First Solar Inc

NASDAQ:FSLR

Earnings Call Transcript 2022-Q1

[Operator]

Good afternoon, everyone. And welcome to First Solar’s First 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 a listen-only mode. As a reminder, today’s call is being recorded.

I would now like to turn the call over to Mitch Ennis from First Solar Investor Relations. Mitch, you may begin.

[Mitch Ennis, Investor Relations]

Thank you. Good afternoon everyone and thanks for joining us. Today, the company issued a press release announcing its first 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. Following the remarks, we will open the call for questions.

Please note, this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management’s current expectations including, among other risks and uncertainties, the severity and duration of the effects of the COVID-19 pandemic. We encourage you to review the safe harbor statements contained in today’s press release and presentation for a more complete description.

It is now my pleasure to introduce Mark Widmar, Chief Executive Officer. Mark?

[Mark Widmar, Chief Executive Officer]

Thank you, Mitch. Good afternoon. And thank you for joining us today. To begin, while our $0.41 loss per share results came in within our internal expectation for the quarter. It is reflective of what is projected to be a challenging 2022 from an earning standpoint. Due to the factors that we highlighted during our call in March, in which we’ll address further today.

That said, we are encouraged by our strong bookings progress. As we booked 11.9 gigawatt in less than 60 days since the prior earnings call, bringing our year-to-date bookings totaled 16.7 gigawatts. Further setting ourselves up for 2023 and beyond, an important feature of many of these recent bookings as previously discussed is that they include adjusters to potentially increase ASPs based on the realization of our technology roadmap, achievements, and sales risk sharing mitigation.

In addition, we have begun to employ a similar ASP adjustment mechanism related to aluminum exposure. Later in the call, we will provide an indicative view of how these pricing adjustments could result in an ASP potentially significantly greater than the baseline reflected at the time of our bookings.

In short, while these contracts have a baseline ASP that is reflective of the value of the product, we are manufacturing today. That ASP has the potential to increase, to capture the value of our product or technology enhancements or to offset sales rate and aluminum margin erosion risk.

We believe this agile approach to contracting will continue to attract customers looking for long-term certainty and value. The combination of reliable competitive pricing and supply certainty, lower political and compliance risks and access to our best available technology is a tremendous value driver for sophisticated customers who may be fatigued with a volatility uncertainty. That can be experienced transacting in this industry, particularly in the current environment.

It is worth noting that many of these recent bookings are with long-term repeat customers with relationships that span hundreds of megawatts of previously installed capacity. In addition, our most recent bookings include significant volume from customers new to First Solar. These decisions to work with First Solar and our technology speaks volumes, not just about the trust in the company, the value of our differentiated CadTel semiconductor and our adherence to principles of responsible solar, but also the risk of pursuing a solar at any cost strategy. By which we mean an approach that would otherwise compromise values and ambitions for projects powered by truly low carbon and environmentally superior solar.

This trust is in part built upon the company’s dependability and its ethos of honoring its commitments. Some argue that the current volatility in the industry in general and the module availability in pricing specifically, at this particular moment in time provides the company with an opportunity to pursue repricing of legacy contracts. Contracts that we are delivering on today, but which we’re entered into in price several years ago. We take a different view. We are continuing to build First Solar for the long-term and our partnerships with our highly valued customers is critical aspect of that ambition.

We believe the benefits that come with continuing to serve a base of enduring strategic customers that seek to partner with a company for large scale multiyear procurements outweighs the potential long-term adverse impacts that could result from taking a transactional versus relationship based approach in the short-term.

Turning to Slide 3, I’d like to review some highlights and provide some updates from the quarter. As just mentioned, we booked 11.9 gigawatt since the March earnings call. After accounting for shipments were approximately 1.7 gigawatts, which was in line with our expectation. This brings our total contracted backlog to 36.4 gigawatt. Manufacturing domestics remain strong despite some planned downtime for upgrades in Vietnam in February and March and our Q1 production of approximately 2.1 gigawatts.

With regards to supply chain and logistics, as mentioned on our earnings call in March, we have no direct Tier 1 suppliers in the Russian/Ukraine conflict area. However volatility in various supply markets, such as metals, lumber and fuels is further exasperating the current inflationary environment. In addition, we have some indirect exposure through our equipment vendors as relates to the timing of manufacturing delivery of tools for our new factories in Ohio, in India.

Moreover, the conflict and current inflationary environment have contributed to dislocations in certain currency markets, Alex will discuss the impact to First Solar later in the call. Regarding freight while pricing in the transoceanic freight market continues to be a historic highs and to represent a headwind in 2022. We have briefly seen increased container availability, which we believe as a result, a China’s pursuit of its zero COVID policy with associated lockdowns. That said, transportation costs and transportation duration continue to be significantly higher in the historic norm.

For example, in Q1 shipments from Southeast Asia to the West Coast averaged over 130 days compared to approximately 60 days in 2020. Transit times have been exasperated by the Russia/Ukraine war at several global logistics and shipping companies announced sensations of shipping to Russia, further stranding equipment and vessels and intensifying backlogs and delays in global shipping industry.

Turning to Japan, as we noted during our March earnings call. In late 2021, we received an unsolicited offer to acquire our Japan project development and O&M platform negotiations related to this potential sale are progressing well. And we expect in Q2 to enter into definitive agreements, to sell these businesses. With closing taking place, following satisfaction of customary closing conditions. As previously noted, should this transaction not be completed for any reason, we would expect to either continue our approach of selling down our contracted projects over time or consider an alternative buyer for the platform.

Finally, construction of our third manufacturing facility in Ohio and our first manufacturing facility in India remain on track. Although with the aforementioned risk related to equipment manufacturing and delivery schedules. Beyond these facilities, we continue to evaluate further expansion opportunities. As we have discussed before with our new factories anticipated to represent the lowest cost of production end of fleet, they’re proximity to demand. And given our large fixed operating cost structure, growth is expected to provide significant incremental contribution margin.

As we considered options for growth, we have increasingly been approached to consider further expansions with various financings, ownership and off-take structures. As industry participants continue to embrace the value of entering into long-term partnerships with reliable module suppliers. While we have made no decisions at this time, we have receptive to enabling the ambitions of our partners seeking dedicated supply. To this end, we continue to engage with our tool and equipment vendors to ensure they have visibility into and the ability to support any potential expansion.

Turning to technology. We are pleased with the opportunity – optionality, excuse me. Our current roadmap provides both in terms of enhancing our form factor, product design and energy profile in utility to scale markets, as well as providing a potential route to scale into the residential solar market. With regard to form factor, we expect our Series 7 module, which is to be produced at our new factories in Indiana – Ohio and India will feature a glass area that is approximately 14% larger than our Series 6 plus modules.

Unlike Christmas Silicon modules, which are constrained by the industry standard cell sites and risks such as cell tracking, CadTel has no such form factor or size limitation. A larger form factor benefits our cost per what produced and allows our customers to install more watts with less balance of system cost. In terms of design, we expect the mounting system to be regionally optimized in the U.S. to a tracker application and in India to a fixed tel application. We believe the redesign structure will combine lower cost to produce with greater installed speeds in the field, benefiting both for solar and our customer.

As relates to energy, in addition to benefit associated with degradation, temperature coefficient, sector response and shading, our R&D team continues to make progress on developing a bifacial attributes of our CadTel semiconductor. We are continuing to run tests that we expect will enable us to commercialize the technology across our module platforms and have recently produced another set of preproduction prototypes for additional field and product testing as we work to reaffirm the commercial, financial and operational thesis of – bifacial CadTel.

Looking at the residential market. We recognize the value of high efficiency, aesthetically pleasing and domestically manufactured product. To that end, we continue to evaluate the prospect of leveraging the high band gap advantage of CadTel in a disruptive high efficiency low-cost tandem or multi junction device. We believe that a thin film semiconductor is essential to achieving the highest performing tandem PV module.

And that CadTel is well placed to enable this leap forward in high performance. With a path in the midterm to achieve a 25% efficient multi junction PV module. As we seek to grow our presence and competitive position in the residential and C&I space, this type of module has the potential to be disruptive and provide us with a competitive advantage. In that spirit, we are in discussions with SunPower to potentially develop and eventually introduce an advanced residential solar panel, a stack tended module platform that combines our advanced thin film CadTel semi conduct with responsibly source crystal silicon cells.

We do not intend to disclose further any developments with respect to this discussion, except to the extent an agreement is reached. Finally, as highlighted in our last earnings call, our technology team has been conducting extensive testing to measure the full performance entitlement of cure in high volume manufacturing conditions. Since our last update in March, we have concluded that while the potential for cure remains its implementation will be delayed beyond 2022.

We will prioritize other aspects of our R&D stack in the near-term to ensure focus on the three current technology pathways that we believe can be commercialized in the near-term. Series A bifacial CadTel and tandem multi junction devices, the success of these three pathways is not contingent on cure, which will continue to be developed in parallel. We have continued to advance progress on our previously discussed amendment and advanced stage negotiations to amend certain customer contracts, utilizing cure technology by substituting our enhanced Series 6 product. We maintain our expectation that these amendments will impact 2022 revenue and gross margin by approximately $60 million, which is reflected in our guidance.

Moving to Slide 4 with the aforementioned 11.9 gigawatts of bookings is the prior earnings call, bringing our total year-to-date bookings to 16.7 gigawatts and factoring in shipments of 1.7 gigawatts in the first quarter are future expected shipments, which extend into 2026, our 36.4 gigawatts. Including our year-to-date bookings, we are sold out for 2022 and 2023, have 9.6 gigawatts for plan deliveries in 2024 and have 7.6 gigawatts for plan deliveries in 2025 and beyond. Including these bookings are gigawatt size deals entered into over the past several weeks with among others, Silicon ranch, interjects renewable energies, and Leeward Renewable Energy for delivery in North America and internationally.

Turning to Slide 5. I’d like to take a moment to walk through the recent changes in our contracting structure. This change in approach provides product certainty today. As our baseline ASP is reflective of today’s technology. It further provides ASP upside to the extent we realize future module technology improvements, including new product designs, which deliver a better energy profile for our customers. And finally, it provides greater logistics and commodity gross margin risk mitigation through ASP adjusters, linked to aluminum and sales rate costs.

Every contract is different and not every recent includes every adjuster described here. To the extent that such adjusters are not included in a contract. We believe that baseline ASP reflects a commensurate risk and opportunity profile. As it relates to technology and product adjusters, we have previously and will continue to have both upward and downward adjustments to ASPs to reflect the BIM class delivered reflective of the baseline committed under the contract. As it relates to other technology roadmap and product features, under our previous structure, we would forward sell assumed improvements with no upside and a downside risk in the event, these were not achieved.

As represented by the red circles on the slide, under our updated structure. We forward sell today’s technology with upside for technology improvements as shown by the green circles. As shown by the dotted box on the side. And as we have reflected in the 10-Q filing as of March 31, 2022, we had approximately the 9.8 gigawatts of contracted volume with these adjusters, which is if realized, could resolve an additional revenue up to $0.3 billion or approximately $0.03 a lot. Note, of our 4.8 gigawatts of calendar quarter bookings, 1.4 gigawatt did not include technology adjusters, but with price with an approximate 10% premium, the remainder of the calendar quarter of bookings. As relates to standard versus high load modules, our previous structure assumed a certain mix.

And any deviation from that mix could imply greater high load modules, which have a higher cost per watts reduce, could have in reduced gross margin. Under our updated structure, we have received an increased ASP to offset this additional cost, therefore preventing gross margin erosion as represented by the blue circle on the slide. As it relates to sales trade and aluminum, we were previously exposed to incremental costs and logistics and commodity markets under our updated structure, we have contractual adjusters designed to offset such incremental costs and prevent gross margin and erosion.

As of today, we have 23.2 gigawatt of contracts with either sales freight coverage or no sales freight exposure. The aluminum coverage class was introduced after Q1 quarter end and is in present in 11 gigs of our most recent bookings. Indicatively, assuming today’s sales tray and aluminum environment, a contract with these sales rate and aluminum adjusters with increased ASPs by approximately $0.03 per watt above the baseline.

Finally, as it relates to policy, many of our updated contracts in the United States now specify sharing related to a potential upside for U.S. made modules under an extension of the investment tax credit.

As reflected on Slide 6, our pipeline of potential bookings remains robust. Even after booking 11.9 gigawatts in less than 60 days, our total bookings opportunity of 54.1 gigawatts. Our 23.7 gigawatts of mid-to-late opportunities include 16.1 gigawatts in North America, 5.4 gigawatts in India, 1.7 gigawatts in the EU and 0.5 gigawatts across other geographies.

We are especially encouraged by the continuing growth in our India pipeline, which we believe positions us well to realize multi-gigawatts of bookings over the next several quarters. The global sustained market demand is driven by the fact that we are on the edge of a new age of electrification. One in which essentially everything that can be electrified will be. It is our next big evolutionary leap and our best bet at fighting climate change. As we power transportation and virtually every aspect of our lives, including power producing fuel cells with electricity.

Before turning over the call to Alex on Slide 7, I would like to address recent policy developments in the United States, Europe and India. Trade and industrial policy decisions and the upending of the global geopolitical status quo both play a significant role in impacting market dynamics as well as continuing to inform our growth strategy.

Starting with the U.S. in late December 2021, President Biden signed the Uyghur Forced Labor Prevention Act, which received widespread by partisan support in Congress. This acts rebuttable presumption against the importation of goods produced in the Xinjiang region soon to be produced with forced labor is set to go into effect in June this year.

There exist practical solutions to reduce the risks of purchasing modules associated with forced labor. For instance, the Responsible Business Alliance, the world’s largest industry coalition dedicated to supporting the rights and wellbeing of workers and communities in the global supply chain offers the leading standard for onsite compliance verification and effective shareable audits in the form of its validated assessment program. Yet this established model has not been widely adopted by the solar industry, but the First Solar being the first and at this point only large solar manufacturer to join RBA. In our view, transparency and traceability are crucial to reinforcing our industry’s social license to operate. The transition to a sustainable energy future and the fight against climate change must not come at the price of human rights.

Turning our focus to domestic and trade policy. The Biden inherits administration as the opportunity to deliver a meaningful and durable long-term solar industrial policy through the use of a manufacturing incentive. We remain fully engaged in advocating for legislation that would revive climate and clean energy investment, including the framework for manufacturing tax credits established by the Solar Energy Manufacturing for America Act introduced by Senator Ossoff.

On the trade front, in response of addition by Auxin Solar, the U.S. Department of Commerce has initiated anti-circumvent inquiries against crystalline silicon imports to the United States that undergo minor processing if any at four Southeast Asia countries. We believe this is a positive step towards addressing the problem of mainly crystalline silicon Chinese modules and cells that are completed in Southeast Asia in an attempt to avoid tariffs.

For too long, the American solar manufacturing industry has been undersea from the Chinese headquartered in subsidized companies that have been violating the rules of free and fair trade. The data shows that since the underlying anti-dumping and countervailing duties on Chinese cells and modules were put in place, the value of Chinese imports to the United States decreased by 86%. During the same period, the value of imports from four Southeast Asia countries that issued increased by 868%. Prior to the underlying anti-dumping and countervailing orders, there was virtually no crystalline silicon cells and modules produced in these four Southeast Asian countries.

There is still a very limited polysilicon ingot or a wafer production in these nations. Instead they source the high value wafers from China, which controls 99% of global crystalline silicon wafer production. Additionally, China is the dominant supplier of the other key imports – inputs, such as aluminum, silver plate, UVA sheets, back sheets, aluminum frames and junction boxes. Simply the data truly speaks for itself.

We’ve heard The Sky Is Falling narrative pushed by Robin Hood’s advocating for China to have free rein in the U.S. market. Their doom and gloom is telling it suggests that they are afraid that the Department of Commerce will find that the Chinese solar manufacturers in fact, engage in circumvention and will hold them accountable for their unfair and unlawful trade practices. While the obvious characterize Auxin as a single company seeking to inappropriately exploit the law. It is precisely cases like this that the law are designed for. Indeed Commerce has conducted 85 circumvention inquiries covering all types of industries and of these approximately 80% have been decided in the firm.

We also reject the false narrative that Commerce investigation and pursuit of the rule of law will adversely impact the administration’s climate ambitions. Trading away responsible ultra low carbon solar manufacturing for dependency on China is deeply misguided because China polysilicon is heavily reliant on cold produced electricity. When the price of coal goes up, so does the price of polysilicon and crystalline silicon solar panels, whether it produced in Xingyang or in the United States emissions exasperate the global climate crisis, smoke facts, not visible from Pennsylvania avenue are no less harmful to the environment.

To be clear, the anti-circumvention investigation is not about prohibiting imports, but about ensuring the imports compete fairly in the U.S. market. We welcome the robust international competition and it’s fair and rules based backdrop. The problem today is that dumped and subsidized imports distort competition and cycles of innovation with the Chinese government warping investment decisions and dictating outcomes. The rules are enforced, we are confident that the U.S. solar demand will be met and that we will have a stronger American solar manufacturing industry serving as a secure environmentally responsible source of supply.

More broadly, we firmly believe that the United States need a combination of durable industrial policy, smart trade policy and the enforcement of the rule of law in order to build back American solar manufacturing and innovation. At no point should this vital transition to a sustainable energy future come at the cost of American jobs, investment, innovation and national energy security.

Moving to Europe. We are seeing three pivotal shifts in the policy space. The first is the growing momentum around accelerating renewable energy deployments and bringing forward targets. The second is the recognition that the dependencies on authoritarian states are strategic vulnerabilities. And the last is the rapid strengthening of bilateral transatlantic relationships. All three factors are being driven by Russia’s evasion of Ukraine earlier this year.

With regards to renewable deployment, face not just with the risk and uncertainty of gas supplies, but also the prospects of continuing to funnel billions of dollars to Russia through gas purchases, European leaders are working to speed up the region’s energy transition. The European Union’s REPower EU initiative aims to cut the dependency on Russian gas by deploying more renewable and accelerating R&D in future fuels such as hydrogen.

Individual European countries are accelerating their transition plans. For instance, Portugal aims to have 80% of its electricity come from renewables by 2026, up from the original target of 60% in the same timeframe. Germany is also moving forward with a goal to double renewable energy generation from 40% today to 80% by 2030, an increase of 15 percentage points over the previous target. Significantly the coalition government in Berlin included a cause in the renewable energy legislation package, acknowledging that renewable energy deployment is in the best interest of country security.

With regards to strategic vulnerability there’s growing concern in the EU about replacing energy dependency on one authoritarian state with another, including and especially China, which applies virtually all of the solar panels to the region. European leaders are underscoring China’s position as a systematic rival and threat that operates in an opposition to Europe’s social and democratic model, liberal values and recognition of international law.

Finally, we are encouraged by the strength of the bilateral relationships between the EU and the United States. Near-term cooperation is focused on the immediate needs to alleviate gas shortages in Europe, longer-term shared climate sustainability and energy security goals can lead to more collaboration on clean energy technologies and their deployment.

As both the United States and Europe work through their challenges of rapidly scaling domestic solar manufacturing capacity, they should consider the template that India has established. There are a few better examples of how a combination of trade safeguards, manufacturing incentives and tangible clean energy goals can spur domestic manufacturing than India. Today India is expected to have 40 gigawatts of new sale capacity and 50 gigawatts of new module capacity come online by 2025.

If all of this new capacity does materialize, it would not only make India self sufficient, but it would also create a significant amount of export capacity. This is a direct result of the effective combination of tariffs and non-tariffs barriers to level the playing field. The Indian government’s production length incentive scheme for domestic manufacturing and government clean energy targets that would see 25 gigawatts of new capacity deployed every year until the end of the decade. India’s all of government approach is clearly working and is perhaps one that we can all learn from.

It’s now my opportunity to turn the call over to Alex who will discuss Q1 results.

[Alex Bradley, Chief Financial Officer]

Thanks, Mark. Starting on Slide 8, I’ll cover the income statement highlights for the first quarter. Net sales in Q1 were $367 million, a decrease of $540 million compared to the prior quarter. Decrease in net sales was primarily driven by a lower module volumes sold reflecting seasonality and increased transit times and lower average module ASPs as well as a decrease in revenue from our residual business operations following a sale of free projects in Japan in Q4 of 2021.

On a straight-line basis, the module segment revenue in Q1 was $355 million compared to $690 million the prior quarter. Gross margin was 3% in Q1 compared to 27% in Q4 of 2021. Q1 module segment gross margin was 3% down from 21% in Q4 of 2021 and was negatively impacted by $4 million or 1 percentage point of gross margin of under utilization expense stemming from planned down time for throughput and technology upgrades.

Additionally sales freight warranty expense included in our cost of sales reduced module segment gross margin by 14 percentage points in Q1 compared to 13 percentage points in Q4 of last year. SG&A and R&D expenses totaled $64 million in the first quarter, a decrease of approximately $4 million compared to the prior quarter, primarily driven by lower R&D testing expense.

Production startup, which is included in operating expenses totaled $7 million in the first quarter, an increase of $2 million compared to the prior quarter, driven by increased startup cost associated with our third Perrysburg factory. In Q1 we closed sales of certain international O&M contracts in Chile and recorded a gain on the sale of the business of $2 million.

Q1 operating loss was $58 million, which includes depreciation and amortization of $65 million, under utilization and production startup expense totaling $11 million, share based compensation of $4 million and a gain on the sale of certain O&M contracts of $2 million. We recorded a tax benefit of $19 million in the first quarter compared to tax expense of $36 million in the prior quarter. Decrease in tax expense is attributable to the pre-tax loss in Q1 compared to pre-tax income in Q4 of 2021. Combination of the aforementioned items led to a first quarter loss to share of $0.41 compared to Q4 2021 earnings per share of $1.23 on a diluted basis.

Next turn to Slide 9 to discuss select balance sheet items and summary cash flow information. Our cash marketable securities and restricted cash balance ended the quarter at $1.6 billion compared to $1.8 billion at the end of the prior quarter. Module segment operating cash flow is offset by ongoing project spend in Japan, other operating expenses and capital expenses associated with our new Perrysburg and India factories.

Total debt at the end of the first quarter was $252 million an increase of $12 million from the end of Q4, primarily associated with loan drawdowns in Japan. As a reminder, all of our outstanding debt continues to be project related and will come off our balance sheet when the corresponding projects are sold. Our net cash position, which includes cash, restricted cash and marketable security is less debt decreased by approximately $285 million to $1.3 billion as a result of the aforementioned factors. And in the first quarter cash flow used in operations were $139 million and capital expenditures were $155 million.

Continuing on Slide 10. Our full year 2022 guidance is unchanged from our call in early March. However, I’ll provide some context around some of the risks, uncertainties and opportunities within the year. Firstly, as Mark mentioned, negotiations related to potential sale of our Japan project development and O&M businesses are progressing well. And we’re expecting Q2 to enter into definitive agreements to sell these businesses. The anticipated value in local currency has remained in line with our expectations when we gave guidance in March.

Due to the global macroenvironment and the Bank of Japan, maintaining a commitment to economic stimulus and contrasted tightening U.S. monetary policy, the Japanese yen has in the last two months experienced a sudden and significant devaluation relative to the U.S. dollar. While we continue to anticipate U.S. dollar pre-tax gain on sale of $270 million to $219 million timing of sale and the state of the currency market that closing may adversely impact that value.

Secondly, as it relates to commodities, we continue to see volatility and increased pressure in major commodity markets, including aluminum and lumber. As mentioned our previous guidance call, we continue to face challenges and to validate pathways towards mitigating our aluminum exposure, particularly as it relates to hedging supply from Malaysia and Vietnam factories.

Thirdly, the global sales rate environment remains challenging. With Q1 freight costs tracking largely as expected and we continue to see full year sales rate approaching $0.05 per watt or approximately 18 to 20 percentage points of gross margin. And lastly, we maintain our forecasted cost per watt produced reduction from year end 2021 to year end 2022 of 4% to 6% and our flat year-over-year cost per watt sold.

Turning to Slide 11, I’ll summarize the key message from the call. From a financial perspective, our Q1 loss to share of $0.41 is in line with our internal expectations and we originate our full year guidance. Operationally, production of 2.1 gigawatts and shipments of 1.7 gigawatts were in line with expectations and we continue to advance that technology roadmap across Series 7 by sociality and tandem multi-junction devices.

And finally Series 6 demand has been robust with 16.7 gigawatts of year-to-date bookings, which includes 11.9 gigawatts since the previous earnings call leading to a current contract backlog 36.4 gigawatts. And this includes recent bookings with our updated contracting structure, providing ASP upsides and gross margin risk mitigation.

And with that we conclude our prepared remarks and open the call for questions. Operator?

[Operator]

Thank you, sir. [Operator Instructions] Your first question comes from Philip Shen with ROTH Capital Partners. Please go ahead.

[Philip Shen, ROTH Capital Partners]

Thanks for taking my questions and thanks for sharing all the detail on the contract structure. I have a few on pricing in general. But you had mentioned Mark the $0.03 per watt or $300 million of potential ASP upside for 2023, I think on the Q4 call. So I’d like to explore how much more upside there might be beyond this. For example, which adder is not included in your $0.03 per watt estimate? I believe it’s Series 7 bifacial and origin adders. Can you talk through how much volume in terms of megawatts we could see for each of these in 2023 and what kind of contribute in terms of cents per watt could each represent?

And then beyond this, can you talk through how the anti-circumvention chaos may be incrementally supporting even higher base pricing for your base ASP for incremental contracts? And then finally this is more of a housekeeping question for pricing. Our quick calculation for the Q1 ASP is roughly $0.021 a watt that compares with I think Q4 of closer to $0.31 a watts. So that’s a big change. Can you help us understand what’s missing in our calculation, meaning typically your megawatts shipped maybe a little bit different from your megawatts recognized in revenue. So ultimately what was the pricing or ASP in Q1 and what do you expect in Q2 and three? Thanks guys.

[Mark Widmar, Chief Executive Officer]

All right. So Phil, let me make sure I understand your first question. And actually, if you look at that contracting slide that we have in the presentation indicative contracting, there’s a dotted box that it’s around, I think four different components. One is the temperature coefficient the long-term degradation rate, bifaciality and Series 7, I think is the four that it’s around. And if you look down at the bottom, there’s a note down there that indicates that that is reflected in the 10-Q disclosure. So that three – up to $300 million number that we reference is taking the value of those four items into consideration.

You referenced a few things around, well, what’s not included. So yes, there are certain things that are not included such as domestic content. So if we source from our facility in Ohio, whether existing facility or new facility there are some provisions in our contracts that would say there’s a premium for U.S. made content and that’s even independent of whether or not it even gets captured in a U.S. content ITC. So we highlight at the bottom of the slide that another thing that we’ve done with our contracts is that it’s the extent that there becomes a U.S. content criteria that is used for the ITC.

We’ve contracted that now to provide upside. So there’s pretty significant value uplift for that 10 percentage point, which is what’s currently being considered for domestic content for ITC. But beyond that there’s also a domestic source content that some of our customers just would rather have U.S. made and domestic source product. And to the extent they do, there’s a premium that we are asking for in order to reserve that type of allocation from that factory.

As it relates to the anti-circumvention and the impact to pricing. Look, it’s pricing and it’s not just near term, but as you can see we booked 12 gigawatts since the last earnings call. And a lot of that is going out into 2024, 2025 and even we’re starting to see some momentum going into 2026 as well. That’s obviously a strong indicator fundamentals underlying demand. And one of the things that we alluded to in our prepared remarks is we refer to as this kind of the edge of electrification and kind of this revolutionary age that we’re in right now.

We are seeing a lot of really strong demand. And the way I always sort of positioned it from our perspective, we sit on the front end. So we are enabler of that electrification. And so you have to start off with taking photons and making electrons, and then whatever evolution happens for electrification or transportation or building or other sources of fuels and other things along those lines, we’re going to be a critical strategic enabler of that.

And we’re starting to see a lot of momentum and demand in the marketplace right now, especially for green hydrogen and green not just in maybe some of the places you would anticipate it maybe in the Middle East or in Europe that in India, and even here in the U.S., we’re starting to see some inflection points around that.

So there’s just a strong fundamental underlying demand for our traditional PV and PBS market. But also as we’re starting to see inflection points now with new demand curves starting to come off for things such as green hydrogen and green ammonia. We are seeing better pricing. If you look at the backlog of where we are, our baseline price has improved from the average that was there at the end of the year.

And then when you factor in the benefits of the technology adjusters that we have as well as to the extent that sales rate stays inflated, where it is now, and as well as with aluminum. The combination of those two could add up to $0.06 a watt to where our current pricing is on the baseline. But anyway, we’re encouraged. We’re seeing the positive signs. I’ll let Alex talk a little bit more about Q1 ASP.

[Alex Bradley, Chief Financial Officer]

Yes. So on the ASP side, the shipped volume was about 1.7, on a sold basis it was more like 1.3. So if you do the math on 1.3 against about 303, I think 55 of module revenue get somewhere around $0.27 and change on an ASP basis. And what you’re seeing there is so, volume on a sold basis is down partly there’s some seasonality, right? Typically Q1 is a lower down sold quarter for us. It ramps through the year. You’ve got a little bit of impact there, so we had more DDP versus CIP terms in Q1 relative to last quarter.

And then you’ve got transit time as Mark said in prepared remarks. We’re still seeing times into the U.S. being a record highs up at over 130 days in Q1. So you’ve got those impacts coming through. And on the gross margin side, there’s a little bit of a mix shift as well, which is impacting us. So you’ve got actually got a bit more carry per volume on the sold volume coming through in the gross margin. It’s a little bit offset as you get some benefit in the sales rate there, which is why, if you look at sales rate on a gross margin percentage point basis in Q1, it was down at 14 points, so the full year expectation of the guide 18% to 20%.

So you’ve got a little bit offset there, some higher cost, co-product a little bit of benefit sales rate coming through, but that’s why you’ve got this lower sold volume and the impact you’re seeing the gross margin.

[Mark Widmar, Chief Executive Officer]

Yes. But, I think Phil, when you look – maybe to answer your broader question as well, is that we’re seeing strong demand. We feel like we’re getting attractive pricing in the market. We’re continuing to drive cost down as Alex as indicated, even the backdrop of all the challenges we’re dealing with, we still anticipate a 4%, 6% cost per watt reduction. And then as we highlighted before Series 7, when introduced will be the lowest cost products in our fleet.

So that’s even a lower cost profile than we have today. So the combination of all those, you couple that with the contribution margin flow through from incremental growth, we’re pretty excited about 2023 and beyond, and the opportunities that we’re positioned for right now and continuing to look to grow beyond what we already have committed to with the strong backlog that we have right now.

[Philip Shen, ROTH Capital Partners]

Great. Thanks guys.

[Operator]

Your next question comes from the line of Ben Kallo with Baird. Please go ahead.

[Ben Kallo, Baird]

Thank you, guys. Maybe just to kind of take a step back, going back to when you had module gross margin targets, I think greater than 25% way back. If I put all this stuff together in that Slide 5 and technology advancements, how does that shape up versus that original outlook? And then I have a follow up.

[Mark Widmar, Chief Executive Officer]

Yes. So Ben, I think if you just look at – I mean, right now, when you pull out the effects of sales rate on the quarter, I think we’re in the high teen, 17%, 18%, something like that from a gross margin without the impact of sales rate. And if you – if you then include the technology adjusters, which is another 10 percentage points on top of that, you’re going to get to a gross margin that’s going to be net 25% or north of that 25% number that you reference.

So that’s one way to look at. The other way to look at it, Ben, if we had the commodity adjusters in this current quarter, we would’ve added 10 percentage points to where we are right now, including the impact of sales rate from the commodity standpoint. And we also had a very low shipment quarter. I mean, this is one of our lowest shipment quarters that we’ve had in a long time, as Alex indicated 1.3, sold quarters. 1.3 gigawatts is one of the lowest quarters that we’ve had.

So that’s obviously drawing kind of weight against some of our fixed costs in our production facilities that drove to a lower gross margin. You’ll see that being leveraged as we grow sales volume as we expand throughout the year, we’ll be averaging close to around 2.5 or 2.6 gigawatts a quarter, so essentially double where we are right now on a sold basis to hit our revenue targets for the year.

[Alex Bradley, Chief Financial Officer]

Yes. I think if you look at the backlog that we give in the Q, you’ll see the number tomorrow, you’re going to still see $0.27 ASPs. We had a very large booking quarter, so you’re seeing ASPs relatively flat going out of years. And as we talked about on the call, important to understand that’s a baseline number. And we talked about there being up to $0.03 of technology out, essentially another $0.03 of sales freight is relative to where we are today. And in that same timeframe, you will have cost reduction as well, ongoing. So you’re seeing ASPs flats to rising over time, cost reduction coming down, and then you add volume on top of that.

[Ben Kallo, Baird]

Great. And then congrats on the bookings. How do you think about with the backdrop that you outlined of all the legislative and regulatory positives potentially for you? How do you think about the expanding capacity as you sign up contracts? And thank you very much.

[Mark Widmar, Chief Executive Officer]

Yes. So look what we’ve always said that we want demand to drive supply for us, right? And when you look at the bookings momentum, I mean, if you look at right now, we’ve got 36 gigawatts in our pipeline. If you go back last year at this time, we were about 15 gigawatts. We’ve added 21 gigawatts to the backlog within a 12 month period. And the momentum, if you look at the pipeline, still is 50 gigawatts, 55 gigawatts of a total pipeline.

And as I alluded to, I can easily see over the next several quarters capturing multi-gigawatts volume in India, which we’ve been very patient in terms of taking that volume at this point in time to ensure we get optimal pricing and what we want to capture in India. I think we’re in a good spot there right now. So we’re going to – I wouldn’t be surprised by the middle of this year that we’re largely sold out through 2025 – 2024, excuse me. We’ve got a few more gigawatts. We got a knockout India, which I think we could be in a good position as well as some more volume here in the U.S. of a few gigawatts, we could be in a good position of having 2024 sold out and even a more meaningful position into 2025.

All that sort of gives us the backdrop and the policy support and the environments that we’re seeing in our three primary markets that we want to stay focused on, which is India, the U.S. and Europe, I think there’s some pretty strong inflection points right now for us on a policy standpoint and markets that are compelling for us.

And one of the things we said was what we continue to want to do with our capacity expansion is to be close to end markets, right, to get out from underneath, the ocean freight exposure and the challenges that they can create and the headwind on cost. And so I think thinking through those are three primary markets with robust recurring demand could be pretty attractive as we think about capacity expansion. But overall, I think the building blocks are coming together pretty nicely as we think through that.

[Alex Bradley, Chief Financial Officer]

Ben, one thing I’ll add. Our technology is being unique and different so is our toolset and the manufacturing required for that. So we’ve been engaging with suppliers to ensure that we have line of sight on critical path tools for further expansion. So we continue to have those discussions with our suppliers.

[Operator]

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

[Maheep Mandloi, Credit Suisse]

Hey, thanks for taking the questions. Through customers revised pricing structure. Can you just provide some more visibility around how many contracts and the backlog are under this new structure with reference to the slide in today’s tech or is it fair to assume only the booking since the Q4 call have this new structure and also just wanted to get a thoughts on the cadence we should expect for 2022 in terms of shipments or revenue recognition. Thanks.

[Mark Widmar, Chief Executive Officer]

So if you look at on a sales freight, I’ll just go through the various adjusters. So we’ve got sales freight adjuster, and I believe that’s like about a little bit north of 23 gigawatts so 23 gigawatts out of the 36 or so. The aluminum adjusters about 11 gigawatts out of the, again, we just started contracting that way since the really last earnings call, which was March 1. So about 11 gigawatt under the aluminum, under the technology adjusters you’re going to see in the queue and we announce it effectively, it’s 10 gigawatts that we believe will be able to capture the number that we have contracted that way is higher. I think the number could be closer to around 16 gigawatt or so, but what we identify in the queue is it ties up into our roadmap of our bifacial implementation rollout, our Series 7, our Temco and delegation improvement profile.

So we kind of model that and what the replication and its reach of those technology initiatives. And then how does that roll out relative to what our current delivery schedules look like. But if those push out, for example, if we hold our technology roadmap and the actual schedule for some of those push out, then there’s potentially upside that we can capture beyond just what’s been identified. So that that’s kind of the profile of what’s in the backlog.

What I would just continue to say is that we are – everything we’re contracting going forward is largely under this construct, but for if somebody wants to pay a higher price, right. So in some cases, customers are going to say, look, I’ll just pay for all in everything now and not worry about the adjusters, because it may be easier to get it through their regulator, right.

They got to go to the commission, they got to get approval for the CapEx. They’d rather have it all in number. So they go down that path, right. Some others may say, well, it’s easier for me to get my financing and what have you. And therefore I want an all in number and we’ll provide that it has an uplift enter a premium and some cases, some customers may go the other route and they may say sales freight in particular, I’ll just pick it up myself. So we also have some contracts where customers are saying, look, just give it to me that works. So I don’t have to take any risk on now.

I’ll let them take the whole thing. And I don’t have to worry about it and we just deliver the project, outside of the factory walls and then they take it from there. So we try to highlight in that slide that not all contractors is the same, but what I would say is in each case, what we’re trying to do is to capture the highest value for the technology, not only today, but the future technology as it evolved and also put us in a much better position and a risk reward, balanced position with our customers on things like commodities and sales freight and the like.

[Alex Bradley, Chief Financial Officer]

Yes, as it relates to the cadence of shipping and RevRec, there’s a lot of variability given, as we mentioned, the transit times being higher, lot of our uncertainty around sales freight, obviously we have more visibility to our U.S. transit. And that helps, but I would say you’re going to definitely see a backend profile so you can expect to see a little more, probably closer to two-thirds versus half of shift volume and sold volume being recognized at the second half of the year versus first. But again, a caution there’s a lot of uncertainty around that number, just given what we’re seeing in the shipping transition, shipping market.

[Operator]

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

[Joseph Osha, Guggenheim]

Hello. Thank you. Just for the record, I want to state I’m completely in agreement with your position on the Chinese supply chain. Just want to state that upfront. I’ve got two questions. First, just wondering how your EPC partners are doing in terms outside of your product area, cables, labor, racking all that, what you’re hearing from them in terms of the ability to get projects completed. And then my other question relates to your plans for expansion, you talked about working with other parties, but you’ve maintained a very quick clean balance sheet.

I’m wondering with this much high quality backlog, whether we might see you maybe potentially look at levering the balance sheet in order to continue to drive the manufacturing expansion. Thank you.

[Mark Widmar, Chief Executive Officer]

Yes, I will take the first one that obviously the expansion and leverage. Like nobody’s immune from the challenges in the supply chain right now. And because – it’s one thing on the model side, but we’re also seeing it on our new tool sets right. Of trying to identify and make sure that all the critical components that go into the tool sets that are needed are available throughout the supply chain. And we’ve been working very closely with our tool vendors to make that happen or to ensure that happens, good availability as possible. And it’s challenge and it’s no different than with our EPC partners and the challenges that that they’re dealing with.

And the reality, in some cases it can be something very small and would be perceived as insignificant, but it could be a major constraint, a connector or whatever it may be could become a constraint to the overall project. Everyone’s trying to work around that in some cases. And a lot of cases you’re even seeing a lot of people installing the structures as quick as possible, even though the panels aren’t there, because they know they’re going to run other long lead time constraints and challenges that they’re working through. But yes, they’re dealing with the same supply chain constraints that all of us are at this point in time. I really don’t see anyone being immune.

[Alex Bradley, Chief Financial Officer]

Yes. Because it relates to expansion. I would say right now, by the end of the year, we’ll spend about $1 billion of the roughly $1.4 billion associated with the two new Series 7 plants and that lines up with our year end forecasted net cash balance about $1.2 billion at the midpoint of guidance. If you think about beyond that, the next year we have another 300 to 400 or so of CapEx associated with those plants, but you’re also going to have the first production coming from those plants. Plus you’ve got all the Series 6 products up and running, so the business should be cash generative next year.

You’re right. We haven’t levered up the balance sheet. We do have the ability to potentially lever up with some debt against the India facilities. So we’ve been in discussions and I think we’ve disclosed the potential for leverage, but we sit at the corporate level, which would really be linked to the expansion in India actually around 500 million or so of capital capacity there pretty attractive terms. Going beyond that, I would say that we could add an incremental factory without stressing the balance sheet.

Again, that 1.2, 1.3 is net. So the gross number is higher will be cash generative next year. And as we’ve come out of the systems business the working capital and volatility around the business decreases. Now beyond that, if we were to see opportunity to add significantly more capacity in the near term, as the potential for needing more capital, I think worry to do that right now our read is across debt converted equity to markets are pretty open receptive to capital.

I’d also add that if you just look at the timeframe in which we would add capacity, even if we were to make a decision today, it’s going to be 24 months or so before we’ll be able to bring that capacity online. And the spend timing around the land, the building, the equipment is going to push out such that we have more time for the business generate cash as well. So I think right now as we stand we’re in a pretty good position, I don’t see us needing to access the capital markets, but if we were to do – the desire to do so, I believe those are open to us today.

[Operator]

Our final question will come from Brian Lee with Goldman Sachs. Please go ahead.

[Brian Lee, Goldman Sachs]

Hey guys. Good afternoon. Thanks for taking the questions. A lot of moving parts here around some of the contractual adders. So I just want to make sure I’m not misconstruing it. When you said earlier that on that Slide 4 or 5 you’ve got 36 gigawatts of module shipments teed up for the next several years. And then you have the 12 gigawatt that you booked since the last call. What – I think you made a comment that the contract adders or the commodity adders and/or the technology adders were not applicable for certain percentage of those, is that – was I right in hearing that, that the 12 gigawatts that you booked since the last call could potentially have the three to six sets of adders, whereas the other 24 gigawatt, because those were sort of older contracts do not.

And then just a quick question on the equipment vendors, anything you can elaborate there on in terms of lead times and where you might be seeing some of the most bottlenecks around some of your key equipment and tool sets needed for a capacity expansion. Thanks guys.

[Mark Widmar, Chief Executive Officer]

Yes. So let me try to do this again. So let’s just start with the 11.9 gigawatts was booked after the quarter end so April 1 to today. All – so 11.1 of that would have the aluminum adjuster in it. Okay. So say 11 of the 12. Okay. All that volume would have one or two things on sales freight, either a sales freight adjuster, and I’m talking just the 12 gigawatt or in some cases in this case, in this court in particular, there’s a significant portion of that 12 gigawatts where a customer says, I’ll take the shipping responsibility on my own.

So my obligation is to just deliver it to the factory outside the factory door, and then they take it from there. So I have no shipping risk on that. So think of it as it’s either one or two ways it’s protected from shipping, I’ve got an adjustment to shipping it’s the customer if we exceed the cost that’s in the baseline, which generally is around $0.025 or the customer picks it up and therefore my cost is going down at least $0.025. So those are the two. So you got aluminum 11, you got all of it with one form of sales trade protection, either an adjuster to the ASP or the customer’s picking up. And I don’t have to worry about any of the cost at all.

Beyond that, so that’s 12 out of the total gigawatts were before year end or after quarter end, excuse me, we have an aggregate in the 20 million and the 36 million. We have 23 gigawatts that has sales freight protection, okay. So 23 of the 36 has sales freight. Okay. 11 of it has aluminum. On the technology adjusters of the 36, there is about 16 gigawatts that has technology adjuster, but only about 10 gigawatts are included in that disclosure that you’re going to see in the queue tomorrow, because that’s the portion of the 16 that we expect to monetize or to realize. Now all of the new stuff, it’s highly probable, but the new stuff is going to be captured, right. But that 12 gigwatt, it’s not in that disclosure. It’s got to put that in there as well. That disclosure that’s going to see – you’re going to see tomorrow does not include that 12 gigawatts because it was after quarter end.

So you could take this 10 gigawatts that we just said that’s in the quarter. And you could add the vast majority of that 12 gigawatts that happen after quarter end and say, yes, that will have a technology adjuster as well. But I just want to make sure it’s clear when you look at what’s in the queue tomorrow, you will not see this additional 12 gigawatts. You won’t see it until the actual filing happens for next quarter. Is that clear, Brian? I just want to make sure.

[Brian Lee, Goldman Sachs]

For delineating all that, that does clarify it a lot.

[Mark Widmar, Chief Executive Officer]

Okay. And then as it relates to the tools and what our challenge are, we look – some of our challenges are chips as well, right. So there’s quite a bit of metrology and data and everything else that we capture through our manufacturing process. So a lot of it’s chip dependency. Now we’ve worked through that. And I actually, as of right now, the last word I got from my team yesterday, I think we’ve resolved a good portion of that, which is good. Now we get into other things like glass, right. So in our ovens, we actually have chambers that you could look down into, right. Because if something happens, in some cases, our ovens could be 75 yards long so we have to have their segment in such a way that you also have these chambers that you look down into, and if something goes wrong inside, or you got to fix or repair, you would then access them from above.

And generally there’s a glass opening lid effectively. And we’re struggling with one of our vendors around getting the glass. Now it’s not going to be a constrained. We believe we can still get the tools in. And then when the glass comes, it’s something we can install on site, but won’t be provided upon the initial shipment. So, there’s many different issues, the teams doing a phenomenal job, they’re working each one of these with each one of our tool vendors, bomb item by bomb item for our tool vendors and making sure that they have them and that we can maintain schedules. And they’re thinking through workarounds, but it’s a challenging environment as you can anticipate around supply chain.

[Brian Lee, Goldman Sachs]

All right. Thanks guys.

[Operator]

And that ends the question-and-answers session and today’s conference call. Everyone, thank you for participating, you may now disconnect.