First Solar, Inc. (FSLR) Q2 2022 Earnings Report, Transcript and Summary

Good afternoon, everyone, and welcome to First Solar's Second Quarter 2022 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 listen-only mode. As a reminder, today’s call is being recorded. I would now like to turn the call over to Richard Romero from First Solar Investor Relations. Richard, you may begin.

Good afternoon and thank you for joining us. Today, the Company issued a press release announcing its second quarter 2022 financial results. A copy of the press release and associated presentation are available on First Solar's website at investor.firstsolar.com. With me today are Mark Widmar, Chief Executive Officer; and Alex Bradley, Chief Financial Officer. Mark will begin by providing a business and technology update. Alex will then discuss our financial results for the quarter, provide a guidance update and also provide some insight into our pricing strategy and our vision for gross margin expansion. Mark will then provide perspective on the domestic and international policy environment. Following their remarks, we will open the call for questions. Please note, this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the safe harbor statements contained in today's press release and presentation for a more complete description. It is now my pleasure to introduce Mark Widmar, Chief Executive Officer. Mark?

Thank you, Richard. Good afternoon and thank you for joining us today. To begin, we are pleased with our second quarter results, including earnings per share of $0.52. This result was benefited by the previously announced closing of the sale of our project development platform in Japan, partially offset by an impairment of the legacy systems business project in Chile, which will be discussed later during the call. We've also continued our booking momentum, further strengthening our backlog of future expected deliveries, which now stands at a record 44.3 gigawatts. The 10.4 gigawatts of new bookings since our prior earnings call in April are mostly for deliveries in 2024 to 2026 time frame and have a base ASP, excluding adjustors of $0.301. These new deals bring our total year-to-date bookings to 27.1 gigawatts. From an ASP perspective, we are encouraged by the pricing trajectory of our bookings as we continue to transact for deliveries as far out as 2026. On an overall portfolio basis, the profile of our annual base contracted ASPs remain effectively flat from 2022 through 2025 with the potential to grow with the application of technology, sales trade and commodity price adjustors applicable to many of these bookings. Firstly, as it relates to technology adjustors, if we are able to realize the achievements within our technology road map, the ASP has potentially increased to reflect the value associated with the enhanced product and energy profile. As of June 30th, we had approximately 20.5 gigawatts of contracted volume with these adjustors, which, if realized, could result in additional revenue of up to approximately $0.4 billion or approximately $0.02 per watt, the majority of which will be recognized in 2024 and 2025. As previously discussed, this amount does not include potential adjustments for the ultimate module bin delivery to the customer, which may adjust the ASP under the sales contract upwards or downwards or for those contracts in the United States that include sharing related to potential upside for U.S. main modules under the extension of the investment tax credit. Secondly, the ASP may increase to offset incremental costs as it relates to sales freight. Thirdly, the ASP has also potentially increased to offset incremental costs as it relates to aluminum. With regards to our Series 7 product to be produced at our new factories in Ohio and India, featuring a glass area of approximately 14% larger than our Series 6 Plus modules and utilizing the steel as opposed to aluminum frame, we have also begun to introduce adjustors to offset potential increased steel costs. As a reminder, not every recent contract includes every adjustor described here. To the extent that such adjustors are not included in the recent booked contract, we believe the baseline ASP reflects an appropriate risk reward profile. For example, some of these contracts have delivery terms where the customer is responsible for the cost of sales freight from the factory gate. In summary, we continue to leverage our value proposition of providing our customer and partners with long-term supply certainty, lower political and compliance risk and access to our best available technology. These critical points of differentiation, together with our differentiated CadTel technology, have allowed us to continue to expand our record backlog and an overall pricing that we believe is both, encouraging and competitive and with appropriate risk mitigation. Turning to slide 3. I'd like to review our highlights and some updates from our second quarter. Our manufacturing facilities produced 2.2 gigawatts of modules in Q2. The result was benefited by higher throughput due to faster-than-expected upgrades of certain equipment at our Vietnam manufacturing facilities. As previously disclosed, we have completed the sale of our project development platform in Japan. As we seek to divest our remaining power plant assets, we are evaluating potential buyers for our Luz del Norte project in Chile. Alex will discuss the timing and financial impact of this potential transaction. Construction of our third manufacturing facility in Ohio and our first manufacturing facility in India remains on schedule. To date, we have seen increased -- increases associated with steel and freight costs. Looking forward, as we continue to explore further manufacturing expansion opportunities, inflationary pressures on building equipment and freight costs are expected to remain a concern. Finally, we've entered into a $500 million debt facility with our new -- for our new manufacturing facility in India, with the first disbursements expected in the third quarter. Before turning to shipments, I would like to say a word about the current sales freight environment. While there are reports that suggest supply chains are beginning to trend towards normalization on a macro basis, global sales freight conditions remain challenging. Although spot rates for ocean freight have fallen quarter-over-quarter, these benefits were partially offset by increased fuel costs. In addition, we are approaching the peak period in terms of delivery of goods ahead of the year-end holiday season, which represents a potential headwind that may render the recent easing in the shipping rate as a temporary phenomenon. From a logistics perspective, we are still experiencing the impact of port congestion. In the United States, after brief reprieve, we have seen a continuous buildup of congestion on the East Coast as some shippers divert away from the West Coast port to avoid the potential impacts of ongoing labor negotiations. For example, the queue of ships looking to berth at the Port of Savannah has recently increased to 30 vessels, up from zero in the previous quarter. While transit times from Asia to the United States have improved, they remain well above the pre-pandemic averages. In fact, combined with challenges such as port congestion and blank sailings, has led to an estimated 12% reduction in global shipping capacity. Notwithstanding these challenges, we continue to execute on our strategy of employing freight risk-sharing mechanisms in our customer contracts, with nearly all of our recent bookings, either featuring contractual adjustors designed to offset incremental sales freight cost or allocating all ocean freight responsibility to the customer, in either case mitigating gross margin erosion. As of today, we have 32.7 gigawatts of contracts in our backlog that with either sales freight coverage or no sales trade exposure. As you may expect, contracts where customers take on responsibility for the transport have lower ASP than those where we are responsible for shipping. By way of example, one such contract, which is included in the revenue from contracts from customers' footnote in the quarter's 10-Q, is a 2.3 gigawatt sale to a highly valued long-term partner. This volume targeted for low-bin inventory is contracted to supply from our international factories, with the customer being responsible for transportation, which is currently estimated to be $0.04 to $0.05 per watt. Therefore, the ASP for this transaction is lower than the average of the ASP for other sales contract entered into in the period. Note, 4.9 gigawatts of the 11.9 gigawatts, increase in contracts from customers for future sales, includes -- included in the revenue from contracts from customers' footnote in this quarter's 10-Q requires that customers take on the responsibility for shipping. As First Solar had this shipping responsibility, we estimate that the implied ASP of this 10 -- 11.9 gigawatts volume increase would have risen by approximately $0.02 per watt. Of note, we expect the majority of our India factory output to be contracted on an ex works basis, with the customer picking up modules at the factory gates and assuming all transportation costs. Accordingly, we believe headline ASPs in India will be lower than in other markets where we include an assumption of sales freight within the ASP. That said, Alex will address why we expect gross profit per watt for the India factory to be equal or higher than the fleet later in the call. Turning to slide 4. We address our recent shipments. As just mentioned, we booked 10.4 gigawatts since the April earnings call. With respect to future shipments after accounting for shipments in the quarter of approximately 2.5 gigawatts, which is in line with our expectation, our total contracted to-date backlog is 44.3 gigawatts. We are sold out for 2022 and '23 as of April's earnings call and now sold out for 2024, excluding our new India manufacturing facility. We have 12 gigawatts for planned deliveries, excluding India, in 2025 and have 2.6 gigawatts of planned deliveries in 2026 and beyond. As it relates to our India factory, we have seen significant near- and longer-term demand from domestic customers as we anticipate entering into first contracts for the output of this factory within the coming months. Under our bookings policy, signed contracts in India will not be recognized as bookings until we have received full security against the offtake. As such, deals signed but not fully secured will be reflected with the confirmed but not booked portion of our pipeline graph in the earnings presentation. The 10.4 gigawatts booked since April earnings call include an order for 2.4 gigawatts of modules of one of the largest -- one of our largest standing customers, U.S. headquarter, Intersect Power, announced earlier today. These modules are scheduled for delivery in 2025 to 2026, further expanding the horizon for our backlog. This booking is reflective of a broader trend among longstanding U.S.-based customers to strengthen their commitment to First Solar's CadTel thin film technology as they seek long-term pricing security, supply certainty and value for their project pipeline. We are seeing greater geographical diversity in our bookings at among customers negotiating long-term framework supply agreements. Notably, European developers are increasingly recognizing the risk of relying on supply chains that are concentrated in China. As just one example, the French developer, Akuo, which has placed an order for 500 megawatts for its project portfolio in the U.S. and in Europe. Our bookings momentum demonstrates the growing recognition of the risk of pursuing a solar at any cost strategy. Developers that have built excessive dependencies on China state subsidized solar industry are grappling with an increasing volatile pricing and supply environment. A prime example of this increased risk profile is a recently reported lawsuit filed against a top-tier Chinese solar manufacturer, alleging breach delivery obligations, fraud, fraudulent actions and breach agreements related to product traceability information. This direct contrast with the experience of our customers who have benefited from our emphasis on durable partnerships has enabled long-term growth and our ability to stand behind our contracts and deliver on our commitments. Our customers have also benefited from an industry-leading approach to sustainability, transparency and traceability. We believe that our focus on long-term partnerships and our focus on basing of an enduring strategic customer that seeks to partner with First Solar for large-scale multiyear procurements have been key drivers of our success, and it enabled a solid foundation for growth. We also believe that these strategies set us up for enduring success, differentiating ourselves from the highly volatile transactional environment that some of our competitors may operate in and providing longer-term stability and visibility, not just for our customers, but for our shareholders. As reflected on slide 5, our pipeline of potential bookings remain robust. Even at the year-to-date bookings of 27.1 gigawatts, we retain long-term total bookings opportunities of 52.5 gigawatts. Our 17.8 gigawatts of mid to late-stage opportunities include 9.7 gigawatts in North America, 3.9 gigawatts in India and 4.2 gigawatts in the EU. In India, we continue to see meaningful potential as it relates to demand from domestic developers foreign owned IPPs operating in the country and the Indian government's efforts to boost demand certainty for domestic manufacturers. Similarly in Europe, we are seeing growing demand where geopolitics and the war in Ukraine have led to an urgent effort to deploy more renewables as the EU works to diversify its energy portfolio. Turning to technology. We are pleased with the progression of our current road map. As previously stated, our road map provides us with a high level of optionality, allowing us to pursue enhancements to our product design and energy profile as well as the path to potentially offer a true next-generation solar module for the residential market. On the last earnings call, we had announced that our R&D teams are continuing to make progress on developing the bifacial attributes of our CadTel semiconductor as we reaffirm the commercial, financial and operational thesis of the bifacial product. As our bifacial program evolves from the research level to large preproduction runs, our R&D team is working to achieve field validation, including operational and reliability data. This is necessary to ensure a viable path to large-scale commercial manufacturing. In parallel, we are working to stand up the supply chain necessary to help support the eventual introduction of a bifacial CadTel module. While we expect manufacturing line modifications to be minor, a bifacial CadTel module will have different material requirements necessitating adjustments to our supply chain. I'll now turn the call over to Alex, who will discuss Q2 results.

Thanks, Mark. Before reviewing our Q2 results, on slide 6, I'd like to provide an overview of two events, which impact both this quarter's results as well as our full year outlook. Both relate to our legacy systems business and impact our non-module or other business segment. The first is the recently completed sale of our Japanese project development platform and the pending sale of our Japanese O&M platform. The first discussed on our Q4 2021 earnings and guidance call, in late 2021, we received an unsolicited offer to acquire our Japanese project development and O&M platforms. And our full year 2022 guidance assumed a gain on the sale of these businesses of $270 million to $290 million. On our Q1 2020 earnings call in April, we indicated that negotiations toward the sale were progressing well. In May of this year, we entered into definitive agreements to sell these businesses to PAG Real Assets, subject to customary closing conditions. As previously disclosed and mentioned by Mark earlier in the call, in June, the conditions related to the sale of the project development platform were met. And accordingly, we closed the sale of that business for gross proceeds of JPY 66 billion, including a gain on sale of JPY 33 billion. These results were in line with the assumptions included in our full year guidance. However, due to the sudden and significant weakening of the Japanese yen relative to the U.S. dollar that has taken place in 2022 largely as a function of the contrast between the Bank of Japan's continued commitment to economic stimulus and the tightening of U.S. monetary policy, the U.S. dollar gain on sale of $245 million was $35 million lower than the midpoint of our previous forecast. From a cash perspective, we received net cash proceeds in Q2 of $262 million with an additional $164 million forecasted to be received within the calendar year. And note, the remaining conditions precedent to close the sale of the Japan O&M platform, including regulatory approvals, receipt of third-party consents and other customary closing conditions, are expected to be met in the second half of 2022. The second event impacting both, Q2 results and full year guidance relates to our 141-megawatt Luz del Norte project located in Chile. As disclosed since last year's second quarter 10-Q filing, we've continued to evaluate whether to hold or pursue a sale of the project. We also noted that should we be unable to recover our net carrying value in the project, any future sale could result in an impairment charge. Given that no decision has been made with regards to a sale, no impact from any potential sale was included in our 2022 guidance. In cooperation with the project lenders, we've recently begun a sale process, and in Q2, received multiple nonbinding bids to acquire the Luz del Norte project. Based on analysis of these bids, in Q2, we recorded a pretax impairment in cost of sales of $58 million and additional tax expense of $23 million associated with the Luz del Norte project. As it relates to the full year, assuming a sale is completed later this year, in line with the bids received to date, we expect revenue of $150 million to $200 million from the sale, a reduction in gross profit of $40 million to $50 million, including the Q2 impairment net of future proceeds from the sale, a $30 million to $35 million benefit to non-operating income from debt forgiveness and reduced interest expense, and $30 million to $40 million of tax expense due to the generation of net operating losses, which no future benefit we received and the jurisdictional mix of the income amongst our Chilean entities. The total net impact from the expected sale of Luz del Norte, which was not previously assumed in our guidance for the year, is a $10 million to $15 million loss before taxes and a $40 million to $55 million loss on a post-tax basis, equivalent to an implied loss per share of $0.38 to $0.52. Note that given the early stages of the sale process and uncertainty around the ultimate structuring of any potential sale, although we believe the forecasted range for revenue, pretax losses, tax expense and after-tax losses to be appropriate, there remains significant uncertainty related to the impact of the gross profit and non-operating income lines of the P&L. With this background, starting on slide 7, I'll cover the income statement highlights for the second quarter. Net sales in Q2 were $621 million, an increase of $254 million compared to the prior quarter. On a segment basis, our module segment revenue in Q2 was $607 million compared to $355 million in the prior quarter. The increase in net sales was primarily driven by higher module volumes sold and also benefited by sales freight recoveries. Gross margin was negative 4% in Q2 compared to positive 3% in the prior quarter, primarily driven by the impairment of the Luz del Norte project, which impacted gross margin by 9 percentage points. Q2 module segment gross margin of 5%, up from 3% in Q1, was positively impacted by increased volumes sold. Additionally, sales freight included in our cost of sales reduced module segment gross margin by 16 percentage points in Q2 compared to 14 percentage points in the prior quarter. SG&A and R&D expenses totaled $64 million in the second quarter, unchanged from the prior quarter. Production startup, which is included in operating expenses, totaled $13 million in the second quarter, an increase of $6 million compared to the prior quarter, driven by increased startup costs associated with our third Ohio factory. We recorded the aforementioned $245 million gain on sale associated with the closing of the sale of the project development platform in Japan. Q2 operating income was $145 million, which included depreciation and amortization of $67 million and the utilization of production startup expense totaling $17 million, share-based compensation of $6 million, gain on the sale of the Japan project development platform of $245 million and an impairment of $58 million associated with the Luz del Norte project in Chile. We recorded tax expense of $84 million in the second quarter compared to a tax benefit of $19 million in the prior quarter. The increase in tax expense is primarily attributable to an increase in pretax profit from the sale of our Japan project development platform and an increase in tax expense related to the Luz del Norte project. A combination of the aforementioned items led to second quarter earnings per share of $0.52 compared to a Q1 loss per share of $0.41 on a diluted basis. I'll next turn to slide 8 to discuss select balance sheet items and summary cash flow information. Cash flows generated from operations were $88 million and capital expenditures were $199 million in the second quarter. Our cash, marketable securities and restricted cash balance ended the quarter at $1.9 billion compared to $1.6 billion at the end of the prior quarter. Module segment operating cash flow and proceeds from the sale of our Japan project development platform were partially offset by other operating expenses and capital expenditures associated with our new Ohio and India factories. Total debt at the end of the second quarter was $175 million, a decrease of $77 million from the end of Q1, primarily due to the repayment of a credit facility before transferring the associated project with the sale of the Japan project development platform. All of our outstanding debt is nonrecourse project debt and will come off the balance sheet if the Luz del Norte project is sold. Our net cash position, which includes cash, restricted cash and marketable securities less debt, increased by approximately $372 million to $1.7 billion as a result of the aforementioned factors. Continuing on slide 9. Our full year 2022 guidance is updated as follows. Our previous revenue guidance of $2.4 billion to $2.6 billion was predominantly module segment revenue, which remains unchanged. We are adding other segment revenue guidance of $150 million to $200 million for total revenue guidance of between $2.55 billion and $2.8 billion to reflect the expected sale of the Luz del Norte project in the second half of the year. With half year behind us, we have greater clarity into our full year module segment performance. Whilst the midpoint of our module segment gross profit guidance remains unchanged, we've revised the range from $165 million to $225 million to $175 million to $215 million. Our other segment, which previously was forecast to reduce gross profit by $10 million, is now forecast to reduce gross profit by $50 million to $60 million due to the anticipated Luz del Norte sale, resulting in total forecasted gross profit of $115 million to $165 million. Within gross profit, assumptions related to underutilization losses of $10 million to $15 million and a sales freight impact of 18 to 20 points of gross margin remain unchanged. Additionally, our forecasted cost per watt produced reduction from year-end 2021 to year-end 2022 of 4% to 6%, and our forecasted flat year-over-year cost per watt sold forecasts both remain unchanged. Note, the midpoint of our full year module segment gross margin guidance of approximately 8% remains unchanged from our previous forecast. Following a 3% and 5% module segment gross margin result in the first and second quarters of 2022, module margin improvement is expected to continue in the second half of the year. SG&A and R&D expenses are forecast to total $270 million to $280 million, down from $280 million to $290 million in our previous guidance. In addition, our forecast startup expense of $80 million to $85 million is down from $85 million to $90 million previously for a total forecast operating expenses forecast of $350 million to $365 million. The gain on sale of businesses previously forecasted $270 million to $290 million is now forecast to be $245 million given the aforementioned currency impact. Operating income is estimated to be between $5 million and $70 million, down from previous guidance of $55 million to $150 million as a function of the reduction in the U.S. dollar value of the Japan business sale and the inclusion of the expected Luz del Norte sale in guidance, partially offset by SG&A, R&D and startup expenses savings. Other income and expense guidance moves from $20 million to $30 million of expense in prior guidance to $25 million of income in current guidance as a function of increased interest income and forecast debt forgiveness upon the anticipated sale of the Luz del Norte project. Full year tax expense increases from $35 million to $55 million previously to $55 million to $70 million, following the inclusion of the expected sale of the Luz del Norte project this year, partially offset by a lower-than-forecast gain on sale of the Japan development platform. This results in full year 2022 earnings per diluted share guidance range of negative $0.25 to positive $0.25. Capital expenditures guidance of $850 million to $1.1 billion and shipments guidance of 8.9 gigawatts to 9.4 gigawatts remain unchanged. Our year-end 2022 net cash balance is anticipated to be between $1.3 billion and $1.5 billion, an increase of $200 million following the assumed sale of Luz del Norte and the corresponding reduction in project-level debt. Before handing call back to Mark, given our record backlog and significant recent bookings, I'd like to provide some insight into our pricing strategy and our vision for gross margin expansion for the next three years and beyond. The components of this strategy include our approach of contracting out our capacity several years in advance of production, the anticipated reduction of our cost per watt produced, the expected benefits from capacity expansion, including through scaling a largely fixed overhead structure, and our agile contracting approach, which provides for the potential realization of both incremental revenue and is expected to mitigate freight and certain commodity cost risk. Now with respect to our agile contracting structure, every contract is different, and not every recent contract includes every technology and commodity adjustor we've been describing. Accordingly, while we anticipate seeing some incremental revenue contribution and gross margin protection from these adjustors in 2023, the majority of these potential revenue and gross margin benefits, if we're able to achieve our technology road map, are expected to be recognized in 2024 and 2025. Firstly, as it relates to ASPs, between the pricing reflected in the current contracted backlog and the pricing for the bookings realized in July, we expect the profile of our annual base contracted ASPs will remain effectively flat, and therefore, not decline for 2022 through 2025. Against this pricing backdrop, we anticipate a reduction in cost per watt produced from year-end 2021 to year-end 2022 of between 4% and 6%. Even making the highly conservative assumption of no further reductions to cost per watt produced beyond this point, we expect cost per watt produced exiting 2022 to provide an annual gross margin benefit in 2023 and beyond. On a cost mitigation basis, as it relates to sales freight as well as steel and aluminum costs relative to 2022, we would expect future years to see either a reduced cost profile or should costs remain elevated relative to pre-pandemic norms, the inclusion of adjustors would provide for an increase in ASP to offset such costs. Under either scenario, we would see an expansion of gross profit relative to 2022. As mentioned on the April earnings call, indicatively, assuming today's sales freight and aluminum environment, a contract with sales freight aluminum adjustors is expected to increase ASPs by approximately $0.03 per watt above the baseline. From a growth perspective, relative to today, we expect the announced Series 7 factories in Ohio and India will add approximately 6 gigawatts of annual production starting in 2024. That additional volume is anticipated to provide significant incremental gross profit. In addition, we see the benefit of scale from our largely fixed operating cost structure as we anticipate adding this capacity with limited incremental OpEx. Assuming the midpoint of our current full year 2022 R&D and SG&A guidance of $275 million, this incremental production reduces combined R&D and SG&A cost per watt by approximately $0.01. As it relates to our Indian manufacturing facility, while ASPs in that market are anticipated to be lower than those in the U.S. and other markets, we expect gross profit per watt for the Indian factory to be equal to or higher than the fleet average. This is due to a combination of factory scale, domestic CapEx incentives and other incentives, lower labor costs and the elimination of ocean freight to deliver the domestically produced product. The combined impact of flat ASPs, cost per watt reduction, sales freight and commodity adjustors and capacity expansion against a largely fixed operating cost base provides a compelling case for gross margin expansion over the period we've been discussing. Moreover, this potential for gross margin expansion is further enhanced to the extent that we're able to make achievements within our technology road map. As described on the April earnings call, under our updated contracting approach, we forward-sell today's technology. To the extent we accomplish future module technology improvements, including new product designs and energy-related enhancements, we have the opportunity to realize incremental revenue under sales contracts that include technology adjustors. As Mark noted earlier, this does not include either potential adjustments to the ultimate bin delivered to the customer, which may adjust the ASP under the sales contract upwards or downwards, or for those contracts in the United States that include sharing related to a potential upside for U.S.-made modules on an extension of the investment tax credit. And finally, the gross profit opportunity described here is within the context of our current capacity plan. Additional capacity would be expected to be gross profit accretive to the above scenario. And while we're not making a new additional plant announcement today, I'll now turn the call back over to Mark, who will provide an update on policy and our current thinking with respect to capacity expansion.

All right. Thanks, Alex. To conclude, I would like to discuss the rapidly evolving policy environment both at home and abroad. Beginning in the United States, like many in the energy sector, we were pleasantly surprised by yesterday's joint announcement from Senators Manchin and Schumer regarding the Inflation Reduction Act. We are encouraged that yesterday's announcement made a clear reference to investment in energy security and technology-neutral climate change solutions, and we are supportive of the balanced approach to corporate taxation. While we are still reviewing the full legislative tax release last night, we are hopeful that the advanced manufacturing production credit, if passed, helps deliver the incentives required to boost domestic solar manufacturing and secure our nation's energy independence. As the legislative process moves forward, we urge both chambers to move quickly to pass this critical legislation, which represents the first real step to designing a clean energy industrial policy that addresses climate change while simultaneously codifying American energy security. With respect to 45X, the advanced manufacturing production credit, we urge Congress to ensure that the manufacturing tax credit designed to incentivize domestic solar supply chain are fully refundable in order to deliver the intended result. This legislation’s extension of the solar investment tax credit appears to enable crucial demand-side policy certainty. We're hopeful that, if passed, legislation maintain the domestic content in Senate that will help further ensure that U.S. taxpayer dollars are used to help expand manufacturing here at home. Turning to our considerations to further expand our manufacturing footprint. Our criteria for investment remains unchanged. These include geographic proximity to solar demand, the ability to export cost competitively into other markets, access to cost-competitive labor, low energy and real estate costs, access to or the ability to build a cost-competitive supply chain to support the sourcing of raw materials and components, and as we've repeatedly stated, the domestic policy environment. We agree wholeheartedly with Senator Manchin that the United States needs to remain a global superpower through innovation. As it relates to the potential for our own manufacturing expansion in the U.S., we had previously stated that we were evaluating the potential for future capacity expansion but noted that we first required clarity on domestic solar policy. In light of these latest developments and should the Inflation Reduction Act get passed with consistent language on solar-related tax credits, we plan to pivot quickly to reevaluate U.S. manufacturing expansion. Moving ahead, we continue to be optimistic about the policy environment in Europe and in India. Over the last 10 months, we have met productively with Prime Minister Modi of India and attended the Investment Conference hosted by President Macron of France in addition to having numerous constructive meetings with members of their cabinets. These governments, along with others that are -- we are engaged with are seeking to diversify and grow domestic capabilities. As calls for resilient domestic supply chains grow louder in solar markets around the world, we believe First Solar is uniquely well-positioned to offer a viable alternative based on a proven repeatable vertically integrated manufacturing template. Before I turn the call back to Alex to summarize today's key messages, I would like to note that we have issued our 2022 sustainability report. The report highlights our continued progress across a range of environmental, social and governance metrics, detailing among other accomplishments how we have successfully lowered our environmental footprint while advancing our diversity and inclusion goals. These achievements demonstrate the strength of our commitment to the principles of responsible solar, placing at the heart of our business as we invest in innovation and scale. We are proud that First Solar is an example of how solar can be competitive without compromising our principles and purpose. We have shown that solar technologies can be sustainably scaled without people and the planet paying a high price. Alex will now summarize the key messages from today's call.

Turning to slide 10. From a financial perspective, we're pleased with our Q2 earnings per share of $0.52. We updated our full year guidance to reflect the impact of two discrete legacy systems events. The midpoint of our full year module revenue and gross margin guidance remains unchanged. Operationally, we'll produce 2.2 gigawatts and ship 2.5 gigawatts of modules. Additionally, Series 6 demand remains extremely robust with 27.1 gigawatts of year-to-date net bookings, leading to a record contracted backlog of 44.3 gigawatts. The 10.4 gigawatts of new bookings since our prior earnings call in April had a base ASP, excluding adjustors of $0.301. And finally, we're encouraged by the Inflation Reduction Act proposed legislation and are currently reviewing this development and its potential impact on our business and capacity expansion plans. And with that, we conclude our prepared remarks and open the call for questions. Operator?

[Operator Instructions] Your first question comes from the line of Ben Kallo with Baird.

Hey guys. Congrats on the results and the bookings. How do you figure out the optimal manufacturing capacity just because you've been booking so much? And then, [Technical Difficulty] back to Analyst Day [Technical Difficulty] ago, it was greater than 20% [ph] gross margin. How do I do all the puts and takes and kind of square with that? Thank you.

So Ben, I guess, maybe one way to start, I think we've guided to a number that's, I don't know, 7% or 8% gross margin for the module business in the environment that we're in right now. Okay? This for 2022. So, what Alex has said in his remarks is that obviously, embedded in that low gross margin is the headwinds that we're dealing with around sales freight and with commodities such as aluminum and eventually steel when we introduced Series 7. The impact of that -- the headwind is 11 or 12 percentage points or so of gross margin. So just normalizing for that -- assuming -- it can come through either one away. It can come through as an incremental ASP -- I’m just assuming ASPs stay where they are right now and then we see as a benefit of $0.03 that Alex referenced as a lower cost because sales freight normalizes down to 2.5 cents, which is where our contracts anchored to, and aluminum comes back to historical levels that we have seen previously. So, that gets you basically at your threshold of your 20% relative to what we guided. Now, the guide is also for the full year. And if you look at our gross margin progression, the gross margin is higher in the end of the year. So if you use the exit point, you actually will be north of 20% gross margin. Alex also indicated that we still are -- even though in this challenging environment, we are seeing a cost reduction. So, we are seeing year-on-year cost reduction of about 5% -- 5% to 6%. So, there's an incremental margin expansion there. So when you just layer those together, you're solidly into the 20%. And then if you capture the value of the technology adjustors, then you're meaningfully better than that, right? So, I think everything that we have right now, what we have line of sight to around where we've contracted in terms of our ASPs, and as we've indicated, they're relatively flat or slightly increasing as we go across the horizon. And the other actions that we've taken around our contracting and then capturing the value of our technology road map that we should be very comfortable achieving the minimum threshold of 20%, in my mind, we should do much better than that, but there's still a lot still in front of us to execute on. But I think we've given ourselves a great opportunity to show very strong margin -- gross margin percent as we move forward.

Yes. Ben, I mean, as you think through the optimum manufacturing capacity, we've always said that we want that to be demand driven, right? And clearly, if you look at the backlog we have today, contracts, if you look at the size of the pipeline, we have supported the pieces behind growth there. If you think through how we think about expanding, we've talked about some of the key drivers being stable policy, demand, locating manufacturing proximity to demand, having a technology advantage or a stable technology platform from which to grow and several other things around competitive labor, real estate, power markets, supply chain, et cetera. If you think about where we've been -- we're challenged recently, there's been a lot of volatility in the policy side of that equation, which has been a key driver. And as Mark mentioned in the prepared remarks, we’re obviously hopeful given the news coming out of Washington yesterday afternoon. We're still working our way through that document, a lot to be read there. And look, we're cautiously optimistic. We're very happy that the people are working on that now. We've seen a lot of churn in this over the last couple of months. So, we want to remain cautiously optimistic until we see a natural bill signed into law. But if I look through what drives our potential for expansion, we talked about policy being a key driver. You look at the backlog and the demand that's clearly there. You look at the growth of the macro in terms of solar, both in the U.S., in Europe and in India. And all the markets we've been looking at manufacturing seen the significant opportunity for expansion.

Your next question comes from the line of Philip Shen with Roth.

As a follow-up on the capacity expansion. If the Inflation Reduction Act does get passed, can you quantify in any way given the demand that you see, and that's before the ITC extension, how many new factories you could actually put up and over what kind of time frame? And then, also in the [indiscernible] part of the bill, there's the $0.04 per watt CadTel sell credit, and then there's the $0.07 per watt module credit. I know we talked about this in the past, back -- last year when this was also active, but can -- how much of the credit do you think you can access? Do you think you can tap into the $0.11 to 7 plus 4, or do you think of the ability to just access the $0.04 per watt?

So look, Phil, as it relates to capacity expansion, effectively from this point in time, if we -- something here in the U.S. from a point in time, it's going to take us somewhere around 24 months, maybe slightly less. Hopefully, we see some relief in some of the supply chain challenges that we've been dealing with over the last couple of years. So, maybe we can do something faster. But by the time you put a greenfield with a new building and then the tools, the good thing about it, as we've mentioned previously, is we've been working with our vendors to keep them teed up, knowing that there was going to be another factory. We're actually very pleased with the -- where we are right now and the tool move-in scheduled that we're seeing and Perrysburg 3 and then what we have currently lined up for the India expansion, so. And we've told our vendors, we want to have a cadence of six months after that for at least one more factory and maybe we'd go beyond that given the current environment and the options that we have, not only here in the U.S., but in the EU in India as well. So, it's about a 24-month window. EU could be a little bit faster because we still do have a facility in Eastern Germany that potentially could be utilized for incremental production. But here in the U.S. and even in India, it's going to be on a longer time line accordingly because of that the challenge we're dealing with right now with the supply chain, and maybe we'll see some relief. But, the way I look at it in terms of priorities, if the Inflation Reduction Act goes forward, I think at least one new utility-scale factory, we would love to complete our discussion and operationalize our tandem product that we referenced as -- in a partnership with SunPower for residential market. So that's in the mix as well. And maybe could we throw another U.S. factory into the mix? There's a potential. But I'm also trying to make sure we're looking at every other avenue to get incremental throughput if this goes through. For example, our team has done a phenomenal job of driving incremental throughput through the existing factory. So, let's look at additional constraints within the factory. Where is the constraint? Can we add some capital to the existing production here in the U.S., the 6 gigawatts or so that when we get Perrysburg 3 up and running to add another tool that can increase throughput at the constraint that allows you to optimize across the entire tool set? There's another path there to drive more throughput across the platform, which is one thing that we clearly want to continue to look at. As it relates to the Inflation Protection Act, and in particular, the 45X provision, look, we believe -- and again, we still need to go through, read everything and to consult with everyone that -- to ensure our interpretation is accurate. We believe that we have a full entitlement to the $0.04 plus the $0.07, which would be the sell-in module. The other thing, Phil, I think I've said to you in the past is that the spirit of the legislation, which largely is the same as what was originally in prior versions, was to ensure thin film was not going to be competitively disadvantaged relative to crystalline silicon. And so, the structure and the way it's worded if it were to be passed as it is right now, we also believe that we would benefit from the wafer. And the wafer provision, I think, is $12 per square meter. So, you take that, our modular Series 6 today is about 2.5 square meters, which would imply there's about -- on a module basis, not on a cents per watt basis, there's potentially $30 benefit per module. So, that's another lever that we are going to try to make sure we can go and capitalize on. That one -- again, we believe the intent is to do that, but it's another area that we have to work on. But we want to make sure that anything that is finally passed into law that we are not at all competitively disadvantaged and that we're fully entitled to all the benefits that other technologies such as crystalline silicon would be able to capture.

Your next question comes from the line of Maheep Mandloi with Credit Suisse.

Could you just clarify the base ASPs assumption? I think you made a comment on not declining from '22 to '25. And what puts and takes should we kind of expect to that ASP going forward? Thanks.

What was the last part of the question?

Just puts and takes with that, just with the adjustors and for aluminum steel in shipping and other things.

Yes. So what we said is if you look at what's in the backlog today, we expect the ASPs to be roughly flat going from 2022 out to 2025. If you think about where we are now and you'll see in the Q coming out, and we've talked about where we were, Q1, Q2. You're somewhere in the range of $0.27 to $0.28 ASPs. And we're saying that on a base level, we expect that to be roughly flat out through the 2022 to 2025 horizon. But remember, as I said in my comments, that base ASP is reflective of effectively today's technology. So, when you look at puts and takes around the ASP, you've got potential upside to that based on technology adjustments, should we achieve within our technology road map things that provide more energy or more value to the customer, and those are built into contracts to a large extent today. So, when you look at the ASP side, you have that other key adjustment. You have to ASP, its protection around sales freight and commodities. So, in the event that commodity prices and sales freight remain elevated relative to the norms that we saw pre-pandemic, and typically, the ranges that we assume in our cost structure today, we would have an increased ASP to offset that incremental cost. So, you'd have that adding on as well. So those are the key moving pieces that we see around ASP.

Yes. And I want to just make sure, it's clear because sometimes people want dismiss, well, if commodities or sales freight normalize, then there won't be any benefit to the ASP adjustors. Completely understand. But what it means is our cost per watt will decline then by the corresponding $0.03 a watt. So, either it will come through as a higher ASP if we stay in an inflated environment that we're in right now or it's going to come through at a core cost per watt reduction. And I think sometimes people are dismissing the ASP as if the realization won't be captured, without understanding that what it drives to is the lower cost per watt. Either way, in my mind, it's going to add about $0.03 of gross margin across our capacity plans that are getting up to 15 or 16 gigawatts. So, there's a meaningful benefit one way or the other, either incremental ASP or lower CPW across, call it, 15 or 16 gigawatts production as we move forward.

Your next question comes from the line of Joseph Osha with Guggenheim.

Following up on that previous line of question, there's been lots of talk about the cost adders and the technology adders. But I'm wondering, is there any sort of apples-to-apples per watt cost reduction road map you can talk us through as the technology continues to advance? Because that's, I remember in the past, something you used to communicate about.

So look, one of the things we did say is we're still on target for our cost per watt reduction exit rate is kind of target 4% to 6%. And so, we are taking out costs even in a very challenging inflationary environment this year. We have not given a continuation of that road map of further cost reductions, at least we haven't updated that for a period of time. But by definition, the cost per watt will decline as we improve the technology. So, as we continue to drive the efficiency higher, that's going to drive down our CPW. Plus we have other opportunities through our additional throughput initiatives, whether it's our bill of material reductions that we're working on as well. So, we will continue on a trajectory. If you wanted to assume just a rule of thumb modest kind of view of what we would expect over the next several years, I would believe that we should be still accomplishing at least single digits, maybe upper single digits cost reductions as we move forward. And as we've indicated previously, the Series 7 product will actually drive some cost reduction as well because of the design of that product with higher efficiency, improved throughput and other issues that will drive an improved cost profile. So, when you incorporate Series 7 into the fleet, you're going to see a benefit to the overall cost per watt. So, the cost per watt is not going to -- it's not peaked. It's going to continue to move in a positive direction. Assuming we don't go into some even crazier inflationary environment and we believe that we've largely protected ourselves on most of the exposure in that regard, but there could be some additional headwinds that we'd have to address in the future. But assuming a stable environment that we're in now and just the initiatives that we have in place, we should expect continued cost reduction on our module.

Yes. And Joe, if you think about, as Mark said, a 4% to 6% cost per watt produced number this year, that's the decline. If you go back to the slides that we showed in our Q4 earnings and guidance call, back in end of February, early March, there's a chart in there that shows you the driver of the cost reduction. Those still hold true. If you look through where we have what's the modules, efficiency, throughput and yield, those key drivers to look at this. So, we haven't updated that chart from a new cost perspective, but the same drivers of cost per watt reduction still exist there. We also have on that chart bill of materials. As Mark mentioned, there are bill of material reductions that we would expect in ordinary course. However, we're in an inflationary environment, we also protected against some of the key drivers through the adjustors we have in our contracts. So that's another resource you can look to.

Your next question comes from the line of Brian Lee with Goldman Sachs.

Been a lot of focus around the gross margins and the cadence here. So, I guess, I'll throw my question in the ring as well. The aluminum price, steel pricing environment, also freight, they've all sort of eased a bit recently per your earlier comments. When does it really start to impact the P&L and margins? I know you're talking about a 20% baseline for gross margin when things kind of normalize. And then on top of that, you get some of the tech adders that could take gross margins much higher. But as we think about, let's just say 2023, the cadence, it doesn't appear all of that is necessarily going to normalize. So, fair to assume we're going to see a pretty gradual margin cadence through the rest of this year and into most of next year? And then, with tech adders and some of the new capacity in India and Ohio, the real step-up starts to happen in '24. Just trying to get a sense for how we should budget expectations because there's a lot of moving parts there obviously over the next couple of years for the margin trajectory.

Yes, Brian. So, we said that you're going to see the majority of the benefits come through in '24 onwards. You are going to see some benefit to 2023. If you look through the ASPs, we said those stay relatively flat across that horizon. From a cost per watt perspective, we said we're forecasting that cost per watt reduction this year. You're going to get the benefit of that next year, obviously. From a sales perspective, we do have some protection next year. It's still not every contract, and the amount of protection varies as we had some different flavors of contracts in the early days before we moved to effectively orders today, just a straight pass-through of excess risk to the customer. So you're going to see some incremental protection or benefit from sales freight next year, but really the big push on that you're going to see in 2024. From an adjustor perspective, we said before, the majority of the benefit that technology adjustors you're going to see being out in 2024 and beyond. And then from a commodity price basis, we said on the last call that we first started introducing the aluminum adjusted at that point, the majority of that was 2024 onwards. We've also recently started looking at steel as well for our Series 7 product, that will be 2024 onwards as well. So yes, you're going to see a little bit of benefit come through in 2023, but the majority of that's going to come through fully into 2024. You're also going to see the value of growth coming in mostly in 2024. But I would say that if you look at the timing expectation around our Perrysburg 3 factory, you will see some contribution from that and potentially a little bit from the India factory coming through in '23 as well. So, when you're doing your model, you'll get some benefit of growth coming through in 2023 as well.

Your last question comes from the line of Colin Rusch with Oppenheimer.

Could you talk a little bit about the progress in Europe from a perspective of adding capacity and the volume demand? Certainly, there's a major need there. And the two-year time horizon that you've talked about in terms of the incremental capacity on from your vendors. But in terms of site selection, customers wanting to work with you, things like that, the preparations that you would see giving you the confidence to make those decisions. I'm just curious about an update there.

Yes. So, one of the things we did highlight, if you look at our pipeline as well, I mean, the diversity of our pipeline, especially with near term as well as long-term opportunities in Europe, has grown significantly. I was actually over in Europe a few weeks ago and talking with a number of different customers. And there's a really significant demand and opportunity for partnering with First Solar, no different than what we've seen here in the U.S. and what we've seen in India. I mean, there's fatigue, and we referenced even a lawsuit, a very large litigation against one of the Tier 1 Chinese suppliers. They're fatigued by that, and they want to find someone who they can work with that ensures reliability and certainty. And obviously, there's a significant demand in the market, EU as they're trying to evolve off of their dependencies of Russian oil and gas, and they don't want to reposition that dependency then into another potentially adversarial country for their solar and climate change goals that they have. So, we're in deep discussions with a number of counterparties. They're trying to build an offtake agreement, and we're working through site selections already to try to figure out if we were to make a decision, what would be optimal. We do have cell sites in Eastern Germany. Obviously, the footprint isn't ideal for a Series 7 type product or 3.3 gigawatts of production. But look, we're also evaluating what is the right product for the European market. I mean could it be a combination of the utility scale or also could it be a smaller form factor, maybe a multi-junction tandem product for high-efficiency space constrained spaces. I mean it could be that's the right product to go to market in Europe. And then our Eastern Europe factory -- Eastern Germany factory looks a lot better to accommodate a footprint around that size. So, I would say I'm very encouraged. A lot of opportunity. I think it's a matter of just making the commitment and the contractual obligations and offtakes and being able to secure multiyear supply agreements to have -- provide a little more confidence we would like to have to enable manufacturing in the EU. I think it's pretty promising right now. We still would like to see some movement on the policy side a little bit. I think they're doing a number of positive things there, even including things like CO2 footprint requirements, restrictions as it relates to forced labor and some of the other challenges that we're also seeing in the U.S. trying to deal with their supply chains that are dependent upon Chinese production. So, a lot of good things happening in the EU, and it's a very important market for us, and we're looking at what's the best way to serve it.

There are no further questions at this time. This does conclude today's conference call. Thank you very much for joining. You may now disconnect.