First Solar, Inc. Q1 FY2023 Earnings Call

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

Thank you. Good afternoon, everyone, and thank you for joining us. Today, the company issued a press release announcing its first quarter 2023 financial results. A copy of the press release and associated presentation are available on First Solar's website at investor.firstsolar.com. With me today are Mark Widmar, Chief Executive Officer; and Alex Bradley, Chief Financial Officer. Mark will begin by providing a business and strategy update, Alex will then discuss our financial results for the quarter. Following their remarks, we will open the call for questions. Please note this call will include forward-looking statements that involve risks and uncertainties and include risks and uncertainties related to the Inflation Reduction Act of 2022 that could cause actual results to differ materially from management's current expectations. We encourage you to review the safe harbor statements contained in today's press release and presentation for a more complete description. It is now my pleasure to introduce Mark Widmar, Chief Executive Officer. Mark?

Thank you, Richard. Good afternoon, and thank you for joining us today. As we noted on our last earnings call, we entered 2023 in a stronger commercial, operational, and financial position than the previous year, setting the stage for growth and improved profitability in 2023 and beyond. The first quarter of the year reflects this direction as we commission our latest factory in the United States. It started production of our next-generation Series 7 modules. We secured a manufacturing incentive award in India, progressed our technology roadmap with a new cell efficiency record, and continued our strong bookings and ASP momentum. It’s important to emphasize that our point of differentiation from our unique CadTel technology and vertically-integrated manufacturing process to our commitment to responsible solar continue to set First Solar apart from the competition and are the primary enablers of our long-term competitiveness. Beginning on Slide 3, I will share some key highlights from the first quarter. This quarter, we strategically built on our backlog with 4.8 gigawatts of net bookings since our last earnings call at an average ASP of $0.318 per watt, excluding adjusters where applicable. This brings our year-to-date net bookings to 12.1 gigawatts. While at the same time, our total pipeline for future bookings opportunities has grown to 113 gigawatts and includes 73 gigawatts of mid- to late-stage opportunities. From a Series 6 manufacturing perspective, we produced 2.36 gigawatts of product in the first quarter, with an average watt per module of 467, a top bin class of 475 watts and a manufacturing yield of 98%. This solid performance is the result of a relentless focus on manufacturing excellence. Regarding Series 7, the ramp at our third Ohio facility, which began production in January, is progressing well. We produced 170 megawatts in the quarter and recently demonstrated a high-volume manufacturing production capability of up to 10,000 modules per day, which is approximately 60% of nameplate throughput, and achieved a production top bin of 535 watts. Developed in close collaboration with EPCs, structured and component providers, Series 7 reflects First Solar's ethos of competitive differentiation. Responsibly manufactured in America, largely using domestically sourced components, including American made glass and steel, and entirely produced under one roof, it is optimized for the utility scale market and features a large form factor and an innovative new back rail mounting system. This design is expected to deliver improved efficiency, enhanced installation velocity, and unmatched lifetime energy performance for utility scale projects. We are tracking to begin customer shipments as early as June of 2023, and towards that goal, we are pleased to have recently received Series 7 IEC and UL product certifications. From a technology perspective, in Q1, we certified a new world record CadTel cell with a conversion efficiency of 22.3%. Most importantly, this was achieved in our CuRe technology platform, which provides a significantly improved energy profile. In addition, we recently received an award from the U.S. Department of Energy related to our tandem module development. Moving to Slide 4. We are pleased with production progress at our manufacturing and R&D facilities expansions. In India, at our new Series 7 factory in Chennai, final building and facility works are nearly complete, and the factory has been energized. Tool installation is ongoing, and we received our first incent to operate and expect to begin production and ramping activities during the second half of 2023. Once fully ramped, this facility is expected to add 3.54 gigawatts of annual nameplate manufacturing capacity to the fleet. As previously announced, the India facility has also been allocated financial incentives under the Indian government's production-linked incentive program. First Solar was one of only three manufacturers selected to receive the full range of incentives, which are reserved for fully vertically-integrated manufacturing. The incentives are subject to the facility meeting product efficiency and domestic value creation thresholds, which we will evaluate on a quarterly basis beginning in the second quarter of 2026 through 2031. In Ohio, our project to upgrade and expand the annual throughput of our Series 6 factories by an aggregate of 0.70 gigawatts is also advancing. Tools have been ordered and the additional capacity is expected to come online in 2024. In Alabama, our fourth U.S. factory has received its environmental permits and the foundation of early factory construction is underway. Tools have been ordered, and the facility remains on schedule for completion by the end of 2024, with commercial operations ramping through 2025. When fully operational, these expansions in Ohio and Alabama are expected to increase our annual nameplate capacity in the U.S. to over 10 gigawatts by 2025. Our dedicated R&D facility has also commenced construction and will feature a high-tech pilot manufacturing line, allowing for the production of full-size prototypes of thin film and tandem PV modules, and will provide a means to optimize our technology roadmap with significantly less disruption to our commercial manufacturing lines. This facility is expected to commence operations in 2024. Looking forward, we continue to evaluate the opportunity for further investments in expanding our production capabilities to best serve our key markets. Moving to Slide 5. I would first like to draw your attention to a change in the way we present our contract backlog. In the past, we have shown expected module shipments. Going forward, we will show expected module volumes sold, which takes into account the timing of revenue recognition and is aligned with volumes sold in contracts with customers for future sales disclosures represented in the 10-K and 10-Q quarterly filings. As of December 31, 2022, our contracted backlog totaled 61.4 gigawatts, with an aggregate value of $17.7 billion. Through March 31, 2023, we entered into an additional 9.9 gigawatts of contracts and recognized 1.9 gigawatts of volume sold, resulting in a total backlog of 69.4 gigawatts, with an aggregate value of $20.4 billion, which implies approximately $0.293 per watt, an increase of approximately $0.005 per watt from the end of the prior quarter. Since the end of the first quarter, we've entered into an additional 2.2 gigawatts of contracts, bringing our total year-to-date backlog to a record 71.6 gigawatts. During the first quarter, certain amendments to existing contracts associated with commitments to provide U.S. manufactured product, as well as commitments to supply domestically produced Series 7 modules in place of Series 6, increased our contracted revenue backlog by $35 million across 8.8 gigawatts or approximately $0.045 per watt. Since the second quarter of 2022 and up to the end of Q1 2023, cumulative amendments to existing contracts associated with commitments to provide U.S. manufactured product, as well as commitments to supply Series 7 versus Series 6 modules, increased our contracted revenue backlog by $157 million across 4.1 gigawatts or approximately $0.039 per watt. Now we are currently processing additional amendments associated with providing U.S. manufactured products, which will be reflected in our Q2 contracted revenue backlog when reported. As we previously addressed, a substantial portion of our overall backlog includes the opportunity to increase the base ASP through our application of adjusters. We are able to realize achievements within our technology roadmap as of the required timing for delivery of the product. As of the end of the first quarter, we had approximately 34.5 gigawatts of contracted volume with these adjusters, which, if fully utilized or realized, could result in additional revenue of up to approximately $0.7 billion or approximately $0.02 per watt, the majority of which will be recognized between 2025 and 2027. As previously discussed, this amount does not include potential adjustments for the ultimate bin delivered to the customer, which may adjust ASP under the sales contract upward or downward. In addition, this amount also does not include potential adjustments for increases in sales rate or applicable aluminum or steel commodity price changes. Finally, this does not include potential price adjustments associated with the IT and domestic contract provision under the recently enacted Inflation Reduction Act. As a reminder, not all contracts include every adjuster described here. To the extent that such adjusters are not included in a contract, we believe that the baseline ASP reflects an appropriate risk-reward profile. And while there can be no assurance that we'll realize adjusters in those contracts when they are presented, to the extent that we are successful in doing so, we could expect a meaningful benefit to our current contracted backlog ASP. Our year-to-date contracted backlog extends into 2029. Excluding India, we are now sold out through 2026. Regarding future deliveries. As a reminder, our contracts are structured as firm purchase commitments. In limited circumstances, often related to customer regulatory requirements or a portion of a large multiyear framework commitments, our contracts may include a termination for convenience provision, which generally requires substantial advanced notice to invoke and features a contractually required termination payment to us. This fee is generally set at a substantial percentage of the contract value and is backed up by some form of security. Termination for convenience provisions apply to approximately one-tenth of our entire contracted backlog, with the majority of the applicable megawatts scheduled for deliveries between 2024 and 2025. Should the customer fail to perform under our contract, the ensuing default would, in addition to their incurring potential dispute resolution and project financing complications, entitle us to remedies that could include the receipt of the termination payment. That said, we and our customers, including many of the largest, most respected developers and utilities in the industry, have long taken a relationship-based versus transactional approach to contracts. As a result, this year alone, we have booked multi-gigawatt deals with key customers, including EDP Renewables, Lightsource BP, and Leeward Renewable Energy. We signed a two-year, two-gigawatt order announced prior to the call, further expanding our long-standing relationship with these partners. In choosing to contract with First Solar, our customers value and prioritize more than just the module ASP, including contract integrity, product availability, uncertainty, and an ethical and transparent supply chain. For First Solar, this approach provides the opportunity to partner with customers who share our values, and also provides greater offtake visibility, which helps support our long-term capacity expansion plans. There’s a lot of interest, which has been validating the path through multiple pricing and supply-demand cycles in this industry, and informs and guides our commercial strategy of continuing to enter into long-term multi-year contracts. As reflected in Slide 6, our pipeline of potential bookings remains robust, with total bookings opportunities of 112.7 gigawatts, an increase of approximately 20 gigawatts since the previous call. Our mid- to late-stage opportunity increased by approximately 15 gigawatts to 72.6 gigawatts, and includes 65.6 gigawatts in North America, 4 gigawatts in India, 2.7 gigawatts in the EU, and 0.3 gigawatts across all other geographies. Included within our mid- to late-stage pipelines are 4.7 gigawatts of opportunities that are contracts subject to conditions precedent, which include 1.9 gigawatts in India. As a reminder, signed contracts in India will not be recognized as bookings until we have received full security against the offtake. Turning to Slide 7. Our research and development efforts have continued to be the driving force in the enhancement of our technology. In Q1, we established a new world record research conversion efficiency for CadTel, achieving 22.3% efficiency, as certified by the United States Department of Energy's National Renewable Energy Laboratory. The research cell was constructed at our California technology center. Notably, this new record is based on our CuRe technology, which in addition to increased efficiency has meaningful lifetime energy improvements in real-world conditions, driven by a superior temperature coefficient and best-in-class cell stability. While maintaining First Solar's industry-leading quality and reliability, our CuRe technology provides a up to 6% increase in expected lifetime energy relative to our previous record cell technology. Additionally, the U.S. Department of Energy recently provided two grants associated with our industry-leading point of differentiation efforts. These include a $7.3 million award to First Solar to support the development of a CadTel tandem module for the residential rooftop segment and a $1.3 million grant to the University of Kansas, which is collaborating with First Solar and the Idaho National Laboratory to develop a low-cost next-generation method to optimize solar module recycling. Before turning the call over to Alex, I would like to take a moment to discuss the policy environment in our key markets. In the United States, with respect to the Inflation Reduction Act, we continue to await guidance related to the domestic content bonus provision. We believe it is imperative that the United States Treasury Department issues guidance consistent with the congressional intent of the IRA, which is to nurture true domestic solar manufacturing, ensuring a robust domestic supply chain for American-made solar modules. It is critical that the guidance recognizes that to qualify for the bonus, at a minimum, the manufacturing of solar cells must occur in the United States. This is not only consistent with the clear objective of the IRA, but also supported by the legal framework under the Buy America Act Regulations expressly referenced by Congress in the enacted law. While the intent of the IRA and regulations are clear, it is unfortunate that sections of the industry are advocating that Treasury grant some form of waiver that would allow bonus credits for solar panels assembled using subcomponents, such as solar cells. We believe that any such waiver runs contrary to the letter of the law and congressional intent. The purpose of the bonus credit is to incentivize domestic manufacturing and the creation of a domestic solar supply chain and not to create an entitlement simply to support foreign manufacturers. With regards to international policy, we are seeing some progress in the EU, which has released its new state aid guidelines in the form of the temporary prices and transition framework, and a draft net zero law. The stated guidelines create the framework for allowing EU member states, under certain conditions, to match aid received by clean energy technology manufacturers elsewhere, including under the IRA. The net zero law will establish new ambitions to meet regional needs with domestically produced content, prioritize net zero projects and technologies, and address existing issues such as permitting. As previously mentioned, policy, among other considerations, continues to influence our evaluation of potential additional manufacturing expansion. Such expansions would require further clarity including in the U.S., satisfactory Treasury guidance with respect to domestic content and in Europe, further clarity on EU member states incentives for domestic manufacturing. I'll now turn the call over to Alex, who will discuss our Q1 results.

Thanks, Mark. Moving to Slide 8, I'll present our financial results for the first quarter. In the first quarter, we achieved net sales of $548 million, down $454 million from the fourth quarter. This decline in net sales was primarily due to a planned shift in the timing of module sales, as we increased shipments to our distribution centers to reduce logistics costs and align future customer deliveries with contractual schedules, alongside the completion of our Luz del Norte project sale in the previous quarter. However, these declines were somewhat mitigated by an anticipated rise in module average selling prices and certain earn-outs from legacy system projects. Our gross margin was 20% in the first quarter compared to previous figures. This increase was mainly due to expected benefits from the Inflation Reduction Act amounting to $70 million and a lower sales rate, although this was partially offset by $19 million in ramp costs associated with the new Series 7 factory in Ireland. While logistics costs dropped during the quarter, they remain high in comparison to pre-pandemic levels. These costs reduced our gross margin by 15 percentage points. Looking towards the second half of the year, we anticipate a decrease in logistics costs. As detailed in our 10-Q and most recent 10-K, the Inflation Reduction Act offers specific tax benefits for solar modules and parts produced in the United States and sold to third parties. The benefit for components includes $12 per square meter for a PV wafer, $0.04 per watt for a PV cell, and $0.07 per watt for a PV module. Given the current configuration of our modules, we project a benefit of roughly $0.17 per watt for each module sold. We account for these benefits as a reduction in the cost of sales during the period the modules are sold. In the first quarter, 158 megawatts of U.S.-produced volume sold were made in 2022, which did not qualify for these benefits. Our SG&A and R&D expenses amounted to $75 million in the first quarter, up about $1 million from the fourth quarter of 2022. Production startup expenses, included in operating expenses, totaled $19 million in the first quarter, down approximately $13 million from the previous quarter, as we commenced the plant qualification process for our new Series 7 factory in Ohio. Our operating income for the first quarter was $18 million, which included depreciation, amortization, and accretion of $69 million, production startup expenses of $19 million, and share-based compensation of $7 million. Regarding other income and expense, our interest income for the first quarter rose by $8 million due to higher interest rates and cash deposits. Additionally, other income in the fourth quarter included a $30 million gain related to the sale of our Luz del Norte project, with lenders forgiving a portion of the loan balance as part of that deal. We recognized a tax benefit of $7 million in the first quarter, compared to a tax expense of $1 million in the previous quarter. The increase in tax expense was due to excess tax benefits linked to share-based compensation awards divested during the period, although this was partially offset by higher pretax income. As a result of these factors, our diluted earnings per share for the first quarter was $0.40, contrasting with a net loss per share of $0.07 in the fourth quarter. Next on Slide 9 to discuss select balance sheet items and summary cash flow information. Our cash, cash equivalents, restricted cash, restricted cash equivalents, and marketable securities ended the quarter at $2.3 billion, down from $2.6 billion at the end of the prior quarter. This decrease was primarily driven by capital expenditures associated with our new plants in Ohio, Alabama, and India, and payments for operating expenses, partially offset by a drawdown in our India credit facility and advanced payments received on future module sales. As relates to advance payments, nearly all our contracts in our backlog at the time of booking generally require payment security and cash deposits, bank guarantees, surety bonds, letters of credit, or parent guarantees targeting up to 20% of the contract value. During 2022, as we started contracting further into the future, we generally started requiring a higher percentage of cash deposits. Reflected in our consolidated balance sheet as deferred revenue, these deposits totaled approximately $1.3 billion as of quarter-end and are providing a significant portion of the financial resources required for our existing expansion efforts. Total debt at the end of the first quarter was $320 million, an increase of $136 million from the fourth quarter as a result of the low drawdown on our credit facility related to the development and construction of a manufacturing facility in India. Our net cash position decreased by approximately $0.4 billion to $2 billion as a result of the aforementioned factors. Cash flow used in operations was $35 million in the first quarter. Capital expenditures were $371 million during the period. Given the recent uncertainty in the banking sector, I would like to note that our investment policy and approach to managing liquidity is focused on preservation of capital, the immediate availability of adequate liquidity, followed by return on capital. Continuing this policy, we place our investments with a group of high-quality financial institutions focused on creditworthiness and diversification. We do not have cash invested in regional or super-regional banks. In the quarter, we increased our holdings in U.S. treasuries. In addition, we continue to evaluate putting in place our revolving credit facility to support jurisdictional cash management as well as provide short-term optionality. Turning to Slide 9, our full year 2023 guidance is unchanged from previous earnings guidance calls in late February. Let's reiterate from an earnings cadence perspective. As previously noted on our February earnings guidance call, we anticipate our earnings profile will be higher in the second half of the year due to contractual delivery schedules, timing of the first sales of our Series 7 products and the timing of recognition of Section 45X benefits, driven by both the timing of volumes sold as well as the inventory lag when a product sold in the early part of 2023 may have been manufactured in 2022. For Series 6, following the sale of 158 megawatts in Q1 that was not eligible for the Section 45X tax benefit, we have approximately 50 megawatts of U.S. manufactured products remaining in the inventory that is not eligible for Section 45X, substantially all of which is expected to be sold in the second quarter. Regarding Series 7, we expect to begin shipping products from our third Perrysburg factory in June, and therefore, expect the revenue and Section 45X benefit recognition in the second half of the year. From a volume perspective, we expect first half volumes sold, including 1.9 gigawatts of sales in Q1, to total 4.3 to 4.5 gigawatts, while second half volumes sold will be between 7.3 and 8 gigawatts. From a Section 45X perspective, based on the aforementioned factors, we expect to recognize approximately 25% of our full year guidance in the first half of the year and approximately 75% in the second half. As it relates to our longer-term outlook beyond 2023, we plan to hold an Analyst Day in our Ohio campus on September 7, 2023, which will include a live broadcast. So on Slide 10, I'll summarize the key messages from today's call. Demand continues to be robust with 12.1 gigawatts of net bookings year-to-date, driven by 4.8 gigawatts of net bookings since our last earnings call, with an average ASP of $0.318, leading to a record contracted backlog of 71.6 gigawatts. Our continued focus on manufacturing technology excellence resulted in a record quarterly production of 2.5 gigawatts, and our EMEA, Ohio, Alabama expansions remain on schedule. We also achieved a record cash sale conversion efficiency of 22.3% based on our CuRe technology platform. Financially, with earnings of $0.40 per share, we ended the quarter with a gross cash balance of $2.3 billion, or $2 billion net of debt. We are maintaining our 2023 guidance in full, including full earnings diluted share of $7 to $8. With that, we conclude our prepared remarks and open the call for questions.

We will now go to Philip Shen from ROTH MKM.

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

Yes, I think from '26 and '27, I think we're something approaching combined close to 40% of that current supply plan being sold right now. But obviously, a little bit more of that is in '27 and '28, but I think we'll make good progress on both of those years. I don't really want to commit to a specific date when we would sell out '27 because we'll do '27 the same way that we did with '26. So customers who want '27 volume are going to want to tie that into multiple years. So we're going to leverage that as best we can across the balance of the decade. So I don't think that’s important how quickly we sell that, but it's how we use that '27 volume strategically to create more multi-year agreements and visibility as we go through the balance of the decade. As it relates to bookings, yes, I mean, look, we had 60 days basically since the last earnings call, and so you would expect from that reason it's always going to trend down. But the underlying demand, which is reflected in our total pipeline as well as our mid- to late-stage pipeline as we indicated in our prepared remarks, has continued to grow. So that's extremely encouraging. We have a number of very large deals with strategic counterparties that we're still working through. And if we are successful in closing one or two of those in the second quarter, we could see a very strong result for the second quarter. Plus if we can close more than a handful of those now through the balance of the year, I can continue to see bookings carry forward into Q3 and Q4 being reasonably strong. But they indicated that we're longer dated in some of those commitments, so we'll have to see how it plays out. ASP-wise, I mean the great thing about having such a strong position where we are right now, is we can be patient and book deals that make sense. And there are certain counterparties that we've had ongoing conversation with where we just can’t get to a price that is agreeable. Their expectation relative to ours is that there is a gap. So we’ll continue to see if we can close those gaps. But if not, there's enough opportunity with other partners out there that we think we can continue to achieve strong ASPs. We have said, I want to make sure I’m clear that as we book the India volume, we've indicated before that India volume will have a lower ASP but still a very attractive gross margin on a cents per watt basis as well as on a percentage basis. Plus, now that we have the opportunity for the production-linked incentive, it will carry forward into making those opportunities more accretive if we’re able to realize that benefit. So ASP trends will continue to work through them in a very patient manner for the U.S. We're pretty optimistic with where we are right now, and we'll continue to see how the balance of the year plays out. And also, as we indicated, we have more opportunity to capture technology adders. We also have the opportunity to capture the domestic content in Series 7 uplifts that are already embedded in our contracts. And I think the team did a great job in the first quarter here, realizing another $35 million of ASP uplift because of that. And as I indicated, we have a number of other deals that we're working through right now and will then be captured and reported in our next quarterly call.

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

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

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

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

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

Yes. So I think on the PLI, we're still working through how an accounting will work. It's a return of capital of about 24%, I believe, against the facility cost that's going to take place over 5 to 6 years. We will provide updates on the accounting as we work through that. I'll leave Mark to talk about the expansion. But if I just look through where we are in terms of your question on production versus sold volume, I think this is something that creates confusion around some of the analyst reports potentially around timing. From a production perspective, we will be growing production across the year, but it's not significantly back-ended in 2023. However, from a sold perspective, it is fairly back-ended. We guided to a midpoint of around 12 gigawatts of sold volume this year. We sold 1.9 in Q1. In the remarks just now, we said that we're guiding for a first half volume of 4.3 to 4.5 at the midpoint, and that leads you to 3.5 gigawatts in the second quarter, and then leads to a second half number of about 7.6. You can see this total volume is roughly 1/3 in the first half and 2/3 in the second half of the year. If you think about why that is, it's a function partly of timing of customer demand when customers are requiring shipments. There's also a function of our Series 7 production beginning in Q1 continuing through Q2, but we're not beginning to ship that product until the back end of Q2. Therefore, you won't see the timing of revenue recognition to that come into Q3 and Q4. So that's largely what's pushing that sold volume out. And then, of course, you see a similar dynamic in terms of the Inflation Reduction Act recognition.

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

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

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

Yes. Regarding bookings and the impact of the ASP sequentially, there's a good mix with about 5 gigawatts mainly from four deals, including two we announced, EDPR and Leeward. It's important to clarify that not all of the volume from Leeward is fully booked due to a provision allowing for flexibility in the bookings. A portion of the Leeward volume is reflected in contracts subject to conditions, so not all of the 2 gigawatts is included in the 4.8 gigawatts booked. These bookings show a healthy mix of international and domestic projects, and between Series 6 and Series 7. The ASPs for these different variants will vary, particularly since international pricing is generally lower than domestic due to advantages in the U.S. market, including the domestic ITC bonus. Some volume is also going to Europe at lower ASPs. Overall, the results are strong, but the volume is lower than in the previous quarter, and we usually see higher volumes with larger agreements that potentially allow for more aggressive ASPs. I wouldn't pinpoint the increase to any single factor, but we're pleased with the market opportunities and the ASPs we are securing. On capacity expansion, the main factor at this point is clarity on policy. If the domestic content rules align with the intent of the IRA, requiring manufacturable components in the U.S. for qualification, that will significantly influence new capacity decisions. If the ruling is only for module assembly, we might need to rethink our approach for the U.S. market, which may not necessarily involve building a new factory but could involve establishing a finishing line in the U.S. The interpretation from Treasury, DOE, and the White House seems to favor module assembly rather than full manufacturing, which could lead us to reevaluate our investments. Policy is crucial in this context, and if the direction doesn’t align with long-term strategic interests, we will reassess our capital deployment accordingly. The IRA presents a unique opportunity for the U.S. to develop a lasting supply chain that fosters innovation and establishes the country as a leader in solar and renewable energy technologies. We hope the outcome aligns with this vision, as an alternative approach would compel us to re-evaluate our strategies.

Our next question will come from Julien Dumoulin-Smith, Bank of America.

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

Our contracts are primarily structured as fixed-price agreements. We want to clarify the termination for convenience aspect. Currently, only one-tenth of our backlog, which is around 70 gigawatts, includes these provisions. Most of this backlog is scheduled for the 2024 to 2025 period, and we believe the risk associated with these bookings is relatively low, considering module supply during that time and the typical timeline for plant design and financing. As we look at contracts extending beyond 2025, they continue to follow the firm fixed-price model we discussed, with adjustments for factors like bin class, as well as variations in aluminum and steel pricing, and sales rate adjustments. These measures largely protect us from risks that we think are mainly managed by our customers.

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

Ben Kallo from Baird has the next question.

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

Yes, when considering the global capacity and the potential for oversupply, it’s important to assess how this oversupply relates to financial outcomes. There are various opinions on the potential for global growth as we near the end of this decade. I believe that certain demand drivers, such as green hydrogen, are often underestimated. However, we need to separate that from the specific markets that can effectively utilize it. For instance, in India, trade and industrial policies suggest a focus on domestic markets. Engaging with India for imports, while navigating tariffs and securing a list of approved module manufacturers, presents significant challenges. Thus, meeting the demand in India will have to be through local production. If polysilicon capacity is not increasing in India, it becomes irrelevant for that market. Similar situations can be observed in the U.S. as well. Although there is new wafer capacity being introduced in Southeast Asia, the polysilicon supply chains that support this growth will likely not derive from Chinese sources, adding complexity to pricing. Many of the increases in capacity are happening within China, as seen in announcements regarding capacity expansions. It's essential to analyze what parts of the supply chain are capable of serving the U.S. market since we anticipate strong demand here. Our customers are aware of this. Regarding hydrogen, its development hinges on renewable energy sources like solar. The initial steps require converting sunlight into electricity, and when considering the capital expenditure for solar in relation to the overall cost of hydrogen projects and electrolyzers, it’s relatively minor. Developers of these long-term projects, which rely on solar modules, tend to shy away from risk. This drives them to seek contracts with reliable partners to minimize uncertainties. We are indeed witnessing many discussions around this. Additionally, we are increasing our partnerships with utilities that prioritize their image and integrity, avoiding any association with concerns over labor practices, trade issues, or geopolitical tensions with China. They are more inclined to engage with First Solar due to our trusted status. The same goes for technology companies with significant energy requirements who want to mitigate risks related to module delivery for their projects. Various aspects contribute to our competitive advantage, aligning with our commitment to responsible solar practices and upholding our agreements with clients. Reflecting on our achievements in 2022, it's clear that First Solar modules were predominant in utility-scale projects executed that year, supported by long-term partnerships with clients like Lightsource BP, Leeward, and EDPR.

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

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

Yes. Supply chain expansion, I think, Colin, you referenced glass in particular, but at the end of the day, the module is two sheets of glass and back rail or frame of some type, which has a little bit more steel. Glass is critical. We recently made a joint announcement with a supplier around a factory that they are now going to start up to serve our glass needs, a factory that was idle in Pennsylvania, which will now start up and provide cover glass to us. One of the things that we're doing is diversifying our supply chain from a glass standpoint, which is really important for us. We're also in conversations for coated glass, substrate glass. So we're trying to broaden our reach and engagement. What's also nice about this is some of those partners we are working with on glass are looking at solar as a strategic market they want to be a part of, which gives us a great opportunity to leverage that with them to enable their strategic intent coupled with ours. I'm more optimistic about our supply chain now than I was 6, 9 months ago due to the work our team has done to enable that supply chain from a glass standpoint. Size of the projects, generally larger. We're not really seeing many projects in the 40 to 60 megawatts range. Most projects that we're targeting with our customers are all in the 100 megawatts and generally getting larger. As you start getting into the hydrogen space, which we're beginning to see some opportunities there, those are 300, 400, 500-megawatt type of projects. We’ll continue to grow at least as that evolves beyond just smaller opportunities to full-scale hydrogen projects that are product finance. Those projects will be large, which I believe the demand inflection point on hydrogen probably hasn't been fully appreciated by most forecasts.

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