First Solar Inc

NASDAQ:FSLR

Earnings Call Transcript 2021-Q2

[Operator]

Good afternoon, everyone, and welcome to the First Solar's Second Quarter 2021 Earnings Call. This call is being webcast live on the Investors section of First Solar's website at investor.firstsolar.com. [Operator Instructions].

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

[Mitchell Ennis, Manager, IR]

Thank you. Good afternoon, everyone, and thank you for joining us. Today, the company issued a press release announced its second quarter 2021 financial results. A copy of the press release and associated presentation are available on First Solar's website at investor.firstsolar.com.

With me today are Mark Widmar, Chief Executive Officer; and Alex Bradley, Chief Financial Officer. Mark will begin by providing a business and technology update. Alex will then discuss our financial results for the quarter, provide updated guidance for 2021. Following remarks, we'll 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, CEO & Director]

Thank you, Mitch. Good afternoon, and thank you for joining us today. Beginning on Slide 3, I would like to start by thanking the First Solar team passion, continuing excellence and there are many achievements in the second quarter. Operationally, we have started site preparation with the recently announced 3.3 gigawatt factory in Ohio, which will further cement our position as the largest PV module manufacturer in the Western Hemisphere.

Additionally, I'm pleased to announce that contingent upon permitting and approval of government incentives that are satisfactory to First Solar, we are intending to invest approximately $680 million to add 3.3 gigawatts of manufacturing capacity in India. These next-generation factories represent a significant leap forward in our technology road map and will produce our most competitively advantaged modules with an expected lower cost per watt and environmental footprint compared to our existing fleet.

Commercially, market demand for our CdTe technology is at a record level. Seven months into the year, we have already booked 9 gigawatts, exceeding our prior annual record of 7.7 gigawatts in 2017. From a technology standpoint, our production lines are manufacturing record modules. To illustrate this point, samples produced during our regular production process were submitted for external verification and confirmed by the National Renewable Energy Laboratory at a world record 19.2% glass area efficiency for a CdTe module. For reference and in comparison to our previous aperture area record of 19% efficiency, our new record equates to a 19.7% aperture area efficiency.

Additionally, our advanced research team has been creating new optionality in our R&D road map. For example, we recently deployed prototypes of early-stage bifacial modules at a test facility and are pleased with the initial results.

In summary, the momentum we have cultivated, paired with an increased favorable policy environment, represents a compelling growth opportunity in the near to midterm. However, before discussing these opportunities, I will first provide near-term COVID-19 supply chain cost and market updates.

Please turn to Slide 4. As a global company with the manufacturing operations in the United States, Malaysia and Vietnam, the health and safety of our associates our top priority, with a steadfast commitment to adhering to applicable COVID-19 protocols. As part of this effort, we are working with local governments to facilitate on-site testing and vaccination for our associates.

I would also like to express immense gratitude to our Vietnam manufacturing associates who have to date elected to remain on site in order to maintain manufacturing continuity. While this clearly is a challenging time, we acknowledge your incredible resiliency, ingenuity and leadership to deliver your operational plan commitments.

While we have been permitted and able to maintain manufacturing operations in Malaysia and Vietnam to date, the rise of COVID-19 cases and potential government and other restrictions present risks to our production, supply chain and technology implementation plans. As it relates to our CuRe program, the factory updates and tool implementations at our Vietnam site requires international travel from both third-party equipment installers as well as our U.S.-based associates. But we continue to work with relevant agencies in Vietnam who support this essential travel in a safe manner. Delays resulting from government and other COVID-related restrictions, or an increase in case rates may impact the timing of our cure transition in Vietnam.

Despite this uncertainty, we continue to execute and navigate the current environment as reflected by the manufacturing performance metrics on Slide 4. As highlighted previously, the global shipping environment remains challenging due to port congestion, limited container availability, an increase in cancellation of shipments by logistic providers, scheduled reliability issues and other events. Since the April earnings call, shipping rates have continued to rise. And additionally, COVID-19 outbreaks and restrictions have caused disruptions in China and Southeast Asia, the impacts which have reverberated across the global logistics market. These challenges, coupled with strong global demand have led to a significant increase in the cost of transoceanic freight.

We have partially mitigated the effects of higher shipping cost per watt through improvements in our module efficiency, implementation of Series 6 Plus, expansion of our distribution network strategy in the United States and forward contracts. However, we have seen and expect to continue to see for the remainder of 2021 adverse impacts on our financial results. For context, spot rates for routes between Asia and the United States have increased 200% to 300% from Q2 2020 to Q2 2021. Over this period, sales rate reduced our module segment gross margin by 9 percentage points in Q2 of 2021 or 3 percentage points higher year-on-year.

We continue to facilitate -- anticipate near-term challenges, including elevated fuel cost, average vessel delays of 2 weeks and constrained container availability, impacting our ability to use space secured on vessels. Although these factors contribute to lower-than-anticipated shipments in Q2 and higher freight costs, we have a number of near-term and long-term strategies intended to improve our competitive position with regards to sales.

Near term, we are working closely with our customers to limit our exposure to inflated sales freight costs. In certain situations, we have accommodated requests for delayed module shipments, which provide opportunities to mitigate higher freight costs. Given current vessel schedule reliability, we are adding scheduled buffers to better meet our customers' commitments and provide greater resiliency in our shipment plan.

Average sales freight from Malaysia and Vietnam to our U.S. customers increased $0.05 per watt quarter-on-quarter, ending Q2 was approximately triple that of shipments from Ohio. Long term, this reinforces the strategic thesis for located in additional manufacturing capacity near to demand. Contractually, for certain new bookings, we have employed structures that mitigate sales freight costs in excess of prenegotiated levels. As we continue to secure bookings for deliveries 2 to 3 years in the future, this type of contractual arrangement will help derisk the expected value of our contracted backlog.

I would next like to discuss the key components of our bill and material spend, approximately 2/3 of which is made up of glass and frame costs. From a glass perspective, we have largely hedged the cost through long-term fixed price agreements with domestic suppliers that have volumetric pricing benefits as we achieve higher levels of production.

With regards to aluminum, in August of 2020, we entered into a commodity swap contract to hedge a portion of our U.S. cash flows for purchases of aluminum frames, which ends in Q4. While we anticipate some impacts of the hedge roll -- as the hedge rolls off, we intend to partially mitigate the cost per watt impact through reduced aluminum for module uses, firstly, by differentiating between interior and exterior modules; and secondly, by redesigning the frame.

Finally, the cost of lumber, which is used for our shipping and packing process, was approximately 70% higher on an index basis in Q2 compared to the start of the year. This impacted our Q2 results by approximately $2 million. Since then, lumber costs have significantly declined. And as a result, we are currently not expected to impact our 2021 exit rate cost per watt target.

In summary, while cost and uncertainties remain uncertain bill of material items, we are tracking to achieve a 9% cost per watt produced reduction between where we ended 2020 and expect to end 2021. Note while core production costs are largely on track, the 2 percentage point decrease in our year-over-year cost per watt reduction relative to the previous expectation is largely due to the effects of higher inbound freight costs for raw materials. On a cost per watt sold basis, due to the challenging near-term sales rate environment, our revised year-over-year reduction target is 3%.

Note, as a reminder, sales rate is included in our cost of sales, whereas many of our module peers report sales rate as a separate operating expense. For comparison purposes, we encourage you to consider this fact with benchmarking our module gross margin percentages relative to our peers.

Turning to Slide 5, I would like to provide some context on the ASP trajectory for the year. As a reminder, 2 years ago on the Q2 2019 earnings call, we indicated approximately 4 gigawatts of our 2021 module supply was booked or contracted subject to conditions precedent. In other words, a significant portion of the volumes sold this year had an ASP agreed to 2 years prior to model delivery. Heading into 2020 and into 2021, we were largely sold out of our available supply for the forward year. As a result, we've had limited exposure to the spot market.

We believe there is a strong strategic rationale for forward contracting deliveries in this manner, which provides value for both First Solar and our customers. From our perspective, contracting for future deliveries provides us confidence in our ability to sell through our expected supply and visibility into an expected profit per watt in a TV market that is typically highly price competitive.

From our customers' perspective, these arrangements provide value to clarity and certainty of pricing, product availability and delivery timing, enabling them to underwrite PPAs from a position of strength, with a lower risk to their expected project returns. Being able to provide the certainty to both buyer and seller is a strategic differentiator for First Solar.

From a U.S. policy perspective, both near and long-term pricing for all solar modules, is also impacted by uncertainty over legislation related to force labor in China, tariffs, manufacturing tax credits, investment tax credits and other restrictions and incentives. Given the current lack of clarity over the form, structure and duration of potential policy changes, the near-term and long-term impacts of these on both demand and pricing also remain uncertain. Moreover, this lack of clarity needs to be balanced with the significant capacity expansions announced by our competitors.

From First Solar's perspective, we aim to continue to work with capable, well-financed counterparties that have high certainty in the quality and execution of the projects. We also look to establish and maintain deep relationships and partnerships with our customers, delivering solutions at a fair pricing level that meets their needs and also enables attractive returns for First Solar relative to our expected future cost per watt.

At the time of the previous earnings call, we indicated that the ASP across the volume of potential deliveries in 2022 was 11% lower than the volume to be shipped in 2021. Including our incremental bookings since the previous earnings call, the year-on-year decline is largely unchanged.

Looking into 2023, we are very pleased with the demand and pricing we are seeing for our cad tel modules as we continue to drive to higher wattage and efficiency levels. Although there remains significant uncontracted volume to be booked, the ASP across the contracted volume for planned deliveries in 2023 is only 1% lower than that volume planned for 2022.

Note, while we have yet to commence the sales process for our next-generation PV modules to be produced by our recently announced factories, they are expected to be ASP advantages to their anticipated higher efficiency and superior balance of system cost per watt profile.

In summary, as we have seen a significant increase in desire to work with First Solar due to our demonstrated value proposition. While pricing negotiations in the market remain competitive, we continue to secure volume with customers that value our points of, with the potential for ASP catalysts in the future. Relative to this objective, we are very pleased with our record year-to-date net bookings of 9 gigawatts, which includes 4.1 gigawatts since the April's earnings call. After accounting for shipments of approximately 1.8 gigawatts during the second quarter, our future expected shipments would extend into 2024 or 17.2 gigawatts.

Including our year-to-date bookings, we are largely sold out for 2021 and 2022, have 3.4 gigawatts of planned deliveries in 2023 and 4 and 5 gigawatts in 2024. This long-term demand further supports the investment thesis behind our third Ohio factory and our first factory in India.

Additionally, and as reflected on Slide 6, from an opportunities perspective, our pipeline of future opportunities also remains robust. Note, our capacity expansion in India, and the related increase in available supply to meet projected domestic demand, expands our booking opportunities in the country. And accordingly, our potential bookings in India exceeds 7 gigawatts.

We'd also like to take the opportunity to address the reported use of force labor in the crystalline silicon PV manufacturing industry, which has been highlighted by the recent withhold and release order issued by the U.S. Custom and Border Protection; the Xinjiang Supply Chain Business Advisory from the U.S. government and the Weaver forced Labor Perfection Act which passed the U.S. Senate with unanimous consent; an investigation by the United Kingdom and other countries in the EU.

Climate change is among the most pressing issues facing society today. And fortunately, the challenges of decarbonization of the global electric mix can largely be addressed with commercially available technologies, including solar, wind, energy storage and green hydrogen. Unfortunately, the crystalline silicon supply chain is tainted by the purported use of forced labor and human rights abuses in China, which necessitates urgent action. However, it must be understood that our global collective response to forced labor does not need conflict with a long-term global climate objectives.

While there are commercial solutions to ensure supply chain continuity, we've acknowledged the near-term supply challenges presented by the withholding release issue by the U.S. Customs and Border Protection. These challenges are exacerbated by the overly complex and opaque nature of the crystalline silicon manufacturing process.

While the issue of force labor represents an urgent ethical imperative that must be addressed, it also presents a strategic opportunity to drive change and an opportunity for the United States and like-minded nations to achieve energy security and technological independence through the promotion of a PV domestic manufacturing industry. Relative to this, we strongly support the proposed Solar Energy Manufacturing in America Act, which was introduced by Georgia Senator, Jon Ossoff, and co-sponsored by Senators, Warnock, Bennett and Stabenow.

We believe that is inactive, it will help accelerate the transition to clean energy using domestically produced technology, support American energy independence and create high-quality manufacturing jobs. By creating tax incentives for vertically integrated manufacturers and for each step of the crystalline supply chain, we can establish a level playing field where all PV technologies compete on their own merits and establish a domestic capacity to support America's climate objective.

We believe the Biden-Harris administration has a unique opportunity to adopt a long-term industry policy for solar, which could include a mix of manufacturing tax credits and extension of the investment tax credit with a domestic content requirement among other strategies.

Through a long-term strategic approach to policy, the administration has an opportunity to create an environment that fosters innovation for next generation of PV. While legislative outcome for the U.S. infrastructure in solar remains uncertain, we are broadly encouraged by the legislative sentiment and the willingness to support U.S. PV manufacturing to enable energy independence, security and climate global imperatives.

Turning to Slide 7. Looking forward, we believe strong demand for Series 6, a compelling technology road map, a strong balance sheet and largely fixed operating expense cost structure and an increasingly favorable policy environment for domestic PV manufacturing in the United States and India are catalysts as we evaluate capacity expansion.

With respect to the United States, as announced in June, we are more than doubling our manufacturing capacity in the United States, adding 3.3 gigawatts at an implied CapEx per watt of approximately $0.20. This greenfield expansion financed by cash on hand represents an opportunity, unbound by the legacy Series 4 constraints to optimize each parameter of the factory and product design. Accordingly, this enables us to develop a new product at the intersection of efficiency, energy yield, optimized form factor, cost competitiveness and advantaged environmental attributes.

Starting in 2023, this factory of the future is expected to commence production of our next-generation module, which is expected to lead the fleet in terms of efficiency, module wattage, cost per watt and environmental footprint.

Our next-generation module building upon our CuRe program is expected to push boundaries of our cad tel platform in several ways. Firstly, in midterm, we anticipate this module can achieve efficiency in excess of 20% and with an optimized form factor enable module wattage in excess of our current midterm target. Secondly, we optimized the form factor anticipation to benefit balance of system cost per watt and consequently, module ASP. Thirdly, through an optimization of the module's mounting interface and an increase in automation, this factory is expected to achieve a lower cost per watt produced than our existing fleet, despite being located in a higher cost labor market. Finally, by locating this factory domestically, we reduced our reliance on transoceanic freight costs and anticipated reducing sales freight per watt in the -- for U.S. deliveries.

Our third factory in Ohio is expected to commence commercial production in the first half of 2023, scale to over 3 gigawatts of nameplate capacity by the end of the year and 3.3 gigawatts in 2025. Internationally, we have been evaluating the expansion of our manufacturing presence in India. Our technology is uniquely advantaged in the market due to our temperature coefficient and spectral response advantages, which can result in higher energy per watt installed as compared to crystalline silicon due to the effects of heat and humidity.

As we stated previously, we believe CuRe significantly increases our competitiveness against bifacial modules. The India PV market is predominantly monofacial due to generally low and additionally, the cost of bifacial systems exceeding the benefits of backside energy due to high capital costs, and the additional real estate needed for bifacial plants. However, given the expected lifetime energy benefit of our cure modules, we can achieve with no increase in balance of system costs or other project costs, we are well positioned to capture the value of CuRe in the India market.

We also thought the steps India has taken to foster a healthy domestic PV manufacturing industry which includes a combination of federal and state incentives and national barriers. This includes, among others, a $600 million production-linked incentive scheme with preference given for vertically integrated PV manufacturers who produce modules with an advantaged temperature coefficient. In addition to domestic incentives, India announced a solar tariff policy starting in April 2022, which includes 25% and 40% duties on imported and modules, respectively.

Through its strategic approach, India has combined its clean energy targets with effective trade and industrial policy designed to enable self-sufficient domestic manufacturing and true energy security.

As previously indicated, the factors in evaluating the future capacity expansion include geographic proximity to solar demand where First Solar has an energy or competitive advantage and which could mitigate freight-related costs. Secondly, the ability to export cost competitively into other markets. Thirdly, cost-competitive labor, low energy costs and low real estate cost. Fourthly, a competitive supply changes for source of raw materials and components. And finally, domestic and international policies to ensure such expansion is well positioned. In summary, we believe India meets these criteria.

With the strong demand for our cad tel technology, we are eager to grow our manufacturing capacity to meet this market demand. With our expansion in the United States and India and optimization of our existing fleet, we anticipate our nameplate manufacturing capacity will double to 16 gigawatts in 2024, with the new factories combining 2 to 3 gigawatts of production in 2023.

Moving on to technology. There were several noteworthy accomplishments since the previous earnings call. Firstly, following the implementation of Series 6 Plus in our 2 factories in Ohio, we are now consistently producing 450-watt modules in Ohio and Malaysia, increasing our fleet-wide average watt per module to 4.49 for July month-to-date. Secondly, our commercial production lines are manufacturing record modules, as previously discussed. Finally, our CuRe product has been certified as meeting UL and IEC standards, representing an achievement of the robust quality, reliability and safety requirements.

As we look to extend our advantages in the utility scale market, we recently deployed prototypes of early-stage bifacial cad tel modules at a test facility and are pleased with the initial results, demonstrating real-world bifaciality. While this is only early stage research, we believe there is a path to increase bifacial performance, which has the potential to improve upon our existing temperature coefficient, spectral response, partial shaving and long-term degradation energy advantages. As we've previously stated, we believe CuRe significantly increases our competitiveness against bifacial modules.

By potentially unlocking cad tel bifacial capabilities, we have the opportunity to further improve our existing energy advantage and ground mountain applications. In the residential and C&I markets, we recognize the value of high efficiency aesthetically pleasing and domestically manufactured product. As stated previously, we continue to evaluate the prospects of leveraging the high band gap advantages of cad tel and a disruptive high-efficiency, low-cost tandem or multi-junction device. We strongly believe that a thin film semiconductor is essential to achieving the highest-performing tandem PV modules and that cad tel, which benefits from the many innovations of our technology road map and has a proven commercially scaled track record is ideally placed to enable this leap forward in high-performance modules.

In the midterm, we believe there is a path 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 markets, we believe this type of module has the potential to be disruptive and provide us with a competitive edge.

I'll now turn the call over to Alex, who will discuss our second quarter financial results and 2021 guidance.

[Alexander Bradley, CFO]

Thanks, Mark. Before discussing our Q2 results and 2021 financial guidance, I'd like to reiterate our core operating principle of endeavoring to create shareholder value through a disciplined decision-making framework, balancing growth, liquidity and profitability.

As it relates to growth, we anticipate doubling our nameplate manufacturing capacity from approximately 8 gigawatts today to 16 gigawatts in 2024 through adding additional factories in Ohio and India as well as optimizing our existing fleet. Beyond that, we continue to evaluate the potential for further expansion in the United States as the policy environment develops.

While liquidity position has been a strategic differentiator in an industry that has historically prioritized growth without regard to long-term capital structure. Importantly, we anticipate we'll be able to continue to self-fund the capacity expansion and strategic investments in our technology, whilst maintaining a strong differentiated balance sheet, which we believe is a meaningful competitive differentiator.

While the strength of our balance sheet provides this flexibility, as we expand internationally, we may elect to utilize debt to mitigate currency risk and optimize return on our international expansion. As it relates to profitability, our technology and capacity road map are expected to enhance our long-term earnings potential. Despite a long-term PV industry trend of declining ASPs, we anticipate revenue growth through capacity expansion.

From a pricing perspective, although there remains significant uncontracted volume yet to book, we're pleased with the pricing levels we've secured to date for 2023 deliveries, which in aggregate are only 1% lower than that of volume planned delivery in 2022.

From a margin perspective, continued progress towards our midterm cost toward objective is expected to enhance our profit for potential. And furthermore, we've yet to book 2023 volumes for our next-generation PV modules which are expected to be produced by our recently announced factories. These modules are expected to be both ASP advantage due to their higher efficiency and optimized form factor, which creates value for customers as well as cost per watt advantages.

Combined with the benefits of locating supply near to demand and reducing the cost of sales rate, these factories are expected to increase gross margin per watt by approximately $0.01 to $0.03 relative to our existing fleet. Overall, we leave a combination of capacity growth, technology enhancements and reducing our cost per watt, coupled with an operating cost structure that is 80% to 90% fixed, will drive meaningful contribution margin as we scale.

Before reviewing our overall financial results for the quarter, I'll first discuss the legacy system license that benefited revenue and margin during the period. 2014, we sold a project that was eligible for a 30% cash grant payment under Section 1603 of the American Recovery and Reinvestment Act. The indemnification arrangement in September of 2017, we indemnified the project poster following the underpayment of anticipated cash flow and proceeds by the U.S. government.

In 2018, the project entity commenced legal action seeking full payment of the previously expected cash grants. In Q2 of this year, a settlement was reached pursuant to which the U.S. government made a payment in Q3 to the project entity, a portion of which we're entitled to. Accordingly, we recognized systems segment revenue of approximately $65 million during the quarter, which directly benefited gross margin.

Starting on Slide 8, I'll cover the income statement highlights for the second quarter. Net sales in Q2 were $629 million, a decrease of $174 million compared to the prior quarter. Decrease in net sales was primarily due to the sale of the Sun Streams 2, 4 and 5 projects in the prior quarter, partially offset by the aforementioned settlement agreement.

On a segment basis, our module segment revenue in Q2 was $543 million compared to $535 million in the prior quarter. Total gross margin was 28% in Q2 compared to 23% in Q1. Systems segment gross margin of $65 million was largely driven by the previously mentioned settlement agreement.

Despite the aforementioned delays in certain module deliveries as well as higher-than-expected logistics costs, our Q2 module segment gross margin increased to 20% from 19% in the prior quarter. Whilst we continue to navigate and partially mitigate the effects of the dislocated shipping market, higher freight cost impacted our financial results for the quarter.

In Q2, sales rate totaled approximately $50 million or 9 percentage points of module gross margin. Along with module warranty expense of approximately $2 million, sales freight and warranty reduced our module saving gross margin by approximately 10 percentage points. And as mentioned, we're in the process of implementing Series 6 Plus and CuRe in 2021, which requires downtime resulting in lower production and underutilization.

In Q2, our module segment gross margin was impacted by $7 million of underutilization. In total, sales rate, module warranty and underutilization impacted our Q2 module gross margin by approximately 11 percentage points.

SG&A and R&D expenses totaled $60 million in the second quarter, a decrease of approximately $12 million compared to the prior quarter. In Q2, we had a $3 million reduction in expected credit losses benefited SG&A expense. Production startup, which is included in operating expenses, totaled $2 million in Q2, a decrease of $10 million compared to the prior quarter. This decrease was driven by the start of commercial production at our second Series 6 factory in Malaysia in Q1.

Q2 operating income was $110 million, which included depreciation and amortization of $66 million, $65 million related to the aforementioned settlement agreement, $9 million related to unutilization and production start-up expense and share-based compensation of $5 million.

We recorded tax expense of $20 million in the second quarter compared to $46 million in Q1. The decrease in tax expense for Q2 is largely attributable to lower pretax income. The combination of the aforementioned items led to second quarter earnings per share of $0.77 and $2.73 for the first 2 quarters of 2021 on a diluted basis.

Next turning to Slide 9, I'll discuss fixed balance sheet items and summary cash flow information. Our cash, cash equivalents, marketable securities and restricted cash balance ended the quarter at $2.1 billion, an increase of $255 million compared to the prior quarter with several factors impacting our quarter end cash balance. Firstly, in Q1, we sold certain restricted marketable securities associated with our module collection and recycling program for total proceeds of $259 million. We intend to reinvest these proceeds, at which point they will be considered restricted marketable securities, which are not included in our measure of total cash.

Secondly, in early April, we received proceeds from the sale of our U.S. project development business. And finally, our operating cash flows during the quarter were partially offset by capital expenditures.

Total debt at the end of the second quarter was $279 million, an increase of $22 million from the end of Q1. This increase is due to a loan drawdown on the credit facility for a Japanese systems project. As a reminder, all of our outstanding debt continues to be project-related and will come off the balance sheet when the corresponding project is sold.

Our net cash position, which includes cash, cash equivalents, restricted cash and marketable securities less debt, increased by $233 million to $1.8 billion as a result of the aforementioned factors. Net working capital in Q2, which includes noncurrent project assets and excludes cash and marketable securities, decreased by $176 million compared to the prior quarter. And this decrease was primarily driven by the collection of proceeds from the sale of our U.S. project development business and an increase in current liabilities due to an increase in down payments from module customers.

Net cash generated by operating activities was $177 million in the second quarter. Finally, capital expenditures were $91 million in the second quarter compared to $90 million in the prior quarter.

Continuing on Slide 10, I'll next discuss 2021 guidance. Firstly, starting with our systems business. We recognized a $65 million benefit in Q2 related to the previously mentioned settlement agreement and have incorporated this in our systems revenue and gross margin guidance. Secondly, we're evaluating whether to continue holding our lose our Norte asset in Chile or pursue a sale of this project. The fee such a sale will require coordination of the project lenders and could result in an impairment charge in the future if we are unable to recover our net carrying value in the project. No impact from any possible sale of this project is included in our guidance for the year.

As it relates to our module business, there are several key updates. As highlighted on the previous 2 earnings calls, we continue to anticipate elevated shipping costs of 2021. Despite near and long-term strategies to mitigate the impact, the cost of shipping has continued to rise since the April earnings call. As a result of elevated rates, port congestion, limited container availability and schedule reliability issues, sales rate is expected to adversely impact our 2021 results by an incremental $60 million relative to our previous expectations.

For the full year 2021, we anticipate sales rate and warranty will reduce our module segment gross margin by 10 to 11 percentage points, 250 basis point increase from the previous earnings call. Whilst we continue to manage our core manufacturing costs, we also anticipate a shipping-related variable cost headwind of approximately $20 million, primarily due to elevated inbound freight costs for raw materials. Additionally, Q2 shipments were lower than expected use of vessel delays, constrained customer container availability and accommodating certain customer requests. We're currently tracking to achieve full year 2021 shipments of 7.6 to 8 gigawatts which represents a 0.2 gigawatt decrease to the low end of the guidance range. We also acknowledge that the current logistics environment presents risk to our 2021 shipment plan.

As it relates to capacity expansion, our recently announced factories in Ohio and India are anticipated to commence production in 2023 and increased 2021 capital expenditures by approximately $400 million. Related to this expansion, we anticipate incurring an additional $700 million of capital expenditures in 2022 with the remainder in 2023. With these factors in mind, we're updating our 2021 guidance as follows: our module segment revenue guidance of $2.4 billion to $2.55 billion represents a $50 million decrease to the low end of guidance range to account for our current expectations on shipment timing. Our updated net sales guidance of $2.875 billion to $3.1 billion, which reflects an increase in systems revenue on both the high and low end of the guidance range due to the aforementioned settlement agreement.

Additionally, we've increased the low end of our guidance -- systems guidance range to account for clarity on project sale accountants. Our module segment gross margin guidance is $485 million to $535 million. Whilst our previous guidance, this represents an $80 million reduction to the high end of the guidance range due to a $60 million increase in expected sales rate and $20 million increase in expected inbound rate. Revised low end also represents an $80 million decrease relative to our previous guidance due to a 0.2 gigawatt reduction in the low end of our shipments guidance and an increase in expected sales and inbound freight costs which are partially offset by risk accounted for in our previous guidance range.

As a result of these factors, we anticipate our module 7 gross margin will be approximately 20% to 21% for the full year. For the full year 2021, we anticipate sales rate and warranty will reduce our module segment gross margin by 10 to 11 percentage points. And in addition, we expect the impact of ramp underutilization and reduced throughput to total $41 million.

Our data systems segment gross margin guidance is $210 million to $225 million, which reflects a $65 million increase due to the aforementioned settlement agreement and a $15 million increase to the low end of the guidance range due to the clarity on project sale economics. We anticipate that the majority of our remaining year -- remaining full year systems segment revenue and gross margin, we recognized in the fourth quarter of the year.

Our revised total gross margin guidance of $695 million to $760 million, which reflects a $15 million decrease in the high end of the range. SG&A and R&D expenses of $265 million to $275 million, production start-up expense of $20 million to $25 million and operating expenses of $285 million to $300 million combined are unchanged.

We revised operating income guidance range of $545 million to $625 million and includes anticipated depreciation and amortization of $262 million, share-based compensation of $20 million, $61 million to $66 million related to ramp underutilization, reduced throughput and production start-up expense and a gain on the sale of our U.S. project development and North American O&M businesses of $149 million.

Turning to nonoperating items. We expect interest income, interest expense and other income to net negative $15 million, an increase of $5 million compared to our previous guidance due to higher net interest expense, foreign exchange losses. Our tax guidance of $100 million to $120 million is unchanged.

Our revised earnings per share guidance is $4 to $4.60 per share. As a reminder, there are a number of items impacting our EPS guidance for 2021. Firstly, ramp on utilization, reduced throughput and production start-up expense, driven by factory upgrades, are expected to contribute to a $0.50 EPS headwind in 2021. Secondly, these upgrades will require approximately 3 weeks of planned downtime across the fleet, which is expected to contribute to lower production. And finally, sales rate and inbound freight both remained significantly elevated in comparison to historic levels.

Our capital expenditure guidance has increased by $400 million, driven by our recently announced expansion plan to a revised range of $825 million to $875 million. As a result of additional CapEx in 2021 and high logistics costs, we decreased our year-end 2021 net cash guidance to a revised range of $1.35 billion to $1.45 billion.

And lastly, our shipment guidance is 7.6 to 8 gigawatts which represents a 0.2 gigawatt reduction to the low end of the guidance range.

Turning to Slide 11, I'll summarize the key messages from the call today. From a financial perspective, net cash position of $1.8 billion remained strong, delivered year-to-date EPS of $2.73, and we revised our 2021 EPS guidance range to account for the current freight market.

Operationally, we started flight preparation for our recently announced factory in Ohio and announced our manufacturing expansion into India. As a result of this expansion and optimization of our existing fleet, we anticipate our nameplate manufacturing capacity will reach 16 gigawatts in 2024. And finally, Series 6 demand is at a record high level with 9 gigawatts of year-to-date net bookings, which includes 4.1 gigawatts since the previous earnings call.

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

[Operator]

[Operator Instructions]. Our first question comes from the line of Philip Shen from ROTH Capital Partners.

[Philip Shen, ROTH Capital Partners]

The first one is on Vietnam and Malaysia with the COVID situation there. I think, Mark, you mentioned that people are working hard and maybe even living at the facility to maintain utilization. Can you talk about how you expect utilization to trend ahead? Is there a risk for a shutdown of production at any point in time in the future? And how is this impacting your ability to roll out new updates and so forth?

And then secondarily, in terms of bookings, you guys have had some nice bookings here. There's still a bunch available for 2023. I think you mentioned maybe 3 gigawatts. When do you expect that to possibly get booked? I mean, could we see that booked later this year? Or do you think that might carry into 2022?

[Mark Widmar, CEO & Director]

Yes, Phil. So I guess on -- so obviously, we've got to comply with all the requirements of what's going on in both those countries. And in some cases, there's -- and there has been over periods of time in Malaysia around movement control orders. And fortunately, we've been -- and Malaysia have been deemed to be essential. So that continues to allow us to operate and we continue to try to make sure we comply with all the local requirements. We've also, in both of our facilities, started the process already to get our associates vaccinated. So most of our associates in both of the facilities have received the first shot and we'd expect here in the near term, we'd be able to provide the second shot. So that's helping as well.

Vietnam is the one that I would say that's trending more significantly, right? On a relative basis, you could look at the Vietnam historical number of cases and fatalities are being relatively low by most standards. But we've seen a pretty significant increase here over the last 6 weeks or so. So the government has made and imposed other requirements, including to the extent that you are going to continue to run your factory, there's a requirement to quarantine on site. So we have made for accommodations for our associates there to quarantine. And we've got a schedule which would be in place where we'd be able to rotate associates through over periods of times where the current staff would be quarantine for a period of time, then the new a number of assets would come in over time.

So we have been able to manage, and the team has done a phenomenal job. And I alluded to that in my prepared remarks, they continue to hit their operational metrics. So as I sit here today, as we look across our supply chain, that's both in Malaysia and Vietnam and our own facilities, we're able to manage the current situation. However, if things continue to trend worse, then we'll have to assess and evaluate our ability to continue to run and operate. So it's clearly a challenging environment at which the team have been able to do an outstanding job to continue to operate and to hit our performance metrics.

The -- as it relates to technology rollout, it's a little bit different situation because -- and we highlighted it in terms of Vietnam as it relates to our rollout of CuRe, our sequencing around CuRe would have been Ohio first then Malaysia and then Vietnam. We've already done some of the upgrades that would enable the CuRe product to be released in Malaysia when we started , we have some of the upgrades already positioned to enable CuRe when we start the rollout. And we've just recently completed the rollouts in both Perrysburg 1 and Perrysburg 2 to enable CuRe. We have yet though, to roll out the upgrades that are needed in Vietnam. And there are restrictions and quarantine requirements and reduced travel and the like. So as we alluded to, we're working through and to try to find a path to keep it on schedule, but there is a significant risk that the rollout of CuRe in Vietnam, given the current situation would be delayed. But that's the most significant one that we're still working through at this point in time.

As it relates to bookings, yes, we've got about 3.4 gigawatts of 13. We now with the 2 new factories, we'll be adding close to 3 gigawatts of incremental volume in 2013 -- excuse me, get the right year 2023, sorry about that. And there's a lot of volume still to be booked. So we probably got in the range of 10 gigawatts or something like that engagement with our customers, we've got a number of very large deals right now here in the U.S. as well as in the pipeline for India. As we highlighted, we've got about 7 gigawatts right now of a pipeline in India that we're working to execute now that we've made the announcement around the factory. Subject to final permitting and the incentive programs from the government finalizing that, we'll start contracting that volume as well.

So there's no lack of opportunity. The engagement is good. I would not expect at least over the next few quarters, I don't see a significant slowdown in bookings momentum. I think we're going to have a very strong second half of this year to help start booking out 2023 and 2024.

[Operator]

Our next question comes from the line of Eric Lee from BOFA.

[Unidentified Analyst]

Congrats on the bookings. For the bookings specifically, could you comment on the average ASPs as you look into '23? Is that still $0.20 -- high $0.20 per watt range? And can you talk about where you're booking into that '23-plus time frame?

[Mark Widmar, CEO & Director]

Yes. So what we said on the call was that if you look at our current bookings that we have for 2023, they're essentially flat. I think we said they're down about 1%. And so they're essentially flat as we go from '22 into '23. And pricing, if you actually look at the profile of what we have booked and what we're currently in negotiations with right now is pricing has trended up for both '22 -- if you look at deliveries in '22 and then even what we're seeing in '23.

So there's a lot of momentum. I think what's happening is we continue to book out again we are still somewhat capacity constrained even with the 2 new factories. That volume doesn't start to come out into '23. But even if you look at that volume relative to the global market, we are capacity constrained from that standpoint. And as our book builds up and firms up and it starts to constrain our available capacity to support new customers, it starts to firm up pricing in the marketplace. So we're happy to see that.

We -- as we said that in our prepared remarks, we do look at this as a very balanced perspective to get an ASP that's attracted to both parties, right? The project economics have to work and our return requirements have to be met as well. So you have to balance those 2 into consideration.

And the other thing I'll just say around the bookings is that we are -- and we alluded to this on the last earnings call. And if you look at effectively everything that we booked this quarter, we have started to implement the modifier around shipping costs. So we have benefited in terms of the contract structure in a way that if there's incremental sales freight costs that there would be a mechanism which that would be variable pricing to the customer to accommodate for that. So that's also an item that we're trying to make sure it gets properly reflected in our bookings as we go forward.

[Operator]

Our next question comes from the line of Ben Kallo from Baird.

[Benjamin Kallo, Robert W. Baird & Co.]

Could you talk about a little bit about what went into your guidance, the assumptions? To bring down the low end just a little bit like that seems very small. So I just want to understand what went into there as far as assumptions on shipping costs, especially and then the timing of any other plant shutdowns or costs like that?

And then my second question is just on the ASPs. What I heard you just say was that ASPs are up where you last talked to us about in your negotiations. Can you talk about if that has anything to do what that has to do with if it's supply chain? And then you also mentioned a kicker on the ASPs with the new technology. Could you maybe add more into that?

[Alexander Bradley, CFO]

Yes, Ben, starting with the guidance. On a combined basis, you're not seeing the low end of the guidance range change. But what you are seeing is the impact of the settlement agreement that we had on the previous project come through. So the $65 million that was in the revenue line and flows straight through the gross margin. So that's a benefit to gross margin.

If you look at the module side of gross margin, we're basically down about, call it, $15 million or so on volume as we lowered the lower end of the range on shipment volume and then about $65 million on freight. So it impacted in the quarter about $80 million on freight, $60 million outbound sales rate, $20 million inbound. We had about $15 million or so in the range as a risk. So we're having a net impact down of about $65 million. But again, don't forget that you had the impact coming off of this settlement agreement of $65 million. That's why the consolidated based on the range, you're not seeing it come down significantly.

[Mark Widmar, CEO & Director]

On the ASPs, yes, we are starting to see the ASPs for -- and I'll separate -- we'll talk next-gen product before our secondly, but first is in terms of our Series 6 and Series 6 Plus in CuRe product that we are currently negotiating with customers at this point in time. Yes, we're seeing ASPs starting to firm up. And there's -- what First Solar is able to do, not only with the differentiation we have around capabilities and our technology, but there's an element of certainty.

And given there's so much uncertainty right now that's going on with the crystalline silicon supply chain. Whether it's here in the U.S. or even you're starting to see some emerging issues start to come up in the EU and U.K. and in places like that, it's creating anxiety to a customer and the customer wants to make sure they can have certainty and there's no disruption to their commitment around their module supply chain. First Solar is decoupled from the Chinese Crystalline silicon supply chain, right? So it enables a different opportunity agent with customers and including that, that is playing into some of the opportunities.

Again, though, you still have to deliver great technology and the evolution of CuRe in particular, and it's improving around its long-term degradation rate, I think, is further enhancing our relative competitive position in the marketplace. So it's the product, it's kind of the overall market, it's the certainty of contracting with First Solar is a key driver in the bookings momentum and the firmness of the ASPs. The -- what we alluded to on our new product, which will come out of both of our Perrysburg 3 factory and in our India factory, both of them will be higher efficiency than our current fleet. They also will be optimized. One will be optimized here in the U.S. for a tracker install in the India 1, which is largely -- India is largely a fixed tilt market. It will be optimized a fixed tilt structure, both of them will inherently create incremental value relative to the Series 6 and 6 Plus product that we have today.

And I think what Alex alluded to and also couple that with both of them will be the lowest cost products in our fleet, I think there's an entitlement of $0.01 to $0.03 at least what our initial indications are about $0.01 to $0.03 of incremental gross margin realization with the next-gen product relative to where we sit today on a comparable basis with Series 6 Plus CuRe.

[Operator]

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

[Brian Lee, Goldman Sachs Group]

I had two more modeling specific ones. I guess, first off, on the cash flow trajectory here for the next few years. Can you give us a sense of what net cash balance you're comfortable with? And sort of when you get back to positive free cash flow? Is that in 2024? because there's about the informed CapEx between Ohio and India here, so just wondering kind of what the right free cash flow trajectory to be assuming is?

And then second question, just -- I know, Alex, you mentioned a lot of the OpEx is fixed. We've seen that over the years, but we typically also have seen start-up and production rate costs on new fabs. So how should we be thinking about those costs in '22 and '23 for Ohio and India, respectively?

[Alexander Bradley, CFO]

Yes. So on the cash side, so we're guiding previously to $1.8 million to $1.9 million year-end number. That's now down to $1.35 million to $1.45 million. So $1.4 million midpoint. And the delta there is the $40 million of CapEx that's going to happen this year associated with that spend. So that still leaves another about $900 million to $1 billion or so that's going to happen in the next couple of years.

We haven't given a minimum number that we're comfortable with. I think the business is going to be significantly cash generative over the next couple of years with the 6 factories that are already in place. I can't give you a guided number. But I'd say that we're going to generate enough cash organically, that would be comfortable we could finance the construction of the June factories on Boise we wish and not drop to levels that I wouldn't be comfortable with maintaining in terms of the base net cash balance.

That said, for a few reasons, we may look to leverage the factory in India, especially. I think there's some optimization of capital structure here we might do. There's less equity going into a country where it can be more challenging to bring money in and out. I think there's some benefit to matching some of the revenue and expense stream with the capital structure. I think there's also some beneficial rates we could get using ECA financing, especially for some of the equipment is going to come out of Europe intently in the U.S. as well.

So I'm comfortable we could with organic cash flow over the next couple of years, finance the factories on balance sheet without debt and leave ourselves at levels that be comfortable with, but I think there may be optimization around the balance sheet that will look to do as well.

And then on the OpEx side, we're still working through numbers, but these factories are going to be significantly larger than the previous factories. You think about historically to put in place a factory that was $1.2 million now up to about $1.5 million, $1.6 million of nameplate somewhere in the region of $30 million to $40 million, depending on the location, depending whether it's the first or second factory came down a little bit more. For instance, our second Malaysia -- or second Vietnam factory is significantly a little cheaper than our first. It's always going to be a little higher in the U.S. than it is internationally given labor costs. But in indicative terms, you could take that and double it for scale. And so you could look at startup in the range of probably $60 million to $70 million per factory.

In terms of timing, you're going to see a significant portion of the U.S. factory start-up hit in 2022, call it, 3 quarter, something like that, the remainder in 2023. The India factory is going to be a little behind that. You may see more like 25% to 50% hit in 2022 and the other 50% to 75% hit in 2023.

And the other thing I'd say about OpEx is we did mention that we have about 80% and 90% fixed operating cost structure. So as we do scale these factory, there will be potentially some slight incremental SG&A. But as a whole, as you add that 6.6 gigawatts of capacity and keep the OpEx down, we do get a pretty significant contribution margin and operating margin expansion that we can benefit from.

[Operator]

This concludes today's conference call. Thank you again for participating. You may now disconnect.