First Solar, Inc. Q2 FY2022 Earnings Call

Good afternoon, everyone, and welcome to First Solar's Second Quarter 2022 Earnings Call. This call is being webcast live on the Investors section of First Solar's website at investor.firstsolar.com. At this time, all participants are in listen-only mode. As a reminder, today’s call is being recorded. I would now like to turn the call over to Richard Romero from First Solar Investor Relations. Richard, you may begin.

Good afternoon and thank you for joining us. Today, the Company issued a press release announcing its second quarter 2022 financial results. A copy of the press release and associated presentation are available on First Solar's website at investor.firstsolar.com. With me today are Mark Widmar, Chief Executive Officer; and Alex Bradley, Chief Financial Officer. Mark will begin by providing a business and technology update. Alex will then discuss our financial results for the quarter, provide a guidance update and also provide some insight into our pricing strategy and our vision for gross margin expansion. Mark will then provide perspective on the domestic and international policy environment. Following their remarks, we will open the call for questions. Please note, this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the safe harbor statements contained in today's press release and presentation for a more complete description. It is now my pleasure to introduce Mark Widmar, Chief Executive Officer. Mark?

Thank you, Richard. Good afternoon and thank you for joining us today. To begin, we are pleased with our second quarter results, including earnings per share of $0.52. This result was benefited by the previously announced closing of the sale of our project development platform in Japan, partially offset by an impairment of the legacy systems business project in Chile, which will be discussed later during the call. We've also continued our booking momentum, further strengthening our backlog of future expected deliveries, which now stands at a record 44.3 gigawatts. The 10.4 gigawatts of new bookings since our prior earnings call in April are mostly for deliveries in 2024 to 2026 time frame and have a base ASP, excluding adjustors of $0.301. These new deals bring our total year-to-date bookings to 27.1 gigawatts. From an ASP perspective, we are encouraged by the pricing trajectory of our bookings as we continue to transact for deliveries as far out as 2026. On an overall portfolio basis, the profile of our annual base contracted ASPs remains effectively flat from 2022 through 2025 with the potential to grow with the application of technology, sales trade and commodity price adjustors applicable to many of these bookings. Firstly, as it relates to technology adjustors, if we are able to realize the achievements within our technology roadmap, the ASP has the potential to increase to reflect the value associated with the enhanced product and energy profile. As of June 30th, we had approximately 20.5 gigawatts of contracted volume with these adjustors, which, if realized, could result in additional revenue of up to approximately $0.4 billion or approximately $0.02 per watt, the majority of which will be recognized in 2024 and 2025. As previously discussed, this amount does not include potential adjustments for the ultimate module bin delivery to the customer, which may adjust the ASP under the sales contract upwards or downwards or for those contracts in the United States that include sharing related to potential upside for U.S. made modules under the extension of the investment tax credit. Secondly, the ASP may increase to offset incremental costs as it relates to sales freight. Thirdly, the ASP has also potentially increased to offset incremental costs as it relates to aluminum. With regards to our Series 7 product to be produced at our new factories in Ohio and India, featuring a glass area of approximately 14% larger than our Series 6 Plus modules and utilizing the steel as opposed to aluminum frame, we have also begun to introduce adjustors to offset potential increased steel costs. As a reminder, not every recent contract includes every adjustor described here. To the extent that such adjustors are not included in the recent booked contract, we believe the baseline ASP reflects an appropriate risk reward profile. For example, some of these contracts have delivery terms where the customer is responsible for the cost of sales freight from the factory gate. In summary, we continue to leverage our value proposition of providing our customer and partners with long-term supply certainty, lower political and compliance risk and access to our best available technology. These critical points of differentiation, together with our differentiated CadTel technology, have allowed us to continue to expand our record backlog and an overall pricing that we believe is both encouraging and competitive and with appropriate risk mitigation. Turning to slide 3. I'd like to review our highlights and some updates from our second quarter. Our manufacturing facilities produced 2.2 gigawatts of modules in Q2. The result was benefited by higher throughput due to faster-than-expected upgrades of certain equipment at our Vietnam manufacturing facilities. As previously disclosed, we have completed the sale of our project development platform in Japan. As we seek to divest our remaining power plant assets, we are evaluating potential buyers for our Luz del Norte project in Chile. Alex will discuss the timing and financial impact of this potential transaction. Construction of our third manufacturing facility in Ohio and our first manufacturing facility in India remains on schedule. To date, we have seen increases associated with steel and freight costs. Looking forward, as we continue to explore further manufacturing expansion opportunities, inflationary pressures on building equipment and freight costs are expected to remain a concern. Finally, we've entered into a $500 million debt facility for our new manufacturing facility in India, with the first disbursements expected in the third quarter. Before turning to shipments, I would like to say a word about the current sales freight environment. While there are reports suggesting supply chains are beginning to trend towards normalization on a macro basis, global sales freight conditions remain challenging. Although spot rates for ocean freight have fallen quarter-over-quarter, these benefits were partially offset by increased fuel costs. In addition, we are approaching the peak period in terms of delivery of goods ahead of the year-end holiday season, which represents a potential headwind that may render the recent easing in the shipping rate a temporary phenomenon. From a logistics perspective, we are still experiencing the impact of port congestion. In the United States, after brief reprieve, we have seen a continuous buildup of congestion on the East Coast as some shippers divert away from the West Coast port to avoid the potential impacts of ongoing labor negotiations. For example, the queue of ships looking to berth at the Port of Savannah has recently increased to 30 vessels, up from zero in the previous quarter. While transit times from Asia to the United States have improved, they remain well above the pre-pandemic averages. In fact, combined with challenges such as port congestion and blank sailings, this has led to an estimated 12% reduction in global shipping capacity. Notwithstanding these challenges, we continue to execute on our strategy of employing freight risk-sharing mechanisms in our customer contracts, with nearly all of our recent bookings, either featuring contractual adjustors designed to offset incremental sales freight cost or allocating all ocean freight responsibility to the customer, in either case mitigating gross margin erosion. As of today, we have 32.7 gigawatts of contracts in our backlog that include either sales freight coverage or no sales trade exposure. As you might expect, contracts where customers take on responsibility for transport have lower ASP than those where we are responsible for shipping. By way of example, one such contract, which is included in the revenue from contracts from customers' footnote in the quarter's 10-Q, is a 2.3 gigawatt sale to a highly valued long-term partner. This volume is contracted to supply from our international factories, with the customer being responsible for transportation, which is currently estimated to be $0.04 to $0.05 per watt. Therefore, the ASP for this transaction is lower than the average of the ASP for other sales contracts entered into in the period. Note, 4.9 gigawatts of the 11.9 gigawatts increase in contracts from customers for future sales, included in the revenue from contracts from customers' footnote in this quarter's 10-Q require that customers take on the responsibility for shipping. As First Solar had this shipping responsibility, we estimate that the implied ASP of this 11.9 gigawatts volume increase would have risen by approximately $0.02 per watt. Of note, we expect the majority of our India factory output to be contracted on an ex works basis, with the customer picking up modules at the factory gates and assuming all transportation costs. Accordingly, we believe headline ASPs in India will be lower than in other markets where we include an assumption of sales freight within the ASP. That said, Alex will address why we expect gross profit per watt for the India factory to be equal or higher than the fleet later in the call. Turning to slide 4, we address our recent shipments. As just mentioned, we booked 10.4 gigawatts since the April earnings call. With respect to future shipments after accounting for shipments in the quarter of approximately 2.5 gigawatts, which is in line with our expectation, our total contracted to-date backlog is 44.3 gigawatts. We are sold out for 2022 and 2023 as of April's earnings call and now sold out for 2024, excluding our new India manufacturing facility. We have 12 gigawatts for planned deliveries, excluding India, in 2025 and have 2.6 gigawatts of planned deliveries in 2026 and beyond. As it relates to our India factory, we have seen significant near- and longer-term demand from domestic customers as we anticipate entering into first contracts for the output of this factory within the coming months. Under our bookings policy, signed contracts in India will not be recognized as bookings until we have received full security against the offtake. As such, deals signed but not fully secured will be reflected with the confirmed but not booked portion of our pipeline graph in the earnings presentation. The 10.4 gigawatts booked since the April earnings call include an order for 2.4 gigawatts of modules from one of our largest customers, U.S. headquartered Intersect Power, announced earlier today. These modules are scheduled for delivery in 2025 to 2026, further expanding the horizon for our backlog. This booking is reflective of a broader trend among longstanding U.S.-based customers to strengthen their commitment to First Solar's CadTel thin film technology as they seek long-term pricing security, supply certainty and value for their project pipeline. We are seeing greater geographical diversity in our bookings among customers negotiating long-term framework supply agreements. Notably, European developers are increasingly recognizing the risk of relying on supply chains that are concentrated in China. As just one example, the French developer, Akuo, which has placed an order for 500 megawatts for its project portfolio in the U.S. and in Europe. Our bookings momentum demonstrates the growing recognition of the risk of pursuing a solar-at-any-cost strategy. Developers that have built excessive dependencies on Chinese state subsidized solar industry are grappling with an increasingly volatile pricing and supply environment. A prime example of this increased risk profile is a recently reported lawsuit filed against a top-tier Chinese solar manufacturer, alleging breach of delivery obligations, fraud, and breach of agreements related to product traceability information. This direct contrast with the experience of our customers who have benefited from our emphasis on durable partnerships has enabled long-term growth and our ability to stand behind our contracts and deliver on our commitments. Our customers have also benefited from an industry-leading approach to sustainability, transparency, and traceability. We believe that our focus on long-term partnerships and our focus on building enduring strategic relationships with customers has been key drivers of our success, providing longer-term stability and visibility, not just for our customers, but for our shareholders. As reflected on slide 5, our pipeline of potential bookings remains robust. Even at the year-to-date bookings of 27.1 gigawatts, we retain long-term total bookings opportunities of 52.5 gigawatts. Our 17.8 gigawatts of mid- to late-stage opportunities include 9.7 gigawatts in North America, 3.9 gigawatts in India, and 4.2 gigawatts in the EU. In India, we continue to see meaningful potential regarding demand from domestic developers and foreign-owned IPPs operating in the country, and the Indian government's efforts to boost demand certainty for domestic manufacturers. Similarly, in Europe, we are seeing growing demand where geopolitics and the war in Ukraine have led to an urgent effort to deploy more renewables as the EU works to diversify its energy portfolio. Turning to technology, we are pleased with the progression of our current roadmap. As previously stated, our roadmap provides us with a high level of optionality, allowing us to pursue enhancements to our product design and energy profile as well as a path to potentially offer a true next-generation solar module for the residential market. On the last earnings call, we announced that our R&D teams continue to make progress on developing the bifacial attributes of our CadTel semiconductor as we reaffirm the commercial, financial, and operational thesis of the bifacial product. As our bifacial program evolves from the research level to large pre-production runs, our R&D team is working to achieve field validation, including operational and reliability data. This is necessary to ensure a viable path to large-scale commercial manufacturing. In parallel, we are working to establish the supply chain necessary to help support the eventual introduction of a bifacial CadTel module. While we expect manufacturing line modifications to be minor, a bifacial CadTel module will have different material requirements necessitating adjustments to our supply chain. I'll now turn the call over to Alex, who will discuss Q2 results.

Thanks, Mark. Before reviewing our Q2 results, on slide 6, I'd like to provide an overview of two events, which impact both this quarter's results as well as our full year outlook. Both relate to our legacy systems business and impact our non-module or other business segment. The first is the recently completed sale of our Japanese project development platform and the pending sale of our Japanese O&M platform. The first discussed on our Q4 2021 earnings and guidance call, in late 2021, we received an unsolicited offer to acquire our Japanese project development and O&M platforms. Our full year 2022 guidance assumed a gain on the sale of these businesses of $270 million to $290 million. On our Q1 2022 earnings call in April, we indicated that negotiations toward the sale were progressing well. In May of this year, we entered into definitive agreements to sell these businesses to PAG Real Assets, subject to customary closing conditions. As previously disclosed and mentioned by Mark earlier in the call, in June, the conditions related to the sale of the project development platform were met. Accordingly, we closed the sale of that business for gross proceeds of JPY 66 billion, including a gain on sale of JPY 33 billion. These results were in line with the assumptions included in our full year guidance. However, due to the sudden and significant weakening of the Japanese yen relative to the U.S. dollar that has taken place in 2022 largely as a function of the contrast between the Bank of Japan's continued commitment to economic stimulus and the tightening of U.S. monetary policy, the U.S. dollar gain on sale of $245 million was $35 million lower than the midpoint of our previous forecast. From a cash perspective, we received net cash proceeds in Q2 of $262 million with an additional $164 million forecasted to be received within the calendar year. Note, the remaining conditions precedent to close the sale of the Japan O&M platform, including regulatory approvals, receipt of third-party consents and other customary closing conditions, are expected to be met in the second half of 2022. The second event impacting both Q2 results and full year guidance relates to our 141-megawatt Luz del Norte project located in Chile. As disclosed since last year's second quarter 10-Q filing, we've continued to evaluate whether to hold or pursue a sale of the project. We also noted that should we be unable to recover our net carrying value in the project, any future sale could result in an impairment charge. Given that no decision has been made with regards to a sale, no impact from any potential sale was included in our 2022 guidance. In cooperation with the project lenders, we've recently begun a sale process and in Q2 received multiple non-binding bids to acquire the Luz del Norte project. Based on analysis of these bids, in Q2, we recorded a pretax impairment in the cost of sales of $58 million and additional tax expense of $23 million associated with the Luz del Norte project. As it relates to the full year, assuming a sale is completed later this year, in line with the bids received to date, we expect revenue of $150 million to $200 million from the sale, a reduction in gross profit of $40 million to $50 million, including the Q2 impairment net of future proceeds from the sale, a $30 million to $35 million benefit to non-operating income from debt forgiveness and reduced interest expense, and $30 million to $40 million of tax expense due to the generation of net operating losses, for which no future benefit will be received and the jurisdictional mix of the income amongst our Chilean entities. The total net impact from the expected sale of Luz del Norte, which was not previously assumed in our guidance for the year, is a $10 million to $15 million loss before taxes and a $40 million to $55 million loss on a post-tax basis, equivalent to an implied loss per share of $0.38 to $0.52. Note that given the early stages of the sale process and uncertainty around the ultimate structuring of any potential sale, although we believe the forecasted range for revenue, pretax losses, tax expense, and after-tax losses to be appropriate, there remains significant uncertainty related to the impact of the gross profit and non-operating income lines of the P&L. With this background, starting on slide 7, I'll cover the income statement highlights for the second quarter. Net sales in Q2 were $621 million, an increase of $254 million compared to the prior quarter. On a segment basis, our module segment revenue in Q2 was $607 million compared to $355 million in the prior quarter. The increase in net sales was primarily driven by higher module volumes sold and also benefited by sales freight recoveries. Gross margin was negative 4% in Q2 compared to positive 3% in the prior quarter, primarily driven by the impairment of the Luz del Norte project, which impacted gross margin by 9 percentage points. Q2 module segment gross margin of 5%, up from 3% in Q1, was positively impacted by increased volumes sold. Additionally, sales freight included in our cost of sales reduced module segment gross margin by 16 percentage points in Q2 compared to 14 percentage points in the prior quarter. SG&A and R&D expenses totaled $64 million in the second quarter, unchanged from the prior quarter. Production startup, which is included in operating expenses, totaled $13 million in the second quarter, an increase of $6 million compared to the prior quarter, driven by increased startup costs associated with our third Ohio factory. We recorded the aforementioned $245 million gain on sale associated with the closing of the sale of the project development platform in Japan. Q2 operating income was $145 million, which included depreciation and amortization of $67 million and the utilization of production startup expense totaling $17 million, share-based compensation of $6 million, gain on the sale of the Japan project development platform of $245 million and an impairment of $58 million associated with the Luz del Norte project in Chile. We recorded tax expense of $84 million in the second quarter compared to a tax benefit of $19 million in the prior quarter. The increase in tax expense is primarily attributable to an increase in pretax profit from the sale of our Japan project development platform and an increase in tax expense related to the Luz del Norte project. A combination of the aforementioned items led to second quarter earnings per share of $0.52 compared to a Q1 loss per share of $0.41 on a diluted basis. I'll next turn to slide 8 to discuss select balance sheet items and summary cash flow information. Cash flows generated from operations were $88 million and capital expenditures were $199 million in the second quarter. Our cash, marketable securities, and restricted cash balance ended the quarter at $1.9 billion compared to $1.6 billion at the end of the prior quarter. Module segment operating cash flow and proceeds from the sale of our Japan project development platform were partially offset by other operating expenses and capital expenditures associated with our new Ohio and India factories. Total debt at the end of the second quarter was $175 million, a decrease of $77 million from the end of Q1, primarily due to the repayment of a credit facility before transferring the associated project with the sale of the Japan project development platform. All of our outstanding debt is nonrecourse project debt and will come off the balance sheet if the Luz del Norte project is sold. Our net cash position, which includes cash, restricted cash, and marketable securities less debt, increased by approximately $372 million to $1.7 billion as a result of the aforementioned factors. Continuing on slide 9, our full year 2022 guidance is updated as follows. Our previous revenue guidance of $2.4 billion to $2.6 billion was predominantly module segment revenue, which remains unchanged. We are adding other segment revenue guidance of $150 million to $200 million for total revenue guidance of between $2.55 billion and $2.8 billion to reflect the expected sale of the Luz del Norte project in the second half of the year. With half the year behind us, we have greater clarity into our full year module segment performance. While the midpoint of our module segment gross profit guidance remains unchanged, we've revised the range from $165 million to $225 million to $175 million to $215 million. Our other segment, which previously was forecast to reduce gross profit by $10 million, is now forecast to reduce gross profit by $50 million to $60 million due to the anticipated Luz del Norte sale, resulting in a total forecasted gross profit of $115 million to $165 million. Within gross profit, assumptions related to underutilization losses of $10 million to $15 million and a sales freight impact of 18 to 20 points of gross margin remain unchanged. Additionally, our forecasted cost per watt produced reduction from year-end 2021 to year-end 2022 of 4% to 6%, and our forecasted flat year-over-year cost per watt sold forecasts both remain unchanged. Note, the midpoint of our full year module segment gross margin guidance of approximately 8% remains unchanged from our previous forecast. Following a 3% and 5% module segment gross margin result in the first and second quarters of 2022, module margin improvement is expected to continue in the second half of the year. SG&A and R&D expenses are forecast to total $270 million to $280 million, down from $280 million to $290 million in our previous guidance. In addition, our forecast startup expense of $80 million to $85 million is down from $85 million to $90 million previously for a total forecast operating expenses forecast of $350 million to $365 million. The gain on sale of businesses previously forecasted $270 million to $290 million is now forecast to be $245 million given the aforementioned currency impact. Operating income is estimated to be between $5 million and $70 million, down from previous guidance of $55 million to $150 million as a function of the reduction in the U.S. dollar value of the Japan business sale and the inclusion of the expected Luz del Norte sale in guidance, partially offset by SG&A, R&D, and startup expenses savings. Other income and expense guidance moves from $20 million to $30 million of expense in prior guidance to $25 million of income in current guidance as a function of increased interest income and forecast debt forgiveness upon the anticipated sale of the Luz del Norte project. Full year tax expense increases from $35 million to $55 million previously to $55 million to $70 million, following the inclusion of the expected sale of the Luz del Norte project this year, partially offset by a lower-than-forecast gain on sale of the Japan development platform. This results in full year 2022 earnings per diluted share guidance range of negative $0.25 to positive $0.25. Capital expenditure guidance of $850 million to $1.1 billion and shipments guidance of 8.9 gigawatts to 9.4 gigawatts remain unchanged. Our year-end 2022 net cash balance is anticipated to be between $1.3 billion and $1.5 billion, an increase of $200 million following the assumed sale of Luz del Norte and the corresponding reduction in project-level debt. Before handing the call back to Mark, given our record backlog and significant recent bookings, I'd like to provide some insight into our pricing strategy and our vision for gross margin expansion for the next three years and beyond. The components of this strategy include our approach of contracting out our capacity several years in advance of production, the anticipated reduction of our cost per watt produced, the expected benefits from capacity expansion, including through scaling a largely fixed overhead structure, and our agile contracting approach, which provides for the potential realization of both incremental revenue and is expected to mitigate freight and certain commodity cost risks. Now, with respect to our agile contracting structure, every contract is different, and not every recent contract includes every technology and commodity adjustor we've been describing. Accordingly, while we anticipate seeing some incremental revenue contribution and gross margin protection from these adjustors in 2023, the majority of these potential revenue and gross margin benefits, if we're able to achieve our technology roadmap, are expected to be recognized in 2024 and 2025. Firstly, as it relates to ASPs, between the pricing reflected in the current contracted backlog and the pricing for the bookings realized in July, we expect the profile of our annual base contracted ASPs will remain effectively flat, and therefore, not decline for 2022 through 2025. Against this pricing backdrop, we anticipate a reduction in cost per watt produced from year-end 2021 to year-end 2022 of between 4% and 6%. Even making the highly conservative assumption of no further reductions to cost per watt produced beyond this point, we expect cost per watt produced exiting 2022 to provide an annual gross margin benefit in 2023 and beyond. On a cost mitigation basis, as it relates to sales freight as well as steel and aluminum costs relative to 2022, we would expect future years to see either a reduced cost profile or should costs remain elevated relative to pre-pandemic norms, the inclusion of adjustors would provide for an increase in ASP to offset such costs. Under either scenario, we would see an expansion of gross profit relative to 2022. As mentioned on the April earnings call, indicatively, assuming today's sales freight and aluminum environment, a contract with sales freight and aluminum adjustors is expected to increase ASPs by approximately $0.03 per watt above the baseline. From a growth perspective, relative to today, we expect the announced Series 7 factories in Ohio and India will add approximately 6 gigawatts of annual production starting in 2024. That additional volume is anticipated to provide significant incremental gross profit. In addition, we see the benefit of scale from our largely fixed operating cost structure as we anticipate adding this capacity with limited incremental OpEx. Assuming the midpoint of our current full year 2022 R&D and SG&A guidance of $275 million, this incremental production reduces combined R&D and SG&A cost per watt by approximately $0.01. As it relates to our Indian manufacturing facility, while ASPs in that market are anticipated to be lower than those in the U.S. and other markets, we expect gross profit per watt for the Indian factory to be equal to or higher than the fleet average. This is due to a combination of factory scale, domestic CapEx incentives and other incentives, lower labor costs, and the elimination of ocean freight to deliver the domestically produced product. The combined impact of flat ASPs, cost per watt reductions, sales freight and commodity adjustors, and capacity expansion against a largely fixed operating cost base provides a compelling case for gross margin expansion over the period we've been discussing. Moreover, this potential for gross margin expansion is further enhanced to the extent that we're able to make achievements within our technology roadmap. As described on the April earnings call, under our updated contracting approach, we forward-sell today's technology. To the extent we accomplish future module technology improvements, including new product designs and energy-related enhancements, we have the opportunity to realize incremental revenue under sales contracts that include technology adjustors. As Mark noted earlier, this does not include either potential adjustments to the ultimate bin delivered to the customer, which may adjust the ASP under the sales contract upwards or downwards, or for those contracts in the United States that include sharing related to a potential upside for U.S.-made modules on an extension of the investment tax credit. Finally, the gross profit opportunity described here is within the context of our current capacity plan. Additional capacity would be expected to be gross profit accretive to the above scenario. And while we're not making a new additional plant announcement today, I'll now turn the call back over to Mark, who will provide an update on policy and our current thinking with respect to capacity expansion.

All right. Thanks, Alex. To conclude, I would like to discuss the rapidly evolving policy environment both at home and abroad. Beginning in the United States, like many in the energy sector, we were pleasantly surprised by yesterday's joint announcement from Senators Manchin and Schumer regarding the Inflation Reduction Act. We are encouraged that yesterday's announcement made a clear reference to investment in energy security and technology-neutral climate change solutions, and we are supportive of the balanced approach to corporate taxation. While we are still reviewing the full legislative tax release last night, we are hopeful that the advanced manufacturing production credit, if passed, helps deliver the incentives required to boost domestic solar manufacturing and secure our nation's energy independence. As the legislative process moves forward, we urge both chambers to move quickly to pass this critical legislation, which represents the first real step to designing a clean energy industrial policy that addresses climate change while simultaneously codifying American energy security. With respect to 45X, the advanced manufacturing production credit, we urge Congress to ensure that the manufacturing tax credit designed to incentivize domestic solar supply chains are fully refundable in order to deliver the intended result. This legislation’s extension of the solar investment tax credit appears to enable crucial demand-side policy certainty. We're hopeful that, if passed, legislation will maintain the domestic content in the Senate that will help further ensure that U.S. taxpayer dollars are used to help expand manufacturing here at home. Turning to our considerations to further expand our manufacturing footprint. Our criteria for investment remains unchanged. These include geographic proximity to solar demand, the ability to export cost-competitively into other markets, access to cost-competitive labor, low energy and real estate costs, access to or the ability to build a cost-competitive supply chain to support the sourcing of raw materials and components, and as we've repeatedly stated, the domestic policy environment. We agree wholeheartedly with Senator Manchin that the United States needs to remain a global superpower through innovation. As it relates to the potential for our own manufacturing expansion in the U.S., we had previously stated that we were evaluating the potential for future capacity expansion but noted that we first required clarity on domestic solar policy. In light of these latest developments and should the Inflation Reduction Act get passed with consistent language on solar-related tax credits, we plan to pivot quickly to reevaluate U.S. manufacturing expansion. Moving ahead, we continue to be optimistic about the policy environment in Europe and in India. Over the last 10 months, we have met productively with Prime Minister Modi of India and attended the investment conference hosted by President Macron of France in addition to having numerous constructive meetings with members of their cabinets. These governments, along with others with which we are engaged, are seeking to diversify and grow domestic capabilities. As calls for resilient domestic supply chains grow louder in solar markets around the world, we believe First Solar is uniquely well-positioned to offer a viable alternative based on a proven repeatable vertically integrated manufacturing template. Before I turn the call back to Alex to summarize today's key messages, I would like to note that we have issued our 2022 sustainability report. The report highlights our continued progress across a range of environmental, social and governance metrics, detailing among other accomplishments how we have successfully lowered our environmental footprint while advancing our diversity and inclusion goals. These achievements demonstrate the strength of our commitment to the principles of responsible solar, placing at the heart of our business as we invest in innovation and scale. We are proud that First Solar is an example of how solar can be competitive without compromising our principles and purpose. We have shown that solar technologies can be sustainably scaled without people and the planet paying a high price.

Alex will now summarize the key messages from today's call. Turning to slide 10. From a financial perspective, we're pleased with our Q2 earnings per share of $0.52. We updated our full-year guidance to reflect the impact of two discrete legacy systems events. The midpoint of our full-year module revenue and gross margin guidance remains unchanged. Operationally, we'll produce 2.2 gigawatts and ship 2.5 gigawatts of modules. Additionally, Series 6 demand remains extremely robust with 27.1 gigawatts of year-to-date net bookings, leading to a record contracted backlog of 44.3 gigawatts. The 10.4 gigawatts of new bookings since our prior earnings call in April had a base ASP, excluding adjustors of $0.301. And finally, we're encouraged by the Inflation Reduction Act proposed legislation and are currently reviewing this development and its potential impact on our business and capacity expansion plans. And with that, we conclude our prepared remarks and open the call for questions.

Your first question comes from Ben Kallo with Baird.

Hey guys. Congrats on the results and the bookings. How do you determine the optimal manufacturing capacity considering the significant bookings? Previously, it was mentioned that the gross margin was greater than 20%. How can I reconcile that information? Thank you.

So Ben, one way to start is by mentioning that we've projected a gross margin of about 7% to 8% for the module business in the current environment for 2022. Alex pointed out that this low gross margin reflects the challenges we're facing with sales freight and commodity prices, particularly aluminum and, eventually, steel with the introduction of Series 7. This headwind impacts gross margin by approximately 11 to 12 percentage points. Normalizing for that, assuming average selling prices remain stable while benefiting from a $0.03 reduction due to sales freight normalizing to 2.5 cents and aluminum returning to historical levels, we'd be around the 20% threshold we guided. The guidance applies to the full year, and if we look at our gross margin progression, it improves towards the end of the year, indicating we will exceed 20% gross margin by then. Alex also mentioned that we are experiencing a year-on-year cost reduction of about 5% to 6%, contributing to incremental margin expansion. When these factors are combined, we comfortably reach the 20% target, and if we include the value of our technology adjusters, we could perform even better. Currently, our contracted average selling prices are steady or slightly increasing, and with the actions we've taken regarding our contracts and technology roadmap, I’m confident we can achieve and even surpass the minimum threshold of 20%. There's still a lot of execution ahead of us, but we have a great opportunity to demonstrate strong gross margin performance moving forward.

Yes, Ben, as you consider the optimal manufacturing capacity, we've always emphasized that it should be driven by demand. Clearly, looking at our current backlog and contracts, as well as the pipeline size, we have the necessary support for growth. In terms of expansion, key drivers include stable policy, demand, positioning manufacturing close to demand, having a technological advantage or a stable technology platform, along with factors like competitive labor, real estate, power markets, and the supply chain. Recently, we've faced challenges with significant volatility in policy, which has been a critical factor. As Mark mentioned in the prepared remarks, we are hopeful following the recent news from Washington. We are still processing the details and remain cautiously optimistic. We are pleased that active discussions are occurring, although there has been considerable change in this area over the past few months. We prefer to stay cautiously optimistic until we see a natural bill signed into law. Evaluating our potential for expansion, it is clear that policy plays a crucial role, supported by the existing backlog and demand. The macro growth of solar in the U.S., Europe, and India indicates significant opportunities for manufacturing expansion.

As a follow-up on the capacity expansion, if the Inflation Reduction Act is passed, can you estimate how many new factories you could potentially establish and the timeframe for that, considering the demand you're observing before the ITC extension? Additionally, regarding the bill, there's the $0.04 per watt CadTel sell credit and the $0.07 per watt module credit. We discussed this last year when it was also relevant, but how much of the credit do you believe you can access? Do you think you can utilize the combined $0.11 or just the $0.04 per watt?

Phil, regarding capacity expansion in the U.S., we estimate it will take about 24 months, possibly a bit less. We're hopeful to see some improvements in supply chain issues we've faced recently, which may allow us to expedite the process. Building a new facility and equipping it comes with significant time considerations. However, we have been collaborating with our vendors in anticipation of this expansion, and we are satisfied with the current timeline for Perrysburg 3 and the plans for our expansion in India. We've communicated to our vendors a timeline for an additional factory within six months after this expansion, potentially exploring more options within the U.S., EU, and India, depending on the circumstances. The EU expansion could proceed somewhat faster because we still have a facility in Eastern Germany that could support additional production. In contrast, expansions in the U.S. and India will have longer timelines due to the ongoing supply chain challenges. Should the Inflation Reduction Act be enacted, we aspire to establish at least one new utility-scale factory and advance our partnership with SunPower for the residential market's tandem product. There is a possibility of adding another U.S. factory as well, but we aim to explore all possible avenues to enhance throughput in our existing operations. Our team has excelled in increasing production capacity at our current facility, so we are examining where additional capital investments could optimize production. Concerning the Inflation Protection Act and the 45X provision, we believe we are entitled to the $0.04 and the $0.07 credits associated with sales. Historically, the legislation's intent has been to ensure that thin film technologies do not fall behind crystalline silicon options. If the current wording is passed, we expect to benefit from the wafer provision as well, which could yield approximately $30 per module based on the size of our Series 6 modules. It is crucial for us to ensure that any finalized legislation does not leave us at a competitive disadvantage and allows us to capture all the benefits available to technologies like crystalline silicon.

Could you just clarify the base ASPs assumption? I think you made a comment on not declining from '22 to '25. And what puts and takes should we kind of expect to that ASP going forward? Thanks.

Yes. So what we said is if you look at what's in the backlog today, we expect the ASPs to be roughly flat going from 2022 out to 2025. If you think about where we are now, and you'll see in the Q coming out, and we've talked about where we were, Q1, Q2. You're somewhere in the range of $0.27 to $0.28 ASPs. And we're saying that on a base level, we expect that to be roughly flat out through the 2022 to 2025 horizon. But remember, as I said in my comments, that base ASP is reflective of effectively today's technology. So, when you look at the puts and takes around the ASP, you've got potential upside to that based on technology adjustments, should we achieve within our technology roadmap things that provide more energy or more value to the customer, and those are built into contracts to a large extent today. So, when you look at the ASP side, you have that other key adjustment. You have to ASP, its protection around sales freight and commodities. So, in the event that commodity prices and sales freight remain elevated relative to the norms that we saw pre-pandemic, typically, the ranges that we assume in our cost structure today, we would have an increased ASP to offset that incremental cost. So, you'd have that adding on as well. So those are the key moving pieces that we see around ASP.

Yes. And I want to just make sure, it's clear because sometimes people want to dismiss, well, if commodities or sales freight normalize, then there won't be any benefit to the ASP adjustors. Completely understand. But what it means is our cost per watt will decline then by the corresponding $0.03 a watt. So, either it will come through as a higher ASP if we stay in an inflated environment that we're in right now or the cost per watt will decline. I think sometimes people are dismissing the ASP as if the realization won't be captured, without understanding that what it drives to is the lower cost per watt. Either way, in my mind, it's going to add about $0.03 of gross margin across our capacity plans that are getting up to 15 or 16 gigawatts. So there's a meaningful benefit one way or the other, either incremental ASP or lower CPW across, call it, 15 or 16 gigawatts production as we move forward.

Following up on that previous line of question, there's been lots of talk about the cost adders and the technology adders. But I'm wondering, is there any sort of apples-to-apples per watt cost reduction roadmap you can talk us through as the technology continues to advance? Because that's, I remember in the past, something you used to communicate about.

We are still on track for our cost per watt reduction target of about 4% to 6%. Despite the challenging inflationary environment this year, we are cutting costs. We haven’t updated our roadmap for further cost reductions recently, but as we enhance our technology, the cost per watt will naturally decline. Additionally, improving efficiency will further lower our cost per watt. We have other opportunities to drive costs down, such as reducing our bill of materials. Looking ahead, I believe we can achieve at least modest single-digit cost reductions over the next few years. The Series 7 product will also contribute to cost reduction due to its design, which includes higher efficiency and improved throughput. The cost per watt is not at its peak and will continue to improve, provided we don’t encounter a significantly worse inflationary situation. We believe we have mitigated most of our exposure to inflation, but there could still be some challenges ahead. Assuming the current stable environment and our ongoing initiatives, we expect continued cost reductions for our modules.

Yes. And Joe, if you think about, as Mark said, a 4% to 6% cost per watt produced number this year, that's the decline. If you go back to the slides that we showed in our Q4 earnings and guidance call, back in end of February, early March, there's a chart in there that shows you the driver of the cost reduction. Those still hold true. If you look through where we have what's the modules, efficiency, throughput and yield, those key drivers to look at this. So, we haven't updated that chart from a new cost perspective, but the same drivers of cost per watt reduction still exist there. We also have on that chart bill of materials. As Mark mentioned, there are bill of material reductions that we would expect in ordinary course. However, we're in an inflationary environment, we also protected against some of the key drivers through the adjustors we have in our contracts. So that's another resource you can look to.

Been a lot of focus around the gross margins and the cadence here. So, I guess, I'll throw my question in the ring as well. The aluminum price, steel pricing environment, also freight, they've all sort of eased a bit recently per your earlier comments. When does it really start to impact the P&L and margins? I know you're talking about a 20% baseline for gross margin when things kind of normalize. And then on top of that, you get some of the tech adders that could take gross margins much higher. But as we think about, let's just say 2023, the cadence, it doesn't appear all of that is necessarily going to normalize. So, fair to assume we're going to see a pretty gradual margin cadence through the rest of this year and into most of next year? And then, with tech adders and some of the new capacity in India and Ohio, the real step-up starts to happen in '24. Just trying to get a sense for how we should budget expectations because there's a lot of moving parts there obviously over the next couple of years for the margin trajectory.

Yes, Brian. So, we said that you're going to see the majority of the benefits come through in '24 onwards. You are going to see some benefit to 2023. If you look through the ASPs, we said those stay relatively flat across that horizon. From a cost per watt perspective, we said we're forecasting that cost per watt reduction this year. You're going to get the benefit of that next year, obviously. From a sales perspective, we do have some protection next year. It's still not every contract, and the amount of protection varies as we had some different flavors of contracts in the early days before we moved to effectively orders today, just a straight pass-through of excess risk to the customer. So you're going to see some incremental protection or benefit from sales freight next year, but really the big push on that you're going to see in 2024. From an adjustor perspective, we said before, the majority of the benefit that technology adjustors you're going to see being out in 2024 and beyond. And then from a commodity price basis, we said on the last call that we first started introducing the aluminum adjusted at that point, the majority of that was 2024 onwards as well. We've also recently started looking at steel as well for our Series 7 product, that will be 2024 onwards as well. So yes, you're going to see a little bit of benefit come through in 2023, but the majority of that is going to come through fully into 2024. You're also going to see the value of growth coming in mostly in 2024. But I would say that if you look at the timing expectation around our Perrysburg 3 factory, you will see some contribution from that and potentially a little bit from the India factory coming through in '23 as well. So, when you're doing your model, you'll get some benefit of growth coming through in 2023 as well.

Could you talk a little bit about the progress in Europe from a perspective of adding capacity and the volume demand? Certainly, there's a major need there. And the two-year time horizon that you've talked about in terms of the incremental capacity on from your vendors. But in terms of site selection, customers wanting to work with you, things like that, the preparations that you would see giving you the confidence to make those decisions. I'm just curious about an update there.

Yes, one of the key points we want to emphasize is the significant growth in our pipeline, particularly regarding both immediate and long-term opportunities in Europe. I recently visited Europe and spoke with various customers who showed considerable demand for collaborating with First Solar, similar to what we've experienced in the U.S. and India. Many are feeling the pressure from a recent major lawsuit involving one of the Tier 1 Chinese suppliers and are seeking reliable partners. In the EU, there is a strong drive to reduce dependence on Russian oil and gas, and they want to avoid transferring that reliance to another potentially adversarial country in their pursuit of solar and climate change objectives. We are currently in extensive discussions with multiple parties, negotiating off-take agreements and working on site selections to determine the most optimal locations for expansion. We have cell sites in Eastern Germany, although the current footprint may not be ideal for a Series 7 product with the desired production capacity. We are also exploring which products would be best suited for the European market, considering options like utility-scale offerings or smaller high-efficiency products suitable for constrained spaces. The Eastern Germany factory appears more viable for accommodating a footprint of that size. Overall, I am optimistic about the opportunities in Europe. It’s a matter of finalizing commitments, contractual obligations, and securing multiyear supply agreements to increase confidence in our manufacturing endeavors within the EU. While we see promising developments, we hope for some progress on the policy front. There are positive initiatives underway, such as restrictions related to CO2 footprint and forced labor, which mirror challenges we face in the U.S. regarding our supply chains that rely on Chinese production. A lot is happening in the EU, which is a crucial market for us, and we are assessing the best ways to serve it.

There are no further questions at this time. This does conclude today's conference call. Thank you very much for joining. You may now disconnect.