Hello. Good afternoon, everyone, and welcome to First Solar's [First] (ph) Quarter 2023 Earnings Call. This call is being webcast live on the Investors section of First Solar's website at investor.firstsolar.com. At this time, all participants are in a listen-only mode. As a reminder, today's call is being recorded. I would now like to turn the call over to 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 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 provide a business update. Alex will discuss our financial results and provide updated guidance. 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 statement 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.

Thank you, Richard. Good afternoon, and thank you for joining us today. With half of 2023 behind us, we continue to see strength in commercial, operational, and financial foundations, both in 2023 and in the coming years as we continue to grow. The second quarter of the year continued the steady progress established in the first as we ramped up production and delivery of our next-generation Series 7 modules, reinforced our global leadership in thin film PV with a strategic acquisition, and continued our strong bookings and ASP momentum. Moreover, continuing our commitment to sustainable long-term growth, earlier today, we announced that we will invest up to $1.1 billion in building a new, fully vertically-integrated manufacturing facility in the United States, our fifth in the country. Driven by compelling market fundamentals, supportive trade and industrial policies, and robust customer demand, as reflected in our year-to-date bookings, total contracted in backlog and pipeline of mid- to late-stage opportunities, we are pleased to continue to expand and invest in domestic manufacturing in the United States. This new facility is anticipated to be completed and begin production in the first half of 2026. And along with our Alabama facility, currently under construction, we'll produce our Series 7 module, which is expected to be a fully domestic product, and is determined by the current guidance issued by the U.S. Department of Treasury. This new investment puts us on track to grow our manufacturing footprint to approximately 14 gigawatts in the U.S. and 25 gigawatts globally by 2026, reaffirming the growth thesis we established in November of 2016. As noted on previous earnings call, the position we are in today is enabled by our point of differentiation. Our unique CadTel semiconductor technology, vertically-integrated manufacturing process, decision to locate manufacturing close to demand and develop robust…

Thanks, Mark. Starting on Slide 8, I'll cover our financial results for the second quarter. Net sales in the second quarter were $811 million, an increase of $262 million compared to the first quarter. Increase in net sales was primarily driven by strong market demand that led to higher volumes sold, commencement of sales of our next-generation Series 7 modules and an increase in module ASP. Gross margin was 38% in the second quarter compared to 20% in the first quarter. This increase is primarily driven by the increase in module ASPs, lower sales rate costs and higher volumes of modules produced and sold in the U.S., resulting in additional credits from Inflation Reduction Act. Based on our differentiated vertically-integrated manufacturing model and the current form factor of our modules, we expect to qualify for a Section 45X credit of approximately $0.17 per watt for each module sold, which is recognized as a reduction to cost of sales in the period of sale. During the second quarter, we recognized $155 million of such credits compared to $70 million in the first quarter. I encourage you to review the safe harbor statements contained in today's press release and presentation and risks related to our receiving the full amount of tax benefit we believe we are entitled to under the IRA. The reduction in our sales freight costs during the quarter reflected improved ocean and land rates, the significant reduction in non-standard charges of container detention and demurrage, as well as a beneficial domestic versus international mix of volumes sold. The lower sales freight costs reduced gross margin by 8 percentage points during the second quarter compared to 15 percentage points in the first quarter. Ramp costs, which include costs associated with operating a new factory below its target utilization and performance…

[Operator Instructions] Our first question comes from the line of Philip Shen. Philip, please go ahead.

Hi, everyone. Thanks for taking my questions. Two categories. First one on bookings. Looks like your ASP was strong and healthy for bookings ASP at about $0.327. And then you have, Mark, I think you mentioned the addition of another $0.02 of adders. I wanted to ask you, what do you expect your bookings to look like ahead? You had a little bit of a quiet period during Q2, but then you ramped it up subsequent to July 1. Do you think that accelerates now that you have new capacity announced? And then, the second category of questions here is, we thought you were sold out for 2024. But in that agreement that you announced today, you highlighted -- and I think in some of the other agreements over the past few weeks that you have more -- that you booked for '24. How are you guys able to do that? Did someone -- did a party cancel their order? Or are you running above 100% utilization? Is there any more volume left to be sold in '24? And how much is left for '25? So, thanks, guys.

Yes. So I'll -- maybe I'll take the second one first, Phil. So, the reason we're able to still commit to some opportunities in '24 and '25 is really twofold. First is, and we highlighted in my prepared remarks, that we are using India in '24 and '25 for U.S. shipments. Demand in the U.S. was so strong, and we were restructuring some deals with customers that we could meet '24-'25 volume requirements and then pull through out of years as well where we had a little bit more supply. Those deals penciled out really well. So, we'll use some of the India line. We also have requirements under the incentive package that we received in India that there's some amount of exports that need to be achieved. And now there -- what we larger doing is accelerating the timing of those exports into the first couple of years of production in India and using that to support the U.S. market. So that's a piece of it. The other is the ramp of our Perrysburg Series 7 factory is going very well, and that is creating some incremental capacity that's available in '24 in particular. And then we're looking to pull forward some of the Ohio upgrades that we were talking about before. Remember, as part of our overall announcement, we indicated there's about 0.9 gigawatts of volume that we would use to further throughput and drive more output out of our Series 6 factories in Ohio. We are pulling forward some of those initiatives in order to create a little bit more supply earlier than we had anticipated. So all that is helping kind of create supply for '24-'25. The biggest [indiscernible], I just want to make sure it's clear, is really the volumes we're going to support out…

Great. Thanks, Mark. Actually, just want to -- since I'm on the line, I just want to clarify, your $0.296 is the ASP for the whole backlog, whereas the $0.327 I was talking about, I think that's the ASP for the incremental bookings since the first quarter. Is that correct? Just to clarify.

The total backlog as of the end of the quarter which was about 70 gigawatts, that average ASP was $0.296. The bookings since the last earnings call, which was 8.9 gigawatts, was $0.293. But that did not include sales rate of half the volume. If you include the sales rate -- normal sales rate adjuster, our sales rate, that equivalent ASP would be in the low $0.30s. That -- those are the numbers.

Okay. Got it. Thanks. I'll pass it on.

All right, thank you. And our next question comes from the line of Brian Lee. Brian, please go ahead.

Hey, guys. Good afternoon. Thanks for taking the questions and congrats on the new factory announcement. I had two questions here. I guess, first off, on the domestic content rules since they've been out from mid-May, what have you been articulating? I guess maybe the customer feedback has been around the 40% and 55% threshold. Is that basically going to be achieved by just buying Series 7 panels from Alabama and the new site? And then would you be expecting more pricing potential? It sounded like you did on volumes from those sites going forward. If you could maybe help quantify. And then the second question was just on that new factory, any puts and takes on first half 2026? Maybe it's a little bit of a nitpicking item, but would there be ability to move that up given -- I think, historically, you've talked about like a two-year build cycle. So, is there room to have this even online a bit earlier into the end of '25? Thanks, guys.

Yes. On the domestic content rules, again, the way it's defined right now is that there are components that will determine if the module is manufactured in the U.S., and therefore, is a manufactured domestic product. As we indicated in our remarks is that for Series 7, especially for our new factories, we'll be 100% compliant with all of those requirements. So, all of those components that have been identified will be manufactured in the U.S. Again, that's a strategy that we embarked upon years ago to have a local supply chain. As a result of that, then the full entitlement for the module will be captured at the project level. As you know, there's no one else that will meet those requirements, whereas other manufacturers who made announcements in the U.S. will actually manufacture the cell and very few, if any, will get glass in the U.S. I have yet to see an announcement of anybody indicating availability or contracting for glass in the U.S. We've been unique in our position there and been able to capture very strategic partnerships around sourcing of our glass. And so, I think we'll be in an advantaged position. Our customers are clearly still trying to do the math. I think there are still questions. But I think there's a high level of confidence that First Solar is the best-positioned module to ensure the domestic content bonus, which is why we also see such a high volume of conversions that are being done, as I referenced in my prior response to Phil as well. So that's where -- from a domestic content standpoint, we're working very closely. We are providing -- we're being very transparent. I know there's been some speculation that manufacturers are not willing to provide cost-level information. We are obviously…

All right. Thank you. And our next question comes from the line of Joseph Osha. Joseph, please go ahead.

Hi, thank you, everybody. Two questions. First, I'm seeing perovskites and CIGS talked about. I'm wondering if we might get some sense as to when we might see those turning up in shipped products? And also whether -- if we're talking about tandem cells or higher-efficiency products, whether we might see those begin to show up in rooftop? And then, I do have one other question. Thank you.

Look, I would say on the perovskites side of the house in particular, I'm very happy with capabilities that Evolar brings to the table there. I think it's very complementary to capabilities that our own internal team has. And -- on continuum, maybe slightly different approaches, but both showing -- demonstrating very good results. And again, there's a combination of challenges, but one, first and foremost, that everyone is working through is stability of the device. Efficiency is obviously important, but you also need something that's stable. And perovskites, in general, have -- historically had issues and challenges with trying to demonstrate long-term durable stable devices. So, having there on CIGS6, Evolar has got some very deep capabilities there and record sales that they've demonstrated, it's like north of 23%. And we think that there's a potential for a tandem technology, thin film-thin film that can get to market sooner than maybe perovskites can at this point in time. And there would be a CadTel top cell, with CIGS bottom cell. And if we were able to do something like that, then that would clearly give you a higher-efficiency product that could expand our addressable market. And that's largely why we're investing in the technology the way we are. I mean, we are a module manufacturing technology company. We want to be a technology leader. We are a world-class leader as it comes to thin film devices. Both of these are thin film semiconductors, and we'll continue to evolve the capabilities there. As it relates to when we can get to market, that's -- it's probably too early to determine. There's a lot that needs to be done yet to address a number of hurdles and issues that have to be resolved. But I'm encouraged with at least the platform that we have, very complementary to our world-class leadership that we've taken in CadTel. These are two alternatives thin films that can be very complementary and I think can further our technology leadership over time.

Thank you. And my quick follow-up, Brian alluded to this a little bit, just stepping back from the just announced factory and thinking more out towards the end of the decade, should we kind of think about 18 months to two years as a reasonable cadence for your ability to add manufacturing given site selection, tools, all this kind of stuff? Or could it be slower or faster?

I think I'd mark it to that two-year cycle. I think that's probably the right timeline. I mean there's other issues that we're running into. It also varies where we're going to go. If we go to India, I would argue potentially, India could a little bit faster. U.S. is running to a number of challenges, especially around construction and timelines to do that, availability of workers, access to energization of the factory. We're still looking at Europe, and it depends on the path we go in Europe. That could also maybe be slightly shorter timeline than where the U.S. is right now. But I think the best way to look at it is kind of a two-year timeframe.

Understood. Thank you.

All right, perfect. And our next question comes from the line of Julien Dumoulin-Smith. Julien, please go ahead.

Hey, guys. It's Alex Vrabel on for Julien. Just a question on the domestic content one more time. I mean you alluded there, Mark, to -- some of the sort of missing bits that have to be clarified here. I'm just curious, given you guys have already sort of booked some, I guess, ASP uplift in '24 relative to offering domestic content, if there's any sort of, I guess, clawback potential from the developer, if they're actually not able to get it given some of the clarifications that we're waiting on? And I'll throw my second in here as well. When you think about the longer-term, I guess, expansion opportunity in the U.S., you guys have sort of historically been about a third of the U.S. market. I think we have upwards of 70 gigawatts announced as far as module in the U.S. currently. How do you think about sort of your broader market share in the U.S.? And what that could become over time as we get into the latter half of the decade? Thanks.

As it relates to -- most of those -- just as a reminder, most of the conversions that we put in place that relates to '23, '24 and '25, that's really what the years it sits in, those were all somewhat thought through and envisioned as a potential opportunity through the contracts that we were structuring at that point in time in which we implied domestic content. And to the extent, certain rules would come through, then there would be -- and to the extent we provided them with the domestically manufactured product that we would be entitled to incremental ASP. In other cases, we've left them open, and it was really up to the customer. And if you want domestic supply, then fine, we'll provide it. We have the option to provide it internationally as well. If you want domestic, then we'll negotiate an incremental ASP from that standpoint. So as it relates to any callbacks or provisions in those adjustments of modification amendments that we did, really there's nothing embedded in those agreements that would result in that. Now, I will say on new volumes that we're booking now, there are provisions in there that would require an adjustment to the extent we do not meet the representations that we gave to the customer, right? So for example, I said that our Series 7 product would be domestically manufactured product, and therefore, the list of 10 or how many components there are would all be manufactured in the U.S., and therefore, the product would be domestically manufactured. And we've given ourselves some buffer relative to that. And to the extent we don't manufacture the product as currently envisioned to ensure that all those components are domestically manufactured, yes, then there would be a potential impact for that lack of performing effectively, right? But that's all within our own control. And if the project qualifies or doesn't qualify, we're held harmless. As long as we meet our requirements, whether the project level hits its 40% or 55% or whatever it may be, there's no recovery or clawback from First Solar. The only thing we have, which you would expect under any contract, we have an obligation to comply. And we made a representation around it being a domestically manufactured product. And therefore, those components which have been identified have to manufacture in the U.S. And really, I see that as not a lot of risk because that's what we're doing already, all that's being sourced here in the U.S.

Got it.

Sorry. I think I cut you off there a little bit. Our next question comes from the line of Vikram Bagri. Vikram, please go ahead.

Hi, there. I was hoping that you could give a little bit more color on the expected increase in module gross profit relative to your prior expectations. Just kind of what's driving that? What are the puts and takes there? How much of that benefit is coming from sales freight versus manufacturing efficiencies?

Yes. So it's a little bit of both. You're definitely seeing a drop in sales rate. We did forecast a drop throughout the year, perhaps dropped a little bit earlier in Q2 than we had expected. So I'd say more than half of what we have added in terms of module gross profit to the guide is associated with better sales rate. But there is a little bit of improvement in the core relative to our previous guide as well. Importantly, just to make sure it's clear, we said that we're not changing our forecasted Section 45X benefit. So it's not an increase in the cost of goods -- on the gross profit line associated with a reduction in cost of goods from IRA benefits. It's all fitting across core cost of production and sales rate.

Got it. Thank you. And just one follow-up. In terms of the mix of deliveries, you mentioned some recent contracts, which have projects in Europe as well as in the U.S. How are you thinking about supplying those? Could we expect any supply coming from the U.S.? And then just how do you think about the pricing dynamic in those markets where ASP is a bit lower than we see domestically?

Yes. So, we currently are not envisioning sourcing anything from the U.S. to Europe. Now could there be a particular deal that we've contracted that would -- because of a particular [win] (ph) that we needed for that project or a particular product that we needed, could it come from the U.S.? Potentially, but that's not the intent. The intent would be to support Europe out of our international factories in Malaysia and Vietnam. Obviously, Malaysia and Vietnam are also our two lowest-cost factories before India gets up and running. When India is up running, then it will become our lowest-cost factory in the fleet. But right now, they're our two lowest-cost factories. And yes, we are -- we have global customers, right, very large utilities or oil and gas majors that one global supply. They have projects in the U.S., and they have projects in India. They may have projects in Europe, and they want to have product and they enter into agreement with First Solar, so we could source not just a particular region but multiple regions, no different than the Energix deal that we announced. I mean that was volume for the U.S. It included volume in Israel. It included volume in Poland, at least potentially identified, which is where they're developing. We will have -- we do have to differentiate pricing in some regards to be competitive in those opportunities relative to where other global pricing has gone. But we still will get a premium. We're not in a position where we're having to price liquidation type of fire-sale ASPs like others are doing right now, because there's a long-term relationship that we have with strategic partners. And I think using Energex, as an example, to the best of my knowledge, they are 100% sourced to First Solar regardless of where their projects are. But I have to make sure that they can be competitive in the market at which they compete in. And I can't establish a market price that's meaningfully out of market, so we price accordingly.

Okay. Perfect. Thank you so much. And that is all of the questions we have time for today. We would like to thank everyone for taking the time to dial in today. You may now disconnect.