts per module were 436 and 438 watts. And the ARC bin distribution from 435 to 445 watt modules was 92% and 96%. At the time of our third quarter 2019 earnings call, we had recently validated a new world record 447 Cad tel modules. Building on this, we have implemented these learnings and started commercial production of a 445 watt module. Continuing this momentum over the next few quarters, we expect our top bin to increase further to 455 watts. In September and October month to date, our Vietnam factories achieved a manufacturing yield of 98%. We continue to implement the learnings and best practices across the fleet with a fleet wide yield target of 98% for our current manufacturing footprint by the end of 2021. In the future, we see the potential to incrementally improve the obvious target. As noted previously, continued throughput, module watts and manufacturing yield improvements will help drive down our module costs per watt. Since the previous earnings call, we have not experienced significant disruption to our manufacturing operation from the pandemic. Much of our ability to mitigate the potential impact stems from our vertically integrated manufacturing process, diversified supply chain and differentiated Cad tel technology. By contrast, the largest PV model manufacturers globally produced crystalline silicon modules using a batch process technology with multiple process steps. None of these manufacturers are fully vertically integrated and realized to varying degrees on third party sourcing of poly silicon, ingots, wafers themselves. Productions of a single crystalline silicon module acquires each of these process steps several factories in multiple days. During the third quarter, several poly silicon produces experienced significant disruptions that hindered their ability to maintain manufacturing operations. This disruption coupled with a supply chain largely concentrated among a few Chinese companies reduces the available supply of poly silicon. The poly silicon price increase that follows resulted in downstream pricing pressures for wafer cells and modules, and consequently, for project developers. While the market for poly silicon has since improved, these events highlight the benefits of our vertically integrated manufacturing process, which enables price and delivery time certainty for customer orders within our contracted backlog. From a shipping and logistics perspective, the most significant impact to date remains the challenging global freight market. While limited freight capacity has increased spot rates, our logistics strategy which primarily relies on foreign shipping contracts has out reduced its impact. Regarding our capacity roadmap, we have received the major equipment required to commence commercial production at our 6 Series six factory in Malaysia. However, as highlighted during our second quarter earnings call, third party equipment vendors, as well as our US base associates are needed on site for tool installation. Currently, all non citizens traveling to Malaysia must have explicit written permission from the Malaysian authorities prior to arrival and are subject to mandatory 14-day quarantine period. While several vendors have received the necessary travel approvals, we're continuing to cooperate with the relevant agencies to gain approval for the remaining travel in a safe and timely matter. Delays in the approval process and compliance with required isolation procedures have the potential to impact the timing of commercial production and consequently, our full year 2021 production plan. Despite this uncertainty, we continue to evaluate opportunities across our existing manufacturing footprint to further increase our production and capacity entitlement. Touching on the System segment, our EPS results have favorably impacted by the sale of three projects in Japan and to in India. For the sale of our American Kings project in Q2, the Japan and India sales in Q3 and with a potential sale of the Sun Streams 2 project in Q4, 2020. We have a viable path to close each project sale contemplated in our original 2020 guidance from February. Starting to slide 4, I'd like to highlight the bookings and shipping activity for the quarter. In September, we were awarded the PPA for 180 megawatt AC solar project, with the option for future energy storage located in Arkansas. This project will support the clean energy needs of three General Motors facilities in the Midwest, starting in 2023. Building off of this, and the recent PPAs we assigned with Reagan and Dow, we are witnessing leading corporations taking bold steps to reduce their environmental footprint and doing so supported by technology developed and manufactured in the United States. As the only US headquartered company among the 10 largest PV module manufacturers globally, with a differentiated catch up technology using the lowest carbon footprint and water usage and a leading PV module recycling program that recovers 90% or more of the glass metals and Cad tel semiconductor materials. We are well positioned to address this market need. Additionally, it has been an active quarter for our systems business in Japan, as we continued success adding to our contracted backlog with the addition of two projects totaling approximately 80 megawatts. From the third party module sales perspective, 36 demands has been robust, among other bookings, as announced last week, we secured a 0.9 gigawatt of volume from this to energy for deliveries scheduled in 2021 and 2022. As part of this deal, our Series 6 technology will support six privates in Texas, a region that leverages our temperature coefficient, spectral response, and durability and quality advantages. As a US solar technology provider, we are proud to play a supporting role and district's commitment to achieving net zero carbon emissions by 2050. As highlighted during our Q2 earnings call, we've had a significant volume of 2021 opportunities that were in late stage negotiations, but were delayed due to uncertainty and a tax equity market. While, Alex will provide a more detailed tax equity market update. I would like to note that visibility into 2021 tax capacity has modestly improved. And we secure 0.5 gigawatts of 2021 opportunities since the previous earnings call. Additionally, demand in 2022 and 2023 has been strong, with 0.9 gigawatts of bookings since the previous earnings call. As a result of the recent systems and third party module wins net bookings since the previous earnings call totaled 1.6 gigawatts across 1.5 gigawatts of third party modules and 41 gigawatts systems bookings. Additionally, while not yet meeting all the requirements of a booking we have contracted 0.6 gigawatts subject to conditions precedent for expected deliveries in 2021 and 2023. So the project associated with General Motors PPA has been sold in conjunction with a model purchase order and has been recognized as third party module booking. Included these most recent bookings, we have 6.7 gigawatts go for deliveries in 2021 and 3.6 gigawatts booked for deliveries across 2022 and 2023. In Q3, we shipped 1.2 gigawatts, resulting in year-to-date shipments through the end of the third quarter 3.7 gigawatts. As mentioned during our Q1 earnings call in May, our shipping profile has been back weighted to the second half of the year. Despite this profile, our year-to-date shipments including the third quarter had been below our expectations from the start of the year, largely due to the combination for COVID-19 driven customer project and financing delays. Before delving into the specifics of our pipeline of bookings opportunities, it is important to highlight that some of the trends we are seeing, including the impact of COVID-19 on the near and long term growth of solar installations globally. In the United States, the EIA forecasts that approximately 14 gigawatts of utility scale solar capacity will be added in 2020. This strong demand is led by several states including Texas, California, North Carolina, Nevada, and Virginia. Each was near term development pipelines exceeding one gigawatt. The continued growth of utility scale solar despite the pandemic related headwinds face to the relative health of the US market. Internationally, the impacts of the pandemic have varied by market. While China remains the world's largest solar market, and installed capacity expect it to increase year-over-year. It is seen project completion timelines slipped due to the pandemic. Despite these challenges, the country's 14 five year plan scheduled to be launched in 2021 is expected to call for targets of at least 60 gigawatts per year of installed PV capacity, or approximately 300 gigawatts over the duration of the plan. In Europe, we anticipate a contraction in new install capacity as countries like France extend projects to the deadlines like six months to accommodate for COVID-19 related delays. In India, despite five months COD extension delays caused by a combination of the pandemic and the seasonal monsoons are expected to take a toll on the country's aggregate installed capacity this year. While the global PV industry has clearly not been immune to the pandemic's impact, some developments this year will shape the long term future of the industry. The first of these is a range of new policies designed to decarbonize electricity and mobility further while powering post pandemic economic recovery plans. Arguably, the most wide ranging example is the European Green Deal, which is aimed to transform the bloc into a carbon neutral economy by 2050 by decarbonizing electricity and transportation. The Green Deal which could make solar the number one source of electricity in Europe by 2025 is an example of how political leaders are bundling post pandemic economic recovery with decarbonization commitments. The other comment I would like to note is the growing recognition of the importance of self reliance, and a diversified solar supply chain in some of the world's biggest solar markets. A combination of factors including governmental policy, increasingly tense bilateral relationships, the pandemic, and pricing and supply volatility in the crystal silicon industry, has reignited the debate around risk posed by allowing a single country to dominate the PV solar supply chain. Responses have been varied with new rules that favor PV modules with a lower carbon footprint in South Korea, while India and Europe have renewed talks on domestic manufacturing. Earlier this month the United States, the President issued a proclamation revoking the exemption of bifacial panels from the application of selection 201 safeguard tariffs. Although this exemption is currently subject to a temporary restraining order, preventing the presidential bifacial exemption revocation from taking effect. The common thread, however, is an underlying desire to boost supply certainty and security, while safeguarding domestic manufacturing from unfair competition. In summary, we believe our investment thesis remains inviting as we are well positioned to benefit from the current dynamics in the solar industry. As shown on slide 5, our mid to late stage pipeline of opportunities remains robust. And it's increased 0.5 gigawatts despite bookings of 1.6 gigawatts since the prior earnings call. In terms of segment mix, this opportunity pipeline of 8.3 gigawatts includes approximately 7.7 gigawatts of potential module sales, with the remaining representing potential systems business opportunities. In terms of geographical breakdown, North America remains the region with the largest number of opportunities at 7.1 gigawatt; Europe represents 0.9 gigawatt with the remainder in Asia Pacific. As a reminder, a mid to late stage pipeline reflects those opportunities we believe, could book within the next 12 months, and is a subset of a much larger pipeline of opportunities which total 16 gigawatts of opportunities in 2022 and beyond. From a cost perspective, we indicated during our Q2 earnings call that our Vietnam factory we have achieved a 40% reduction relative to our 2016 Series 4 cost per watt. Building on this momentum as a reflection of our manufacturing execution, we have also achieved this milestone at our Malaysia factory during the quarter. Note as a reminder, our cost per watt metric includes sales rate and warranty. From build materials perspective, growing solar demand and the emergence of bifacial modules, which generally are dual glass, had contributed to pressures on the supply and cost of PV glass. Similar to our shipment strategy, our glass procurement strategy largely relies on four contracts, which has a substantially mitigated this impact today. From a fleet wide perspective, as a result of our continued manufacturing execution, we remain on track to achieve and potentially exceed our 10% cost per watt reduction target between where we ended 2019 and expect to in 2020. In Ohio, our third quarter core cost to watt produce continued to be higher than our international average. Our US manufacturing provides strategic benefits and over time, we anticipate a reduction in the cost for watt through the following initiatives. Firstly, by installing additional tools and optimizing the two Ohio factories into one consolidated platform, we expect to increase nameplate capacity slightly more than 25% to 2.4 gigawatts by the end of 2021. With this additional capacity, we are able to amortize the fixed cost structure including labor and depreciation over more watts produced. We are starting to see this benefit as reflected in October capacity utilization. Secondly, as previously disclosed, we have contracted a flow class supplier agreement with a producer in Ohio. We anticipate starting to receive the initial benefits of this agreement in Q4, and continuing into early 2021, with an expected reduction in the associated variable build and material costs. Finally, our manufacturing yield in Ohio was approximately two percentage points below the fleet average. Through the implementation of learnings from our international factories, we see a path to achieve similar yields at our Ohio factors. Through the implementation of these key initiatives among others, we anticipate our Ohio cost per watt premium over time to reduce to $0.02, including sales rate. Turning to slide 6, I would like to discuss the relative performance of our technology and the lab versus real world operating conditions. PV module lab testing protocols were developed in the early days of solar using standard test conditions of 25 degrees centigrade at a terrestrial standard spectrum. PV modules in the field, however, exposed to variable conditions, including heat, humidity, dust, and extreme weather events such as wind and hail. Each of these factors cause deviation from lab performance, with the effects varies by technology. Ultimately, lifecycle energy produced in the field is what drives project economics. And by analyzing the factors that cause divergence from laboratory performance, we can better understand the value proposition of our Cad tel technology. Firstly, as it relates to temperature, module device, operating conditions can exceed 70 degrees centigrade. Module watt is however is assigned at lab standard test condition of 25 degrees. And as panels heat up over the course of the day beyond this threshold, there's a corresponding decline in power. Series 6 has a temperature coefficient advantage relative to crystalline silicon, which is anticipated to increase further with our copper replacement module, meaning Cad tel responds more efficiently than crystalline silicon to real world temperatures. Secondly, due to the unique spectrum of light Series 6 captures our technology outperforms crystalline silicon on a watt for watt basis in humid environments. Thirdly, estimated useful life of PV power plants can exceed 30 years as a result, aggregation is an important driver of project economics. With the expected implementation of our copper replacement program, we anticipate a reduction in long-term aggregation beyond our current warranty of 50 basis points per year. We expect this innovation will enhance our competitive advantage by increasing lifecycle energy and project value for our customers. Finally, as it relates to by facial technology, while there is a potential for backside energy gain, the ground reflectivity, known as a [Veto] varies by geography, climate and season, and is often inversely correlated with hot and humid climates. Slide 6 depicts the relative lifecycle kilowatt hours expected to be produced by our equal watts of our copper replace Series 6 modules, which we call Series six CuRe, relative to leading crystalline silicon by facial modules. As a result of the aforementioned advantages, as compared to leading crystalline silicon by facial modules, we estimate that our Series 6 CuRe module can produce up to 10% more life cycles kilowatt hours per kilowatt install, in climates with extreme heat and humidity, including Brazil, Central Africa, Southeast Asia, India, and southern United States. Importantly, when implemented, our CuRe product is expected to be well positioned in other key markets with more moderate climates including France, Spain, Japan, and the Midwestern United States. We expect to begin delivering 36 CuRe models in the second half of 2021. Turning to slide 7, I would like to review a framework that highlights the factors that influence ASPs, starting with bifacial. While, backside energy gain is accretive to ASP, with only a modest increase to manufacturing cost a lot, the downstream costs related to additional balance of system structures, increased vegetation management, and higher cost of capital associated with our [Veto] uncertainties are partially offset to this ASP benefit as it relates to crystalline silicon with larger form factors, the potential ASP benefit largely stems from the dilution in the manufacturer's fix bill of material costs rather than an increase in energy density. This potential cost reduction, which may be passed through to the customer is partially offset by the downstream cost of additional support structures, physical handling challenges with oversized modules, increased insurance premiums, and risk associated with cell cracking and wind loads. As relates to our copper replacement Series 6, once implemented, we anticipated ASP accretion due to increase efficiency, improved temperature coefficient, and a significant reduction in long-term aggregation. Importantly, this innovation is driven by efficiency improvements, which results in dilution of our variable and fixed bill of material costs. We expect to capture this ASP accretion as a technology does not significantly impact balance of system and development costs or project risks. Finally, it's important to note the opportunities with our Technology Roadmap, with cell efficiencies entitlement effect in excess of 25%, coupled with the energy advantages of Cad tel, we believe the outlook for our technology platform remains strong. In support of our roadmap over the over the coming quarters, we anticipate certifying a new world record for Cad tel. I'll turn the call over to Alex who will discuss our third quarter financial results and fourth quarter guidance. Alex?

Thanks Mark. Starting on slide 8, I'll cover the income statement highlights for third quarter. Net sales in Q3 were $928 million, an increase of $285 million compared to the prior quarter. The increase was primarily driven by the sales of certain Japan and India projects as well as an increase in the volume of Series 6 modules sold to third parties. On a second basis are the percentage of total quarterly net sales and module segment revenue in Q3 was 46% compared to 58% in Q2. Total gross margin was 32% in Q3 compared to 21% in Q2. The System segment gross margin was 33% in Q3 compared to 21% in Q2. This increase was primarily driven by the aforementioned international project sale, and the sale of early stage development assets, including a project entity associated with the General Motors PPA. This is partially offset by $14 million performance liquidated damages stemming from underperformance of third party equipment and several of our legacies EPC projects. Module segment gross margin was 30% in Q3 compared to 22% in Q2, the several positive and negative factors been impacted this Q3 result. Firstly, we recorded a reduction in our product warranty liability reserve, which was primarily due to low warranty settlements than previously estimated for our Series 2 technology. This resulted in a $20 million reduction of our warranty liability and the corresponding benefits the cost of sale. Secondly, certain of our legacy module sale agreements are covered by a collection and recycling program, where a corresponding expense, the estimated future cost obligation was recognized at the time of sale. In Q3, we recognize the $19 million reduction in our module collection and recycling liability due to changes in the estimated timing of cash flows associated with capital, labor and maintenance costs. This also results in a corresponding benefit to cost of sales. Finally, we incurred an impairment loss of $17 million for certain module manufacturing equipment, including framing and assembly tools no longer compatible with our long term Technology Roadmap. This is also a corresponding increased cost of sales. On a net basis, these factors increased module segment gross margin dollars and percent by $21 million and 5%, respectively. Separately, our module segment gross margin was impacted by negative $6.5 million of Series 4 gross margin, which included $2 million a decommissioning and severance cost. Our Series 4 gross margin reduced overall module segment gross margin by 1.5%. These facts in mind, we're pleased with our overall module segment gross margin result and our Q3 Series 6 gross margin relative to our previous expectation of 25%. This was exceeded despite lower than expected Q3 volume sold and despite incurring $3.5 million of unforeseen COVID-19 driven logistics costs in the quarter. Additionally, another reminder sales price and warranty are included in cost of sales, and reduced module segment gross margin by 6%. SG&A and R&D expenses total $73 million in the third quarter, a decrease of approximately $1 million compared to the prior quarter. That decrease is primarily driven by lower severance and projects impairment, partially offset by higher legal and incentive compensation expense. Production startup which is included in operating expenses totaled $13 million in the third quarter, an increase of $7 million compared to the prior quarter. And this increase is driven by higher startup expenses in our second Series 6 factory in Malaysia. Interest income was $2 million per quarter compared to $4 million in Q2. This decrease was primarily driven by low interest rates and investment balance for our marketable securities. We recorded tax expense of $38 million in the third quarter compared to $10 million in q2. This increase in tax expense largely attributable to higher pretax earnings in Q3. The combination of aforementioned items led to third quarter earnings per share of $1.45 compared to $0.35 in the second quarter. I'll next turn to slide 9 discuss select balance sheet items and summary cash flow information. Our cash marketable securities and restricted cash balance ended the quarter of $1.7 billion, an increase of approximately $29 million compared to the prior quarter. Total debt at the end of the third quarter was $261 million, the decrease from $465 million in end of Q2 as a result of international project sales. As a reminder, all of our outstanding debt continues to be project related and will come off our balance sheet when the corresponding project is sold. Our net cash position which includes cash, restricted cash and marketable securities, less debt increased by approximately $233 million to $1.4 billion. This increase is driven by proceeds from system sales and module segment operating cash flows, which was partially offset by capital expenditures and loan repayments associated with the Ishikawa project sale. Net working capital in Q3, which includes non current project assets and exclude cash and marketable securities decreased by $18 million compared to the prior quarter. Net cash provided by operating activities was $208 million in the third quarter compared to $148 million in the prior quarter. As it relates to our Chicago project, we repaid the project that prior to close which resulted in higher operating cash flows upon transaction closed. As it relates to Miyagi and Anamizu project, the associated project that was assumed by the buyer, which reduced cash, outflows from financing activities and operating cash inflows or transaction flow. Finally, capital expenditures were $106 million in the third quarter, which brings our year-to-date, total $327 million as we continue our Series 6 capacity expansion. Turn to slide 10, I'll next provide an updated perspective on 2020 guidance. On our Q2 call, we provided guidance metrics that we believe were largely within our control or within reasonable line of sight at the time. This included production, operating expense, and capital expenditure guidance for the full year 2020. While significant uncertainties remain regarding the severity and duration of the COVID-19 pandemic and its impact on our operations and financial results; we believe visibility into our financial performance for the fourth quarter has improved on account of the following. Firstly, at the time of our Q2 earnings call, we cited tax equity market uncertainty for projects set to achieve commercial operation in 2021, which has the potential to impact our module customers and our self developed Sun Streams 2 project. Although provisions for credit loss have stabilized somewhat in Q3, significant uncertainty remains for Q4 and 2021. Forecasting tax capacity for the second half of 2021 remains difficult to due to uncertain economic outlook, government response and trajectory of COVID-19. However, some tax equity providers have begun committing to 2021 financings albeit concerned in volume. While this is incrementally positive for the US solar market, we remain strongly supportive of a direct pay legislative solution in lieu of the investment tax credit to alleviate potential disruptions in the tax equity market. Secondly, with the sale of our American Kings projects in Q2, the previously mentioned sales of the Japan and India assets in Q3, and with the expected sale of a Sun Streams 2 project in Q4 2020 or Q1 of 2021; we have a viable path to close each project sale contemplated in our original 2020 guidance from February. Finally, at the time of the February guidance call we anticipated fully and module shipments of 5.86 gigawatts. Shipments through the end of the third quarter total 3.7 gigawatts which are below our year-to-date expectation largely due to COVID-19 driven project, financing, logistics and customer delays. This has resulted in a shipment profile incrementally weighted to the second half of the year. However, a significant volume of modules that we anticipate recognizing in 2020 revenue are currently in transit, or will be shipped in the coming weeks. With the improved visibility for system sales for 2020, and year-to-date progress to module shipments, we are reinstating financial guidance for the fourth quarter that considers this range of outcomes for module revenue recognition timing and closing of the Sun Streams 2 sale. Given the uncertainty around any outcome from the evaluation of strategic options for our US project development business, and the sale timing of our North American O&M business; our fourth quarter guidance assumes no change for our existing lines of business. And today while we've largely managed the impacts of COVID-19 in our business and has not had significant impact on our operation. Our guidance assumes we will continue to be able to mitigate any such impact on our supply chain operation without the incurrence of the material cost. I'll now review our fourth quarter guidance ranges with implied full year 2020 guidance range is included on slide 11. Starting with shipment, due to the aforementioned uncertainties, we anticipate volumes of 1.8 to 2 gigawatts in Q4, which implies 5.5 to 5.7 gigawatts for the full year. Production in Q4 is expected to be 1.5 gigawatts that implies full year 2020 production of six gigawatts including 0.2 gigawatts of Series 4. Not that our full year production guidance 6 gigawatts has increased by 0.1 gigawatts relative to the guidance provided during our Q2 earnings call. Net sales are expected to be between $540 million and $790 million in Q4, which accounts for potential delays in the close of our Sun Streams 2 project sale and module revenue recognition timing. Total gross margin is projected to be 26.5% to 27% in Q4. And note that we anticipate the closing of the Sun Streams 2 project sale will be slightly diluted to overall gross margin percentage. Module segment gross margin is projected to be between 27% and 28% in Q4. We anticipate our module segment gross margin will be supported by an increase in volume sold and continued reductions in our cost per watt, partially offset by a modest supply in ASP. And included in this gross margin guidance is an anticipated 40 basis point gross margin percentage drag due to Series 4. Operating expenses are expected to be between $90 million and $95 million in Q4. This includes production staff and expenses related to our second Series 6 factory in Malaysia at $15 million. We anticipate R&D and SG&A costs, excluding staff and expenses of $75 million to $80 million in Q4. Our current implied full year 2020 operating expense guidance of $351 million to $356 million is within the guidance range provided during our second quarter 2020 earnings call. Operating income is estimated to be between $50 million and $120 million in Q4. Turning to non operating items, we expect interest income, interest expense and other income to negative $5 million. Anticipated tax benefit of $45 million to $ 60 million in Q4, which includes a discrete tax benefit of $60 million associated with the closing of the statute of limitations on uncertain tax position. These results in Q4 earnings per share guidance range of $1 to $1.50 per share, and $3.65 to $4.15 per share implied for the full year 2020. Our 2020 capital expenditure forecast to $450 million to $550 million remains unchanged from the prior quarter. Our year end 2020 net cash balance is anticipated to be between $1.2 million to $1.3 billion, decrease relative to our Q3 net cash positions primarily due to capital expenditures and project spend related to our Sun Streams 2 project. Turning to slide 12, I'll summarize the key messages from today's call. Firstly, we had Q3 earnings per share of $1.45, increased our quarter and net cash position, improved module segment gross margin quarter-over- quarter and reinstated financial guidance for the fourth quarter. Secondly, we had strong manufacturing performance with each factory averaging over 100% capacity utilization in Q3, and that our Malaysia factory achieved our midterm cost to watt target of 40% reduction from 2016 Serie forecast. Thirdly, demand for our Series 6 products is robust and we had continued success adding into our contracting pipeline with net bookings of 1.6 gigawatts since the prior earnings call and 4.1 gigawatts year-to-date. Our contracted backlog remains a pillar of strength with 6.7 gigawatts contracted for expected deliveries in 2021 and 3.6 gigawatts contracted for expected deliveries across 2022 and 2023. And finally, despite ongoing challenges relating to the COVID-19 pandemic, we remain pleased with all operational and financial performance. And with that we conclude our prepared remarks and open the call for questions. Operator?

[Operator Instructions] Our first question comes from Philip Shen with ROTH Capital Partners.

Hi, everyone. Thanks for the questions. I have a few here, so thank you for your patience. The first one is on CIGS. I think we picked up recently that you guys restarted your CIGS research efforts. So wanted to get a sense for what that might mean, relative to Cad tel. Second, I think you guys have talked about getting to eight gigawatts of capacity by year end 2021. Can you talk about the conditions that need to exist to consider expanding capacity, and then what the timing and the locations of that might look like? And then number three here, with the ever growing importance of security of supply, especially in the face of the Shin Jong risk and the concentration of capacity in China? Can you talk about how the tenor of conversations with customers may have changed over the past month? And then help us understand how much is booked in 2021 and 2022 and 2023? Thanks, guys.

I'll let Alex take the last one booked in 2021, 2022 and 23. So I'll try to take the other three because he can gather those numbers. So your question is around CIGS and where to the extent that we are looking at that as a technology or really any technology because at the end of the day core module, technology manufacturing company, that's what we do. And we need to continue to find ways to differentiate ourselves on a technology basis and to find ways to be as disruptive as we can with our technology and always increase advantages relative to crystalline silicon and whatever the ultimate competition may be. We've looked at things in the past. We've looked at the crystalline silicon and mono crystalline silicon. We look at perovskites; we look at everything and as it relates, if your question is CIGS is -- an indication that we don't have confidence cad tel that's not anywhere close to the reality. Cad tel in my mind will always be advantaged relative to six. And we believe it has a roadmap to be advantage relative to crystalline silicon. But the reason that we would look at crystalline silicon, or CIGS or perovskites, or organic TV or anything else that may be out there is how do you complement the two? And we've mentioned this before that we believe over time, that multi junction type of technology will evolve into the marketplace. And cad tel in of itself is a very good top so from a standpoint of having a high band gap. So it captures a significant portion of the overall sun spectrum. And when you need that as a second cell underneath that would be what's complimentary to that. And could it be six? Could it be crystalline silicon? Could it be processed at some form or fashion? And so we're always going to look at that. We believe it's the evolution of technology that will happen in the future, we've highlighted in previous calls too that we are reinvigorating our advanced technology team. And so to the extent that we need to look at different materials, different semiconductors can be complimentary to cad tel, we'll continue to do that. But I don't look at the CIGS or really any of those other technologies as is replacing cad tel. The core will be of our semiconductor and overall device will be cad tel. The question is, is there something else that becomes complimentary with it, and we need to look at all options that could be out there. As relates to the expansion in a gigawatts? I mean, yes, we have I think indicated, our nameplate would be about eight gigawatts at the end of 2021. We are in the last phase of our Series 6 transition with our second factory in Malaysia with startup and current plans will start up in Q1 of 2021, we are looking beyond that. And as we've always said, we've got a balanced business model between growth, liquidity and profitability. And we obviously understand the value of growth and the leverage against fixed costs and flow through contribution margin. And so we are evaluating options and we will look at where we can create the next disruptive lowest cost factory. So, as we continue down our journey with Series 6, one of the things that we pass ourselves with, probably about nine months or a year ago is what's the factory of the future look like? What's the next generation technology in terms of driving the lowest cost for our cad tel platform? And so we have been doing that and trying to find a way to create that disruptive, lowest cost from the fleet factory, which under that construct, most likely would not be in the US for the reasons that we've mentioned. And we believe we have relative representation here with costs almost 2.5 gigawatts in the US. But other markets, we would look to, India could be one; we've talked before about potentially, our 15 factory in Germany started out as an easy way to get to market quickly and leverage that factory that we closed down almost a decade ago. So those are things that we're looking at. And we also believe that as we've had indicated, I think, Alex mentioned in his prepared remarks that freight is basically 6% of gross margin right now, 6% of the ASP effectively. And so getting closer to market and driving down your freight costs is an advantage that we continue to look to. So being in a market that can consume 2.5 to 5 gigawatts of volume on a recurring basis, it would be important. So those are the many different factors that we look at as we think about expansion. And but just want to make sure it is clear that is on the agenda of things that we're looking at this point. So why security in any impact with what's happened with the China, the latest evolution now being on the potential use of forced labor and implications of data and potentially product being banned in the US. It's one of many different dimensions that a lot of our customers have as it relates to relying on China in long term and the uncertainty around that. I don't know if it would have increased meaningfully over the last month, it's just one of many different concerns that they've had, I mean, even with the discussion around bulk power systems and potential implications around that. The modules have been looked at, is there a risk of that can be impacted. The discussion of extension of the 201 tariffs; there's many different things that come into the mix. And a lot of our customers here in the US in particular want to do business with an American company. They want to de-risk their supply. It's related to ability to deliver against commitments and any uncertainties that could be imposed upon the Chinese supplier and some of the issues that are coming up as you mentioned with forced labor. So I don't know if it's changed significantly in the last month, it clearly is top of mind. And it's just one of many different factors that all of our customers think about when they have to rely upon their Chinese, our Chinese counterparty as a supplier. Alex?

Yes, just to throw the numbers on the end of this. So right now we have 6.7 gigawatts booked for 2021 and 3.6 gigawatts booked across 2022 and beyond.

Our next question comes from Brian Lee with Goldman Sachs.

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

I'll start on the gross margin, if Mark also comments on the cost reduction beyond that. So you're doing basically the right math with the reported module segment gross margins about 29.5 and you've got three big things that moved in there, by reduction our warranty liability, about $20 million, but the good guy, reduction in the end of life recycling about $19 million also good guy, then you got an impairment charge about $17 million. That's good again, so we net all of those, you've got about $21 million, or about five percentage points, you take that down to about 24.5. And then we said that within the overall margin, we had about a $6.5 million, or 1.5% negative associated with Serious 4, you add that back in, you get to about 26%. And then on top of that, we did have some COVID charges in that number, there's about $3.5 million of COVID charges, you back that out again, you're going to be another 50 to 100 basis points. So somewhere around 26.5 to 27 around the Series 6 number. So yes, we're a little ahead of where we expect it to be. And part of that as a function of how well the factories have been running. As Mark mentioned in his prepared remarks, we've now managed to get to the cost reduction target that we expected in our high volume manufacturing by the end of the year. In Q3, we're already there on Malaysia site we already achieved that last quarter in Vietnam. So running a little ahead there. In terms of where we think we'll be by Q4, we are going to be about 27.5 and 28 gross margin on Series 6 is the number we're guiding for Q4 so that one held roughly steady from where we were last quarter. And then in terms of cost reduction, beyond that, we are not giving guidance out through 2021. Mark, if you want to comment anything?

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

Our next question comes from Ben Kallo with Baird.

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

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

Our final question comes from Michael Weinstein from Credit Suisse.

Hi, guys. Can you talk about what would drive capacity as in a particular regions or existing locations as you've in the past few years, this is driven by a move from the Series 4 to Series 6. Going forward, is it demands growth, or something else that drives it?

It's, whenever we grow, we want to make sure that it's tied to a market indicator, right. And basically really has to start with relative competitive advantage and position of the technology, the market has to be there, right and good thing about where we are now with solar procurement, it used to be policy lead now it's economic procurement, people are buying solar from the pure economic standpoint. And so I don't really see any constraints on the market, per se. But we do look to markets where we would have advantages around our technology. So hot, humid climates, for example, would be a market, they would be attractive to us; again, being closer to the market, or at least driving efficient shipment, logistics routes to access the market is important. The reality is freight cost is 10%, north of 10% of the overall cost of the product. And so if you can get that number down, say cut it in half, you get 5% savings just by getting closer to the customer and reducing your overall freight costs to deliver over the technology. There are many other factors that we use when we screen a site; energy is a meaningful component of our overall costs. So we have to have competitive cost of energy, labor rates have to be competitive, from math standpoint as well, while the processes are largely automated, still major component of the overall cost structure that has to be thought through and whenever we make decisions of where we're going to manufacture. But the reality is that we will grow most likely it's probably going to be outside of the US as we currently envision it, it could change. We have ability just to expand within the footprint and drive more throughput of what we already have here in the US, as we think about where our next factory would be, as we currently envision it would probably be in an international market somewhere close to customers, close to where there's a strong recurring annual demand requirement, and one that we have our technology is well positioned and competitively advantage whether it's hot, humid climates, whether it's the advantages of our Co2 footprint, environmental aspects around our technology, which more and more markets are starting to value. Those are the types of things that we take in consideration as we think about any expansion.

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