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…

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…

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…

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,…

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.