Good afternoon, everyone, and welcome to First Solar's First Quarter 2023 Earnings Call. This call is being webcast live on the Investors section of First Solar's website at investor.firstsolar.com. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to hand the call over to Mr. Richard Romero from First Solar Investor Relations. Mr. Romero, you may begin.

Thank you. Good afternoon, everyone, and thank you for joining us. Today, the company issued a press release announcing its first quarter 2023 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 strategy update, Alex will then discuss our financial results for the quarter. Following their remarks, we will open the call for questions. Please note this call will include forward-looking statements that involve risks and uncertainties and including risks and uncertainties related to the Inflation Reduction Act of 2022 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. As we noted on our last earnings call, we entered 2023 and its initially stronger commercial and operational and financial position than the previous year, setting the stage for growth and improved profitability in 2023 and beyond. The first quarter of the year reflects this direction as we commission our latest factory in the United States. It started production of our next-generation Series 7 modules. Secured a manufacturing incentive award in India, progressed our technology road map with a new cell efficiency record and continued our strong bookings and ASP momentum. It’s important to emphasize that our point of differentiation from our unique CadTel technology and vertically-integrated manufacturing process to our commitment to responsible solar, continue to set First Solar apart from the competition and are the primary enablers of our long-term competitiveness. Beginning on Slide 3, I will share some key highlights from the first quarter. This quarter, we strategically built on our backlog with 4.8 gigawatts of net bookings since our last earnings call at an average ASP of $0.318 per watt, excluding adjusters were applicable. This brings our year-to-date net bookings to 12.1 gigawatts. While at the same time, our total pipeline for future bookings opportunities has grown to 113 gigawatts and includes 73 gigawatts of mid- to late-stage opportunities. From a Series 6 manufacturing perspective, we produced 2.36 gigawatts of product in the first quarter, with an average watt per module of 467, a top bin class of 475 watts and a manufacturing yield of 98%. This solid performance is the result of a relentless focus on manufacturing excellence. Regarding Series 7, the ramp at our third Ohio facility, which began production in January is progressing well. We produced 170 megawatts in the quarter…

Thanks, Mark. Turning on Slide 8, I'll cover our financial results for the first quarter. Net sales in the first quarter were $548 million, a decrease of $454 million compared to the fourth quarter. The decrease in net sales was primarily driven by an expected shift in the timing of module sales as we increased shipments to our distribution centers, both to mitigate logistics costs as well as to align future shipments to customers with contractual delivery schedules, along with the completion of sale of our Luz del Norte project in the prior quarter. These decreases were partially offset by an expected increase in module ASPs and certain earn-outs on legacy systems projects. Gross margin was 20% in the first quarter compared to [indiscernible]. This increase was primarily driven by expected benefits from Inflation Reduction Act of $70 million and lower sales rate, partially offset by $19 million of ramp costs of our new Series 7 factory in Ireland. Although logistics costs decreased during the quarter, they continue to remain elevated relative to pre-pandemic levels. During the first quarter, they reduced gross margin by 15 percentage points. As we look to the second half of the year, we expect to see a reduction in logistics costs radical. As further described in our 10-Q and most recent 10-K, Inflation Reduction Act of a certain tax benefits for solar modules and solar module components, manufactured in the United States and sold to third parties. As of components, the benefit is equal to $12 per square meter for a PV wafer, $0.04 per watt for a PV cell and $0.07 per watt for a PV module. Based on the current form factor of our modules, we expect to qualify for a benefit of approximately $0.17 per watt for each module sold. We recognize…

[Operator Instructions] We will go to Philip Shen, ROTH MKM.

Last quarter, you talked about how bookings might decelerate. We saw some of that this quarter but the ASPs for the bookings were in line, if not higher, actually, they were higher versus last quarter. How do you expect bookings to trend in Q2? We have some of that data now, but the rest of the quarter, Q3 and Q4? And then how do you expect that bookings ASP also to trend? And now that you're sold out through '26, when do you expect to sell out '27?

Yes. I think from '26 and '27, I think we're something approaching combined those two, we're approaching close to 40% of that current supply plan being sold right now. But obviously, a little bit more of that is in '27 and '28, but I think we'll make good progress on both of those years. I don't really want to commit to a specific date when we would sell out '27 because we'll do '27 the same way that we did with '26. So customers who want '27 volume, we're going to want to tie that into multiple years. So we're going to leverage that as best we can across the balance of decade. So I don't think that's important not quickly we sell that, but it's how we use that '27 volume strategically to create more multiyear agreements and visibility as we go through the balance of the decade. As it relates to bookings, yes, I mean look, we had 60 days basically since the last earnings call, and so you would expect just from that reason always going to trend down. But the underlying demand, which is reflected in our total pipeline as well as our mid- to late-stage pipeline as we indicated in our prepared remarks, has continued to grow. So that's extremely encouraging. We have a number of very large deals with strategic counterparties that we're still working through. And we are successful in closing one or two of those. And in the second quarter, we could see a very strong result for the second quarter, plus if we can close more than a handful of those now through the balance of the year, I can continue to see bookings carrying forward into Q3 into Q4 being reasonably strong. But they indicated that we're longer dated in…

Next, we'll take a question from Kashy Harrison, Piper Sandler.

So my question is around your capital allocation strategy. So if we look over the next 10 years or so, it looks like you're positioned to generate, call it, north of $10 billion from the manufacturing credits or pace of what you've been done so far. It seems like it would be pretty questionable political move to use that cash to return capital to shareholders, and there's only so much money you can spend on R&D each year. And so Mark, Alex, when you look at the business over the next decade, assuming treasury guidance comes in line with your expectation, is it a safe assumption that you're going to use that cash to expand manufacturing capacity? And if not, what are you going to do with all that cash?

So look, I think the near-term answer is it's not going to be a problem for us over the next couple of years. If you look at where we are right now, we started this year with $2.6 billion gross, $2.4 billion net. We're planning to end the year from a forecast basis about $1.35 billion, I think at the midpoint so down $1 billion or so. Over that time, you've got $2 billion of CapEx in the guide. So operating cash flow is obviously strong. But I look forward beyond that. Clearly, we've given a view of how we think about cash in the past, right? It's not working capital around the business. That has come down a little bit since we exited the systems business, but at the same time, as we grow the module business you do have increasing working capital. We talked about growth expansion occurred where we'd like to use the money more, and that's the best use of our cash, the highest ROIC at the moment. The project business has gone basically. There is potentially some use around M&A. We've talked in the past, M&A used to be focused around development business and acquiring platforms and projects more likely to be used now on the development side, R&D side, manufacturing side. If we get through all of that and we can't uses for capital, where increase didn't make sense, we would look to return. I think given the cycle that we're in right now, we're going to have significant opportunities to deploy capital to increase manufacturing over the next few years. The other piece I would say is that as we think through needs going forward, you talked a little bit about some of the constraints in the supply chain in the near term. As you're seeing more announcements in the U.S. and as we continue to grow, there may be constraints that we either can choose to all of need to help mitigate in the supply chain, which may necessitate some capital investment across areas that are adjacent to our module manufacturing directly. So there's other areas that may either look to or potentially have to deploy capital in the short term.

Next, you'll hear from Maheep Mandloi, Credit Suisse.

Maybe just on the India PLI. Could you just talk about how to think about from an accounting and cash point of view, is it similar to the U.S. credits? And -- any thoughts of expansion there? And secondly, just on the cadence on sold versus produced. Should we expect a similar cadence between the two as we saw last year through the quarters this year?

Yes. So I think on the PLA, we're still working through how an accounting work. It's a return of capital of about 24%, I believe, against the facility cost that's going to take place over 5 to 6 years. And we'll update you on the accounting as we work through that. I'll leave Mark to talk about the expansion. But if I just look through where we are in terms of your question on production versus sold volume, I think this is something that confusion around some of the analyst reports potentially around timing. We -- from a production perspective, we will be growing production across the year, but it's not significantly backended in 2023. However, from a sold perspective, it is fairly back-ended. We guided to a midpoint of around 12 gigawatts of sold volume this year. We sold 1.9 in Q1. And the remarks just now we said that we're guiding to a first half of 4.3 to 4.5 to the midpoint of 4.4 for the first half of the year, and that leads you to 3.5 gigawatts in the second quarter and then leads to a second half number of about 7.6. So you can see this from a total volume were roughly 1/3, 2/3 weighted first half of the year, the second half of the year. If you think about why that is, it's a function partly of timing of customer demand when customers are requiring shipments. There's also a function of our Series 7 production beginning in Q1 continuing through Q2, but we're not beginning to ship that product until the back end of Q2. And so you're not going to see the timing of revenue recognition to that come into Q3 and Q4. So that's a lot what pushing that sold volume out. And then, of course, you see a similar dynamic in terms of the Inflation Reduction Act recognition, if you look at how that plays out, we said on the call, you're going to see something like quarter of the total revenue recognition from the benefit around the Inflation Reduction Act, Section 45X happening in the first half of the year, the remainder in the back half the year, and that's again a function of timing in U.S. sales from our Series 6. The fact that you've got some inventory lag carryover of Series 6 being sold that was produced in 2022, and therefore, doesn't have credit, and you've seen most of that the first and second quarter about 158 megawatts in Q1 and 50 in Q2. And then the Series 7, where, again, we're producing in the first half of the year, but we're not selling that product until the second half. So you could see the credit timing in the second half of the year as well.

Yes. As relates to the expansion in India, India is obviously a very important market for us and one that we're continuing to look to grow. I think there's a sustainable demand profile there that and if you look at their load expectation and low growth to now at the end of this decade, it could be up towards a 60% increase. And clearly, lowest cost form a new generation to help serve that load growth is going to be renewable solar obviously being the primary one. So a lot of growth, a lot of opportunity, extremely -- our technology is extremely well positioned in India. So India is a very attractive market. As we scale up this factory, we'll continue to assess opportunities for additional investments and further capacity expansion in India. But I would expect us, if things progress as we currently envision between now and the end of the decade, we're going to have more than more factory in India.

Next, we'll take a question from Brian Lee, Goldman Sachs.

Just kind of going back to Phil's question around bookings, ASP trends. You had the $0.308 per watt, if I recall correctly, last reported bookings from a quarter ago and then it's $0.318, so it's up $0.01 quarter-on-quarter. I know there's a lot of moving pieces, but can you give us a bit of color around kind of how you had a $0.01 per watt increase from quarter-to-quarter on bookings? Was it Series 7? Is it more U.S.-made modules? I know you mentioned, Mark, the moving pieces around India potentially bringing that blended number down over time. But just wondering if you could give us some of the moving pieces as to how to think about price trends going forward, given it seems like there's still some levers you're able to pull to get that number higher given the results here. And then just a follow-up on capacity expansion. It seems like you guys have been patient on that front, but any updated thoughts on timing and what maybe some of the gating factors are around announcing more capacity given clearly the demand environment continues to be in your favor and now you're almost sold out through '27.

Yes. As it relates to the bookings and kind of the effect of the ASP sequentially. Actually, there's a pretty good mix when I look across call it, 5 gigawatts largely 4 deals that made up most of that volume 2, I think we announced, 1 was EDPR and the other was Leeward. And one of the things just to be clear on the Leeward is that. And you also noticed that we also have contracts subject to CP bucket in our disclosure, that gets about 4 points -- almost gave us 4.7 or something like that, of which 1.9 of that is India. Not all of that volume from Leeward was actually encountered or booking because there is a provision in there that we could flex it up or flex it down. And what we've done is we've taken a percentage of that volume and is reflected in the contract subject to CP. But I just want to make sure that's clear that not all the 2 gigawatts is actually in the bookings to that 4.8 because a portion of it is in the contract subject CP bucket. And again, it can flex up or flex down. But when I look at those bookings, the -- it's a good mix of international and domestic. It's a good mix of Series 6, U.S. and international. It's a good mix of Series 6 and Series 7. So it was not skewed towards one or the other. I will say that clearly, the ASPs that are represented in there for those different variants will be different. So -- and I said this before, the international volume is generally going to be lower than domestic volume because at the extent we're selling into the U.S. market because of the best content value equation…

Our next question is Julien Dumoulin-Smith, Bank of America.

Just moving back to the comments in the prepared remarks about the termination for convenience. Just wanted to follow up. I think you guys said 1/10 of your entire contracted backlog has that with the majority being '24, '25? Can you comment a little bit about what kind of provisions or entitlements are provided for contracts beyond 2025 at present? Any kind of other nuances or other provisions beyond just the convenience piece?

What we said is generally our contracts of fixed price contracts. So generally, that's how they're structured going out now. But we wanted to highlight the termination of the convenience. I think there has been some questions around how strong these contracts are. So we want to make sure it's clear that only 1/10 of our backlog today of roughly 70 gigawatts has termination of convenience provisions. And the majority of those are for the 2024-to-2025-time frame, which I think if you look at where module supply is in that time when you think about timing for which people design plants and finance plant, we think it's relatively low risk that's getting booked. The one I was trying to give you that color as to what was out there. As you go out to further dated contracts, they are -- they've always been, which is firm fixed price contracts with the adjustments that we talked about, so upside downside around bin class, some adjusters around things like aluminum and steel pricing and sales rate adjusters, the general, these viewers' protections or pass-throughs of risks that we feel are pretty mitigated by the customer versus us.

Yes. And then I think we also said is that in some cases, these are regulatory kind of requirements that we have to contract around. These provisions have been in our contracts, and again, on a relatively small percentage of our contracts. Historically, we have not seen customers in both these provisions to the extent they are in a contract. The other thing I would say is that some of these very same contracts that have these provisions were also out there negotiating with customers on domestic content uplift on ASPs. And when those uplifts do happen, there's additional security that has to be posted, which further in my mind, solidifies the commitment from the customer. Also most of our customers view this as a true partnership with First Solar. And they know that if they were to invoke something like that, they would be making a decision to no longer be willing to partner with First Solar. I don't think there's many of our customers today that really want to be that vulnerable given the uncertainty, which could happen at any point in time, right, between geopolitical issues and challenges between the U.S. and China and other implications that could happen that could have an adverse impact on supply chain in the U.S. It's going to be a while before you get a fully vertically integrated U.S. supply chain that would include poly through module assembly. Our customers understand that's what First Solar brings to the equation and they bring certainty and integrity. And I think that will keep most of our partners committed to the long-term relationships and not looking at transactional opportunities.

Ben Kallo from Baird has the next question.

Maybe following on to that first question. Just capacity, Mark, how do you think about it because I think the overcapacity is going to become a bigger worry, at least from our standpoint in Wall Street just because we've seen it before the new announcements. And then my second question is about carbon intensity in your technology and how that benefits you. Specifically, I think I read that creating hydrogen, clean hydrogen will require to get those credits will require solar panels that have this low carbon intensity. So maybe there's a differentiation there.

Yes. I think when you look at the global capacity and the trajectory of oversupply, I think determining what that oversupply is relative to ultimately what the finance going to be. And I think there's all different views around that in terms of how much growth we could see on a global basis as we progress through the end of this decade. And I do think there are some drivers around demand that they aren't fully appreciated such as green hydrogen. But I think you have to then decouple that and say, where is that -- what market is that going to be easily used to address? Like, for example, India, when you look at India and the trade and industrial policies that have been put in place in India largely say it's going to be a domestic market. I mean, to try to engage and support India on an import basis and to pay the tariffs and assuming you can even get to a point where you have the approved to actually sell into India through the approved list of module manufacturers, that's another hurdle and constraint that has to be addressed. So the best way to serve that market is going to be domestically. So when I look at India and say, well, wherever polysilicon capacity is being added, assuming it's not happening in India, it's really irrelevant in terms of the India market. You have a similar dynamic here in the U.S. as well. The polysilicon -- I mean I understand that there's clearly wafer capacity that's being added in Southeast Asia and the cell capacity and to the extent they can get polysilicon supply chains that can enable that capacity, which generally are going to be non-Chinese source, [probably unlock, probably lock] or somebody like that,…

And our final question today will come from Colin Rusch, Oppenheimer & Company.

Can you talk a little bit about some of the supply chain keeping up with your expansion, notably the glass supply chain, the dynamics around that? And then the second question, I'd be curious to hear about is, as you're working through some of the portfolios that you're going to supply, if you could talk a little bit about the size of those projects, how many of them are getting larger? And how much you're seeing in terms of a little bit smaller sizes kind of in the 20 to 60-megawatt range that may get built out here?

Yes. Supply chain expansion, I think, Colin, you referenced glass in particular but at the end of the day, the module is two sheet of glass and back rail or frame of some type, which has a little bit more steel. Glass is critical. And it's [indiscernible] we're in. We recently -- there was a joint announcement with us and beat around a factory that they're going to now start up to serve our glass needs, the factory that was idle in Pennsylvania, which will now start up and provide cover glass to us. And so one of the things that we're doing is we're really diversifying our supply chain from a glass standpoint, which is really important for us. We're also in some conversations with them to provide and with other parties of coated glass, substrate glass. So we're trying to really broaden our reach and engagement. What's also nice about this as some of those parties -- counterparties that we're working with on the glass, in particular, are looking at solar as a strategic market that they want to be a part of, and we've got a great opportunity to leverage that with them to enable their strategic intent coupled with ours. So I'm more optimistic you would ask me 6, 9 months ago, where we were, I would say, I'm more optimistic now with some of the work the team has done to enable that supply chain from a glass standpoint in particular. Size of the projects generally are larger. We're not really seeing in many of the projects in kind of that 40 to 60 megawatts. I mean most of the projects that we're targeting with our customers are all in the 100 megawatts and generally getting larger and as you start to get into the hydrogen space, which we're starting to see some opportunities down that path. I mean those are 300, 400, 500-megawatt type of projects, in which we'll continue to grow at least as that evolves more and it goes beyond just a smaller opportunities at the full-scale hydrogen projects that are product finance and what have you, those are going to be large projects, and that's why the reason why I think that demand inflection point on hydrogen probably hasn't been fully appreciated with most people's forecasts.

And everyone, that does conclude our question-and-answer session today. That also concludes today's conference. We would like to thank you all for your participation. You may now disconnect.