Earnings Call Transcript
First Solar, Inc. (FSLR)
Earnings Call Transcript - FSLR Q4 2021
Operator, Operator
Good afternoon everyone and welcome to First Solar’s Fourth Quarter 2021 Earnings Call. This call is being webcast live on the Investors Section of First Solar’s website. At this time, all participants are in a listen-only mode. As a reminder, today’s call is being recorded. I would now like to turn the call over to Mitch Ennis from First Solar Investor Relations. Mr. Ennis, you may begin.
Mitch Ennis, Investor Relations
Thank you. Good afternoon everyone and thank you for joining us. Today the company issued a press release announcing its fourth quarter and full year 2021 financial results as well as its guidance for 2022. A copy of the press release and associated presentation are available on First Solar’s website. With me today are Mark Widmar, Chief Executive Officer; and Alex Bradley, Chief Financial Officer. Mark will begin by providing a business update. Alex will then discuss our financial results for the fourth quarter and full year 2021. Following his remarks, Mark will provide a business and strategy outlook. Alex will then discuss our financial guidance for 2022. 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 including among other risks and uncertainties the severity and duration of the effects of the COVID-19 pandemic. We encourage you to review the safe harbor statements contained in today’s press release and presentation for a more complete description. It is now my pleasure to introduce Mark Widmar, Chief Executive Officer. Mark?
Mark Widmar, CEO
Thank you, Mitch. Good afternoon and thank you for joining us today. I would like to begin by expressing my gratitude to the entire First Solar team for their hard work and perseverance in a year where much of the solar manufacturing industry faced supply chain, logistics, cost, and pandemic-related challenges. Despite these dynamics, we have continued to scale our manufacturing capacity and adapt our business model in a constantly evolving market. Through our points of differentiation, which include our cad-tel thin-film module technology, a vertically integrated continuous manufacturing process, a strong balance sheet, and a commitment to the principles of responsible solar, we have created a growth-oriented business model, which we believe positions us to be successful over the long term. While Alex will provide a more comprehensive overview of our 2021 financial results, I would like to highlight that our full year EPS results of $4.38 per diluted share came in above the midpoint of the guidance range we provided at this time during our third quarter earnings call. Of note, this EPS result, despite an unprecedented challenging freight environment, is solidly within the original guidance range we provided last February. Beginning on slide three, I’ll highlight some of our key 2021 accomplishments, which we believe positions us for sustainable growth. To begin, we had an excellent year from a commercial perspective securing a record 17.5 gigawatts of net bookings in 2021, more than double our prior annual record. This momentum has carried into 2022 with 4.8 gigawatts of net bookings year-to-date, which brings our total since the previous earnings call to 11.8 gigawatts. As we secure this very significant volume for delivery into the future, we have been employing a contracting strategy which enables our customers to benefit from the evolution of our product and technology platform, while also partially de-risking our position around sales freight. I will discuss this approach later in the call. We produced 7.9 gigawatts in 2021, delivering against our near-term commitments, despite pandemic-related challenges. Moreover, we reduced our cost per watt produced by 6% between the end of 2020 and 2021, despite inflationary pressures and rising commodity costs, and as a result of COVID-19, the inability to implement as planned several module cost reduction programs. Expansion has been an important theme in 2021. As we set the foundation to reach approximately 16 gigawatts of capacity in 2024, we added our sixth Series 6 factory, our second factory in Malaysia in early 2021, announced plans for new factories to produce our next generation of solar panels, which we are calling Series 7 in India and Ohio. As a reminder, the two Series 7 factories are expected to come online in 2023 and combined with their benefit of locating supply near to demand, reducing the cost of sales freight, are expected to increase gross profit per watt by approximately $0.01 to $0.03 relative to our existing Series 6 fleet. On the technology front, we increased our top Series 6 production bin to 465 watts, which represents a 21% increase year-over-year as in line with our guidance provided last February. We reduced our 30-year warranted power output degradation rate from 0.5% to 0.3% per year. This meaningful improvement can result in the module yielding up to 4.4% more energy on a lifecycle basis. And finally, we completed the sale of our US project development and North American O&M businesses. In summary, each of these achievements is the result of our intent to focus on our greatest competitive advantage, which includes our differentiated technology and manufacturing process. Turning to Slide 4, I will next discuss our most recent shipments and bookings in greater detail. We shipped approximately 2.1 gigawatts and 7.7 gigawatts for the fourth quarter and full year 2021 respectively, which was within but towards the lower end of our guidance range that we provided during the Q3 earnings call. As a reminder, we generally define shipment as when the delivery process to a customer commences and the module leaves one of our facilities, whereas revenue recognition or volume sold occurs upon the transfer of control of the modules to the customer, which is commonly upon the arrival at the destination port of the project site. Now, extended transit time due to container availability constraints contributed to our full year 2021 shipments being towards the lower end of our guidance range. The global freight market continues to experience record levels of scheduled delays and reliability issues, which have worsened since the previous earnings call. Due to these challenges, we ended the year with 1.2 gigawatts of inventory on hand and 675 megawatts of shipments in transit not recognized as revenue. While the volume in transit declined quarter-over-quarter, it was meaningfully above the trailing 12-quarter average. Several logistic challenges trended unfavorably in Q4. Firstly, total transit times for transoceanic freight increased by a factor of weeks between Q3 and Q4, reaching levels nearly double historic norms. Secondly, congestion continues to be challenging at US ports, which is further exacerbated in advance of the holiday season. Thirdly, reliability was a significant issue as three in ten planned sailings were canceled around the turn of the year. Finally, over the road trucking is constrained from a capacity perspective with load-to-truck ratios at the highest level in several years. In summary, we are experiencing a two-front impact related to freight in terms of both higher costs and worse carrier performance. With regard to bookings, momentum has accelerated with 11.8 gigawatts of net bookings since our November earnings call. We continue to see an increase in multi-year module sale agreements, driven by our customers' need for certainty in terms of the technology they’re investing in and the suppliers’ integrity and ethics. Representative of this, we have executed an agreement with our highly valued long-term partner SB Energy to supply 1.5 gigawatts of deployment in projects in 2023, 2024, and 2025. As we account for shipments of approximately 2.1 gigawatts during the fourth quarter, our future expected shipments, which extend into 2025, are 26.2 gigawatts, including our year-to-date bookings; they’re sold out for 2022 and have 10.7 gigawatts, 3.4 gigawatts, and 2.4 gigawatts for planned deliveries in 2023, 2024, and 2025 respectively. Next, I would like to provide an update on our project development and O&M platform in Japan. Today, our remaining offerings outside of our core module business include project development in Japan, O&M outside of North America, and our continued ownership of certain power-generating assets. Of these remaining businesses, our Japan platform is the most prominent in terms of perspective, scale, and profitability. In late 2021, we received an unsolicited offer to acquire our Japan project development and O&M platform. We believe that a potential purchase could stretch our strategy to scale a leading solar platform in Japan, coupled with the participation of complementary asset classes that could unlock the full potential of our Japan platform. Accordingly, we are in advanced stage negotiations to sell our Japan project development and O&M platform. While there is no certainty that we will execute a definitive agreement with this counterparty, we believe that the contemplated transaction value is compelling; though, if we do not complete this transaction, we expect to either continue our approach of selling down our contracts or projects over time, or consider an alternative buyer for the platform. And I’ll turn the call over to Alex, who will discuss our Q4 and full year 2021 results. Alex?
Alex Bradley, CFO
Thanks Mark. And before discussing our financial results for the quarter and full year 2021, I’ll first provide an update on our segment reporting. With the potential sale of our Japan project development and O&M platform, the revenue and margin opportunities outside of our core modules business lie largely with a relatively small pool of existing O&M contracts outside of Japan in North America, power-generating assets from projects that we previously developed, and any legacy obligations as a result of our prior systems activities. Accordingly, we’ve changed our reportable segments to align with our internal reporting structure and long-term strategic plan. Going forward, our module business will represent our only reportable segment but for comparative purposes, the prospective module segment is fully comparable to prior periods. Starting on Slide 5, I’ll cover the income statement highlights for the first quarter and full year 2021, which was presented in this manner. Net sales in the fourth quarter were $907 million, an increase of $324 million compared to the prior quarter. This was primarily a result of the sale of three projects in Japan and increased module volume sold in Q4. For the full year 2021, net sales were $2.9 billion compared to $2.7 billion in 2020. Relative to our guidance expectations, net sales were within but towards the lower end of our guidance range due to delays in module sales and revenue recognition, as a result of the aforementioned freight and logistics challenges. Gross margin was 27% in the fourth quarter versus 21% in the third quarter. For the full year 2021, gross margin was 25%, which is unchanged from the prior year. 2021 guidance assumed the completion of two project sales in Japan. The results could be attributed to three project sales in Q4; our Q4 gross profit for our residual business operations was $102 million, approximately $25 million above the high end of our guidance range for Q4 and full year 2021. Module segment gross margin was 21% in the fourth quarter, which is unchanged from the prior quarter. For the full year 2021, our module segment gross profit came in below the low end of our guidance range by approximately $12 million. Additionally, the full-year 2021 module segment gross margin of 20% was down 5 percentage points from 25% in 2020. This was due to several items. Firstly, sales freight continued to adversely impact financial results, reducing gross margin by 6 percentage points in 2020, 11 percentage points for the full year 2021, and 13 percentage points in Q4 of 2021. Note as a reminder, many of our module peers report freight costs as a separate operating expense. For comparison purposes, we encourage you to consider this factor when benchmarking our module gross margin percent relative to our peers. Secondly, 2021 volumes fell below our full year expectations due to the aforementioned ocean freight reliability issues, port congestion, and over-the-road trucking capacity constraints. The year-end 2021 modules in transit number of 675 megawatts remains above historic norms. Thirdly, factory upgrades in 2021 resulted in higher downtime and underutilization, leading to lower production. The full year 2021 ramp and underutilization-related expenses of $19 million accounted for 1 percentage point of gross margin. Finally, we reduced our cost per watt produced by 6% between the end of 2020 and 2021. We faced cost per watt produced headwinds in 2021 as a result of higher inbound freight and other costs. In light of the circumstances, although the module segment gross profit and gross margin came in below 2021 expectations, we are pleased with how we navigated the current environment and delivered solid module segment performance. SG&A, R&D, and production staff expenses total $73 million in the fourth quarter, an increase of approximately $1 million relative to the third quarter. This increase was primarily driven by a $1 million increase in production staff expense from the addition of our third factory in Ohio, and a $4 million increase in R&D expense predominately related to CuRe testing, which will be partially offset by a payment charge related to a certain development project that occurred in the prior period. SG&A, R&D, and production staff expenses totaled $290 million in 2021 versus $357 million in 2020. Overall, we’re pleased with the operating expense results of $290 million, which was within our full year guidance range of $285 million to $300 million, and represents a significant year-over-year reduction. Operating income was $173 million in Q4 and $597 million for the full year 2021. Income tax expense was $103 million for the full year 2021. Fourth quarter earnings per share was $1.23, compared to $0.42 in the prior quarter. For the full year 2021, earnings per share was $4.38 compared to $3.73 in 2020. Our 2021 EPS result came in above the midpoint of the guidance range we provided on the third quarter earnings call and is also within the original range we provided last February. Although several unexpected challenges and benefits we faced last year, our overall performance reflects the strength of our business model and ability to navigate a challenging environment over the course of the year.
Mark Widmar, CEO
So in the Slide 6, our cash and cash equivalents, restricted cash, and marketable securities balance at year-end was $1.8 billion, a decrease of $109 million from the prior quarter. Our year-end net cash position, which includes cash and cash equivalents, restricted cash, marketable securities, less debt, was $1.6 billion, a decrease of $71 million in the prior quarter. Our net cash balance is higher than our guidance range due to lower than expected project spend on Japanese development projects and the timing of cash payments for capital expenditures that were delayed in 2022. Cash flows for operations was $238 million in 2021 versus $37 million in 2020. Capital expenditures were $195 million in the fourth quarter compared to $165 million in the third quarter, and CapEx was $540 million in 2021 compared to $417 million in 2020. With that, I will turn the call back to Mark to provide a business and strategy update. Thank you, Alex. Turning to slide seven, I would like to begin by providing an update on our CuRe program. Over five years ago, we announced the acceleration of our Series 6 transition, which transformed our manufacturing process and significantly increased our module wattage. While the outcome of the Series 6 program has been a great success, as reflected by our record 22 gigawatt backlog as of the end of 2021, it is easy to lose sight of the initial challenges we faced when scaling high volume manufacturing with respect to module wattage, throughput, and manufacturing yield. Through persistence, resilience, and ingenuity, our manufacturing associates methodically resolved these challenges, enabling Series 6 to be the success it is today. Looking forward, CuRe represents an anticipated enhancement to our module performance, which is expected to increase efficiency and lifecycle energy. On the November earnings call, we indicated that we had demonstrated CuRe’s performance entitlements in a lab setting and are working to realize the entitlement in high volume manufacturing conditions. As a result, we have revised our integration schedule to lead line implementation by the end of Q1 2022, with fleet-wide replication timing to be determined upon completion of the lead line. Since the previous earnings call, we have conducted a series of CuRe runs on high volume production lines in Ohio. And while the trends for improving module wattage and degradation appear favorable, we are still working to realize the full performance entitlement in high volume manufacturing conditions. Over the coming weeks, we intend to conduct further testing, which we believe will inform our views on lead line implementation timing. Again, this lead line implementation timing will in turn inform fleet-wide replication timing. As highlighted on our Q2 2021 earnings call, our technology team continues to create new optionality in our technology roadmap. This optionality enables us to partially mitigate the effects of CuRe delays through the enhancement of our current Series 6 technology with our top production bin reaching 465 watts at our Ohio and Malaysia factories. In addition to this improved efficiency and module wattage, Series 6 now has a significantly improved long-term degradation rate. Using improved metrology to measure degradation at our test sites, and further validated by third-party analytic methods and customer site data, the current Series 6 platform now has a 30-year warranted power output degradation rate of 0.3% per year, which is 40% below our previous warranted rate and represents a potential 4.4% increase in lifecycle energy. While the improved Series 6 nameplate wattage allows us to achieve our targeted exit in 2021 with a top production bin of 460 to 465 watts, the expected overall lifetime energy performance of the current Series 6 program remains under that of CuRe, primarily due to differences in warranted degradation rate and temperature coefficient. That said, looking into 2022, we believe there is a path for Series 6 module to increase the top production bin to 470 watts with an upside potential of 475 watts exiting the year. Furthermore, we are also working on our Series 6 modules, under the current program, to achieve a temperature coefficient similar to what is expected under our CuRe program. I’ll discuss additional optionality in our technology roadmap, including bifaciality and opportunities to drive higher levels of efficiency later in the call. While CuRe implementation has been delayed, the significant improvements in efficiency and degradation of Series 6 have been beneficial to more closely meet our customers’ expectations. In connection with our CuRe obligations this year, as discussed on our November earnings call, we have either mandated or are in an advanced stage of negotiation to amend certain customer contracts utilizing CuRe technology by substituting our enhanced Series 6 product. We expect these amendments to impact 2022 revenue and gross margin by approximately $60 million, which is reflected in our guidance. Note, we are still working to finalize certain CuRe-related contract amendments. Relative to our contracted backlog disclosure, approximately 40% of the $60 million is in our contracted backlog disclosure as of December 31, 2021. The balance will be reflected once the remaining contract amendments are completed. These amendments coupled with the existing and forecasted improvements to our current Series 6 program related to efficiency, module wattage degradation rate, and temperature coefficient, as well as other potential enhancements under our technology roadmap, which I will discuss momentarily, have reduced the requirements to implement our CuRe program by a particular deadline. Looking into 2022, we are pleased to enter the year with a record backlog and a growth plan well underway with capacity expansions in the US and India. However, 2022 is expected to be a challenging year from an earnings standpoint, both due to external factors and the near-term impact of factory startup costs associated with our growth plans. The most significant driver impacting the year is the freight market. Ocean freight costs for contracted volumes have risen 200% to 300% from pre-pandemic levels. With our recently concluded carrier negotiations, we expect our 2022 contracted freight rates to increase by more than 100% year-over-year. This compares to a pre-pandemic historic annual percentage increase in the mid-to-upper single digits. At the same time, transit times have significantly increased and reliability and availability have significantly worsened, pushing more volume into a higher price spot market. Despite record profitability across the shipping industry, this situation currently shows no sign of improving in 2022. We increasingly are monitoring the growing calls for accountability, in particular, from Georgia Senator Warnock, who has demanded an investigation into the apparent price gouging of ocean carriers. We expect sales freight for 2022 to increase to approximately $0.05 a watt. This is a combination of contracting and premium rates. Year-on-year, we expect a better mix of contracts and premium rates, but with the substantial increase in contract rates, we expect sales freight costs to increase by approximately $200 million to $240 million year-on-year. Note, our anticipated 2022 shipments were largely booked prior to the shocking increase in freight rates. Relative to our expectations at the time of the negotiation, the module ASP freight rates have more than doubled. Externally, there have been a number of events that have adversely impacted our module cost reduction roadmap. Firstly, the aforementioned freight market disruption has resulted in higher shipment costs for inbound raw materials. Secondly, the increase in inflation and commodities has both directly and indirectly affected our bill of materials and costs of production. The cost of aluminum, which has increased over 40% between the start and end of 2021, has been a strong headwind against our module costs. We have partially offset this headwind by implementing our Series 6 Plus at our Malaysia and US factories, which reduced the aluminum content of our frames by 10%. Thirdly, COVID-19 constraints including travel quarantine restrictions for both First Solar associates and third-party equipment installers have impacted the timing of our Series 6 Plus and throughput upgrades in Vietnam. While we are expecting to see a loosening of travel restrictions this year, this uncertainty presents ongoing risks to the timing of upgrades at our factory in Vietnam to Series 6 Plus, which is expected to be completed in early Q2. COVID-related constraints have also delayed the fleet rollout of our glass optimization program. As mentioned previously, our 2021 cost per watt declined by 6% versus our target of 11%. The shortfall, reflective of the items noted above, resulted in us missing our cost per watt target reduction by approximately $0.01 per watt. While we expect to continue to improve our cost per watt in 2022, we will not be able to offset a number of the headwinds experienced in 2021. Therefore, our module costs will be higher than our roadmap by approximately $0.01 per watt, which is expected to negatively impact 2022 gross margin by approximately $100 million. While there are better sources for expert perspectives on the most recent activities in Ukraine and Russia and the resulting implications on geopolitics, from our perspective, we are watching closely the tragic events unfold. As of today, our supply chain has not been impacted by the crisis and we have no current tier one suppliers in the conflict area. It is reasonable to anticipate natural volatility in various supply markets such as metals or fuel should the conflict continue to escalate. We will continue to monitor this situation daily. Internally, the current limitations, delays, and expected module wattage improvements will adversely impact our expected cost per watt reductions. And finally, capacity growth decisions made in 2021 will provide long-term benefits in 2023 and beyond, but provide a headwind to the 2022 P&L starts due to startup expenses of $85 million to $90 million. We will continue to navigate these headwinds with a focus on the future. As we invest in realizing the full value of our differentiated thin-film technology, this pivotal year will evolve around continuing significant investments in R&D, new products, manufacturing expansion, and employing new contracting strategies, all of which we believe will set the stage for sustained growth in 2023 and beyond. As it relates to R&D, our team has been cultivating optionality in our roadmap across energy attributes, including efficiency, degradation, temperature coefficient, and bifaciality, along with product attributes, including Series 7. More specifically, on the Q2 2021 earnings call, we highlighted that we are deploying prototypes of early-stage bifacial cad-tel modules at our test facility, and we’re pleased with the initial results. Since then, we have continued to run performance tests on both our current and CuRe device platforms and have gathered more field data, with the results implying potential for an increase in specific energy. Adding bifaciality on cad-tel adds to the well-understood and valued temperature coefficient, spectral response, and partial shading, and long-term degradation energy advantages. With a mid-term target of a 490 watt bifacial module, we’re working diligently to commercialize this technology across our future platforms. We believe the commercial and financial prospects of bifacial cad-tel are compelling due to the anticipated higher energy yield with limited CapEx or retooling required to integrate a transparent back contact across the fleet. Turning to Slide 8, as it relates to expansion, construction of our Series 7 factories is underway, and the schedules are on track, with the US factory expected to commence initial production in the first half of 2023 and the India factory by the end of 2023. Once scaled, these factories are expected to lead the fleet in terms of module wattage, efficiency, and cost per watt. With a mid-term goal of a 570 watt by monofacial Series 7 module, we see the potential for meaningful improvements in our module performance. As we significantly increase our nameplate capacity, we believe this anticipated growth when balanced with liquidity and profitability will drive contribution margin expansion given our operating expense cost structure is 80% to 90% fixed. As a reflection of this expansion roadmap and continued optimization of the existing Series 6 fleet, we have summarized our expected exit nameplate capacity in production for 2022, 2023, and 2024 on Slide 9. As it relates to our contracting strategy, a feature of our newer framework agreements is that customers entering into a contract today can benefit from the potential realization of our technology roadmap. For approximately 7.3 gigawatts of bookings secured prior to the end of the calendar year, we’ve structured the ASP and product expectations on a baseline wattage and energy performance roadmap without the full anticipated benefits of our technology roadmap. To the extent, we realize future module technology improvements including new product design and energy enhancements beyond what is specified in the baseline agreement, the incremental value is expected to result in a corresponding increase in ASP. Our ability to contract in this manner provides our customers with clarity of pricing, product availability, and delivery timing enabling them to underwrite PPAs from a position of strength, with lower risk to the expected project returns. From our perspective, there is also strategic rationale to contract in this manner as it provides us confidence in our ability to sell through our expected supply and provides visibility into expected profit per watt with the potential for meaningful upside to the extent we realize these anticipated technology improvements. This framework allows us to understand the price certainty, the value of our investments across different product enhancements. Based on these potential technology improvements, there are approximately 7.3 gigawatts of contracted module volumes as of December 31, 2021; such adjustments if realized could result in additional revenue of up to $2.2 billion, the majority of which would be recognized in 2023. Note this contracting approach has been incorporated into our 2022 bookings year-to-date. From a sales freight contracting perspective, last year, we began employing module contract structures that mitigate our exposure to sales freight. As we continue to look in two to four years into the future, these arrangements provide a balanced risk profile for us and our customers where we are incentivized to minimize sales freight costs that generally provide a cap above which customers are obligated to pay. We started employing these structures in Q2 2021 and approximately one-third of our expected 2022 volume includes the provisions. In 2023 and beyond, we anticipate a significant majority of volume will include these types of provisions. Across our contracted backlog, these contracts provide greater clarity into expected gross profit per watt, thus providing freight relief through a higher ASP if rates remain above pre-pandemic levels. In addition to our contracting approach, our expansion strategy, including our third Ohio plants and our new India plant, are expected to further de-risk our exposure to transoceanic freight costs by bringing manufacturing closer to demand. At the factory scale, our production mix exposed to transoceanic freight risk is expected to decrease by approximately 30 percentage points between 2022 and 2024. Overall, from a pricing perspective, the strong demand we are witnessing for our differentiated cad-tel module has enabled us to secure 10.7 gigawatts of bookings for planned deliveries in 2023 at a baseline ASP that is only $0.003 below our planned deliveries in 2022. It is important to note that ASP is essentially composed of two components: the module plus sales freight. The baseline ASP generally assumes sales freight will be approximately $0.025 per watt. To the extent that the actual sales freight is above the baseline, the ASP will increase to cover most of, if not all, of the incremental sales freight. When including this variable pricing adjustment, and assuming 2022 sales freight environment, we expect our 2023 sales freight adjusted ASP to be approximately $0.01 higher than 2022 on a like basis. In addition, as we secure the significant volume for delivery in 2023, we have been employing a contracting strategy which enables our customers to benefit from the evolution of our technology and product platform. Realizing the entirety of the benefit of this platform will increase our baseline ’23 ASP by up to $0.02 per watt. Turning to Slide 10, we continue to see active customer engagement and high levels of interest in both individual projects as well as multi-year and multi-gigawatt agreements across key markets in the United States and India. Our total booking opportunities of 53.6 gigawatts remain very robust, with 27.7 gigawatts in mid-to-late stage customer engagement. This opportunity set coupled with our contracted backlog gives us confidence as we continue scaling our manufacturing capacity. Incrementally, we continue to evaluate the potential for future capacity expansion. As referenced on the Q3 earnings call, we have started to engage with certain suppliers to ensure we have line of sight on critical path tools for further expansion. We believe strong demand for our cad-tel modules, a dynamic technology roadmap, a strong balance sheet, and largely fixed operating expense cost structure are each catalysts as we evaluate expansion. While this potential expansion may be in the US, India, or beyond, we are seeking clarity on domestic solar policies to ensure such expansion is well positioned. Note, we have made no such decision at this time and any capacity expansions are unlikely to contribute to our 2023 production plan. I’ll turn the call back over to Alex who will discuss the financial outlook and provide 2022 guidance.
Alex Bradley, CFO
Thanks Mark. Before discussing 2022 financial guidance, I’d like to provide an update on our cost roadmap. As initially presented on our February 2021 guidance call, we forecasted the year-end 2020 to year-end 2021 cost reduction of 11%. In November, we revised our reduction assumption to 5% based on increased inbound freight, aluminum, and adhesive costs, resulting in a final year-over-year reduction in payment of 6% to 7%. It is noteworthy that the 5% difference between our original assumption and our year-end result remains a headwind in 2022 and is expected to impact the full year 2022 cost per watt by approximately $0.01. On a cost per watt sold basis, our original year-over-year forecast reduction of 8% was revised to 3% in November, and our final full-year result cost per watt sold remained flat year-over-year. This is despite a year-over-year increase in sales freight per watt of 70%. Excluding the effect of the sales rate, our cost of watts sold declined by approximately 8% for the same period. Looking at 2022, from a glass perspective, we’ve largely stabilized this cost through long-term predominantly fixed price agreements with domestic suppliers that have economic benefits as we achieve high levels of production. On the Q3 2021 earnings call, we highlighted COVID-related delays impacting the startup timing of new glass facilities to support our Malaysia and Vietnam sites. In addition to competitive pricing, these facilities are expected to reduce the cost of inbound freight for our international sites. Given recent improvement in the COVID situation in Southeast Asia, we anticipate this new facility will commence production and begin benefiting cost per watt in the first half of this year. The rise in aluminum, we anticipate framing costs will be elevated relative to historical norms. We highlighted during our Q3 earnings call that we had a commodity swap contract in place, which covered the majority of our US consumption in 2021. Note, many of our aluminum contracts with suppliers in Malaysia and Vietnam factories reference aluminum trade on the Shanghai Futures Exchange, which makes hedging a challenge, given foreign investors cannot access the market without a registered local entity in China. While aluminum pricing remains above pre-pandemic levels, going forward, and for both domestic and international sites, there are several strategies and processes to reduce framing cost in the near term. Firstly, by differentiating the frame design and reducing costs for modules installed in certain geographies and parts of the array exposed to standard versus high mechanical loads; secondly, by optimizing the mounting interface for our Series 7 module; and finally, by evaluating alternative materials for the construction of our frames, including a steel back rail for our Series 7 modules in India. As it relates to logistics, outbound sales freight is expected to be approximately $0.05 per watt in 2022. In context, prior to recent dislocation in the global freight market, sales freight per watt was generally between $0.02 and $0.025 per watt in 2020. Note, the aforementioned sales freight contract provisions are expected to provide approximately half a penny benefit on a fleet-wide basis in 2022. On a fleet-wide basis, relative to where we ended in 2021, we anticipate reducing our costs per watt produced by 4% to 6% by the end of 2022. Despite an expected 25% to 40% increase in sales freight per watt, we anticipate our cost per watt sold will be flat between the end of 2021 and 2022, respectively. Excluding the effect of sales freight, we anticipate our cost per watt sold to decline by approximately 5% to 8% over the same period. Note, the expected 25% to 40% increase in sales freight in 2022 is expected to be partially offset by contract provisions for sales rate recovery, which cover approximately one-third of our shipments in the year. By 2023, similar sales rate recovery provisions are expected to cover a significant majority of our shipment.
Mark Widmar, CEO
Turning to slide 11, looking forward, despite near-term inflationary pressure around certain commodity and logistics costs, we believe our revised midterm roadmap will enable us to continue reducing our Series 6 costs per watt. Starting with efficiency, our midterm goal is a 490 watt bifacial and 500 watt monofacial model. As a reminder, improvements in module watts generally provides benefits to each component of cost per watt including our variable, fixed, and sales freight costs. Secondly, we’re tracking to increase throughput by 9% to 11% in the mid-term on our existing manufacturing base, resulting in a fixed cost solution benefit. Thirdly, we continue to see a positive increase in our Series 6 manufacturing yield to 98.5% in the mid-term. Fourth, we see opportunities to reduce our bill of material costs by 10% midterm, primarily across framing and glass. And finally, we believe the culmination of fitting our module profile, transport optimization, and employing risk-sharing mechanisms in our customer contracting, could lead to a 40% to 50% reduction in net sales freight costs. Note, this expected reduction includes a combination of cost recaptured through the aforementioned sales rate customer contracting strategy, as well as increased modules to shipping containers. Separately, as it relates to Series 7, we anticipate both India and Ohio factories to have cost per watt, once fully ramped, lower than our current lowest cost factories in Vietnam. Combined with the benefit of locating supply near to demand and reducing the cost of sales freight, Series 7 is expected to reduce cost per watt and net sales freight costs in total by approximately $0.01 to $0.02 relative to Series 6. With that context in mind, I’ll discuss the assumptions included in our 2022 financial guidance. Turning to Slide 12. Starting with legacy systems items, we are pleased with the potential value and long-term benefits of selling planned development and O&M platforms. While there’ll be no assurance that we will enter into an agreement for a transaction, our guidance assumes a gain of approximately $270 million to $290 million, which would be recognized as a gain on sale of businesses, which lies between gross margin and operating income on the P&L. As we previously assumed ongoing asset sales from the development portfolio, which benefit gross margin, this change in assumption is a headwind to gross margin in 2022. Furthermore, until any sale is closed, overhead costs associated with this planned platform will also continue to impact operating expenses. In addition, we signed an agreement to sell remaining international O&M contracts outside Japan. Upon closing, which is expected in the first half of 2022, we expect to recognize a pre-tax gain on sale shown in the income statement between gross margin and operating income of approximately $10 million. As it relates to power-generating assets, we’re evaluating whether to continue holding or sell multi-assets in Chile, whether it's a series of sales for this project. Considering such a sale would require coordination with the project lenders, as previously discussed on the November earnings call, could result in an impairment charge in the future if we are unable to recover our net carrying value in the project. No impact from any profitable sales of this project is included in our guidance for 2022. 2022 shipments are expected to be between 8.9 and 9.4 gigawatts, which exceeds our production plan for the year of 8.2 to 8.8 gigawatts due to higher than expected inventory levels at year-end 2021. Our factory expansion and factory upgrade roadmaps are expected to impact operating income by approximately $95 million to $105 million. This comprises the startup expenses of $85 million to $90 million, primarily incurred by our new factories in Ohio and India. As previously mentioned, we’re planning to implement Series 6 class upgrades in Vietnam and other upgrades in 2022. These upgrades require downtime resulting in estimated underutilization losses of $10 million to $15 million. We anticipate these improvements to contribute meaningfully to the 2023 production plan. Our liquidity position has been a strategic differentiator in an industry that has historically prioritized growth without regard to long-term capital structure. For example, we’re one of the few solar companies that both entered and exited the last decade, and our strong balance sheets enabled us to weather periods of volatility and also to pursue growth opportunities. Additionally, we were able to self-fund our Series 6 transition while maintaining our strong liquidity position ending 2021 with $1.6 billion of net cash. Based on our existing liquidity position, coupled with expected operating cash flows from existing Series 6 factories, we believe we can self-finance our expansion roadmap. However, based on the opportunity to secure competitive terms and strategic benefits of a partner when entering a new market, we may raise financing for the construction of our new factory in India. I will cover 2022 guidance ranges on slide 13. Our net sales guidance is between $2.4 billion and $2.6 billion, which is predominantly module segment revenue. Gross margins expected to be between $155 million and $215 million, which includes $155 million to $225 million of module segment gross margin and negative $10 million impacts from other legacy activities. Module segment gross margin includes underutilization losses of $10 million to $15 million. As discussed, we anticipate sales freight will be a significant headwind in 2022 and we anticipate sales freight will reduce our module segment gross margin by 18 to 20 percentage points for the full year of 2022. SG&A expense is expected to total $170 million to $175 million, compared to $170 million in 2021 and $223 million in 2020. As indicated in the guidance call last February, we anticipated the sale of our US product development business to result in annualized savings of approximately $45 million to $50 million of which approximately 60% sits in the operating expense line. We’ve tracked well relative to this cost reduction plan and are pleased with expected savings on a go-forward basis. R&D expense is expected to total $110 million to $115 million versus $99 million and $94 million in 2021 and 2020, respectively. As we continue to grow our manufacturing capacity, we also intend to add additional headcount to our R&D team to further invest in Advanced Research Initiatives. SG&A and R&D expenses combined are expected to total $280 million to $290 million, and total operating expenses, including $85 million to $90 million in production staff expense, are expected to be between $365 million and $380 million. Operating income is expected to be between $55 million and $150 million, inclusive of an expected approximately $280 million to $300 million gain on sale related to the aforementioned Japan project development and international O&M transactions, and $95 million to $105 million of combined underutilization costs and planned startup expenses. So the non-operating item effects interest income, interest expense, and other income are expected to be net negative $20 million to $30 million, which is predominantly driven by FX and interest expense related to Japanese projects. Full-year tax expense is forecast to be $35 million to $55 million. This results in full-year 2022 earnings per diluted share guidance range of $0 to $0.60. And note from an earnings cadence perspective, we anticipate our earnings profile will improve gradually over the course of the year with a significant impact in the quarter in which any sales of a pan-developed platform were to close. Capital expenditures in 2022 are expected to range from $850 million to $1.1 billion as we advance the construction of our Ohio and India plants and upgrades to the fleet and invest in other R&D-related programs. Our year-end 2022 net cash balance is anticipated to be between $1.1 billion and $1.35 billion. The decrease from our 2021 year-end net cash balance is primarily due to capital expenditures associated with the building of our Ohio and India manufacturing plants, which we expect will be partially offset by financing proceeds. Turning to slide 14, I’ll summarize the key messages from today’s call. Demand has been robust, with 11.8 gigawatts of net bookings from the previous earnings call. Our opportunity pipeline continues to grow with a global opportunity set at 53.6 gigawatts, including mid-to-late stage opportunities of 27.7 gigawatts. On the supply side, we continue to expand our manufacturing capacity and expect to exit 2024 with approximately 16 gigawatts of capacity. We see significant mid-term opportunities for improvements in our modular efficiency, cost, and energy metrics. We ended 2021 with full year EPS of $4.38 and are forecasting full year 2022 earnings per share of $0 to $0.60. With that, we complete our prepared remarks and open the call for questions.
Operator, Operator
Our first question is from Philip Shen with ROTH Capital Partners.
Philip Shen, Analyst
Hi, everyone. Thanks for taking my questions. First one is on pricing. As you think through your pricing for 2022 and 2023 with the backdrop of the contracting strategy and the recent bookings, do you think the blended pricing in 2022 could possibly be $0.30 or higher or do you expect both 2022 and 2023 to be in the high $0.20 per watt? And also was wondering if you could speak to what the expected margins might be for 2023, especially as you drive some costs down in 2023, maybe some of the headwinds abate a touch and then your pricing can stay relatively flat? And then finally talked about new products in your OpEx investment, through some of your work, it seems like you might be exploring some residential solar opportunities, so I was wondering if you might be able to talk through whether or not you see some concrete opportunities there? Could that be a new product for you as you roll out the new plant in Ohio? And if so, what kind of volume could that be? It is a nice market with healthy ASPs, so any color there would be very helpful. Thanks.
Mark Widmar, CEO
Phil, regarding pricing, there might be some upside in 2022, but it won't be significant. Approximately 30% of our volume includes sales freight adjustments, which will comply with contractual obligations and adjust if costs exceed what we agreed upon, potentially affecting pricing. If we can enhance the temperature coefficient on our current product, there might be some monetization opportunities in 2022, although significant increases in average selling price (ASP) beyond what you see now are unlikely. The contracted backlog is expected to be around $0.27 related to the 22 gigawatts we have under contract. Looking into 2023, ASPs are relatively flat, down about three-tenths of a cent compared to 2022. There are around $0.03 in adjustments, with slightly more than a penny accounted for in the sales rate. It’s important to note that our pricing encompasses both the module and its delivery. Currently, our net module pricing stands at about $0.22 after accounting for costs and delivery. Under the revised contracting structure, we anticipate an increase in ASP of about $0.025 in 2023 compared to 2022 because of how we’ve crafted the contracts. However, only about 70% of our contracts for 2023 feature this structure. All bookings, including the 12 gigawatts referenced, include a modification formula where the customer may accept certain pricing types, alleviating our freight risk. Including sales freight and technology price adjustments, significant increases could occur in 2023 compared to 2022. The potential exists to approach or even exceed the 30s, but the risk profile concerning sales freight will affect individual opportunities. While I can't provide specific expected margins, there is upward potential in ASPs as referenced. We indeed reduced costs per watt by 6% in 2021 compared to 2020, and we see opportunities for additional reductions in 2022. Hence, if you calculate accordingly, you can discern a trajectory leading to a lower cost per watt despite current challenging conditions. You can estimate margins based on the ASP and cost factors we discussed during the call. Additionally, we are exploring tandem structures and high-efficiency modules aimed at enhancing our presence in the traditionally utility-scale segment, which could also lead to higher ASPs in residential markets. We're targeting 16 gigawatts; even if we manage to capture a portion of the potential, it would still represent a small fraction of our overall business.
Alex Bradley, CFO
So just one thing to add on the 2022 to 2023 on top of the ASP and cost indication that Mark gave is that when you get into 2023, we’re going to have call it one or two gigawatts of Series 7 come online. As we indicated that Series 7 has an ASP entitlement, as you can assume, already reflected in the backlog in some cases, but in some cases, it may not be, and there may be some upside from that. It also has a $0.01 to $0.02 cost advantage based on the sales freight.
Operator, Operator
Thank you. Our next question is from Joseph Osha with Guggenheim Partners.
Joseph Osha, Analyst
Hello, gentlemen, congratulations on continuing to represent American solar manufacturing so well. Two questions for you. First, I’m wondering, given the relatively recent shift in policy, we’ve seen the vis-à-vis 201 and the bifacial exemptions. Have you seen that manifest in terms of pricing conversation for your more recent bookings? And then secondly, Mark, I think I heard some comments regarding 2023 and some maybe fluidity to the plans there, depending on policy. If so, if you could clarify that, that would be great.
Mark Widmar, CEO
On the policy regarding 201, we were disappointed with the bifacial exemption that was provided. The way I see it, every module has various attributes but essentially, all of them convert photons to electrons. We emphasize our attributes such as spectral response, moisture resistance, temperature coefficient, and shading response. These are characteristics that utilize our technology beyond just the basic function of generating power, and bifaciality is just one of those attributes that enhances energy generation. Therefore, it doesn't make sense to exempt bifacial modules. Similar logic applies to any attribute that could justify exemption from 201 duties; it just doesn't add up. Our customers appreciate their relationship with First Solar and our commitment to fulfill contracts, even during challenging times. This partnership, sustained through good and difficult situations, is essential, and we believe in collaborating to find solutions for mutual success. We view this as a long-term journey towards electrification, which begins with converting photons to electrons—a space where we excel. While there are policy challenges that come and go, we strongly believe that our partners can rely on us compared to our competitors, especially those from China, who may not be able to support their partners through uncertainty. Our recent achievements reflect our strong position: we booked 12 gigawatts and have a mid-to-late stage backlog of 27 gigawatts. Including early-stage projects, our total pipeline expands to 55 gigawatts, both metrics showing an increase of about 10 gigawatts since our last earnings call. Regarding growth, we are expanding with two new factories, one in Ohio and another in India, and are evaluating further expansion based on our growing backlog and opportunities. If demand increases, we will need to consider additional capacity, potentially another factory or even two to achieve 6 gigawatts. We’ll keep you informed as we work closely with our suppliers to make the most of these opportunities.
Operator, Operator
Thank you. Our next question is from Keith Stanley with Wolfe Research.
Keith Stanley, Analyst
Hi. Thank you. First, just some clarifications on the 2022 guidance and appreciate the detail you’ve given. Much of the Japan and O&M business operations contribute to earnings for the year separate from the gain you’ve noted and I just want to confirm the year-end cash balance includes the planned sales.
Alex Bradley, CFO
Yeah, so there’s very minimal assumed contribution from the O&M business and the Japan business. The assumption is we wouldn’t sell any assets this year, all of that will be reflected in the sale of the business and come through in the gain on sale. So you’re seeing that full number be $270 million to $290 million, and there’s about an additional $10 million value associated with the sale of the O&M business. We’re seeing limited additions to ongoing revenue and earnings. For the time that we keep that business, we view that it all gets lumped into gain on the sale. From a cash perspective, yes, the assumption is the value and cash from that sale is in the cash number at year-end.
Operator, Operator
Perfect, thank you. And our next question is from J.B. Lowe with Citi.
J.B. Lowe, Analyst
Hi, Mark and Alex. Mark, you mentioned earlier that your 2023 average selling prices are down about $0.003, but netted against freight, they would actually increase by about $0.01. Could you elaborate on the factors influencing that? Also, given the situation in Europe regarding the ongoing crisis, have you started discussions with customers there yet? I know it’s been just a few days, but have you been reaching out to customers in any new or unexpected areas since things began? Thanks.
Mark Widmar, CEO
Regarding the average selling price, about 30% of our contracts in 2022 include some form of freight adjuster. To provide perspective, in Q1 of 2021, our reported freight was approximately $0.025, which increased to $0.05 a watt this past year. Traditionally, we have assumed a freight cost of around $0.02. As we increase our sales volume, it lowers the average freight cost and significantly enhances our net pricing. We noticed a notable shift beginning in Q2 of 2021, prompting us to adjust our contracts to mitigate the entire freight risk. While some benefits will be seen this year, a larger portion will flow into a higher percentage in 2023 and beyond, with all future contracts containing a freight adjuster. This year, there’s about $0.05 acting as a headwind, though we expect to recover some amount from customers, resulting in adjustments to the average selling price throughout the year—potentially around $0.015. Consequently, we anticipate our average selling price will increase from the current backlog figures as these sales rate adjustments take effect in 2022 shipments. This same analysis shows that about $0.015 will contribute to our 2023 figures. Year-over-year, when comparing apples to apples, the average selling prices are expected to increase by about a penny, meaning this year's $0.27 may move closer to $0.275 in 2023, with an additional penny increase accounted for. This forecast holds if sales rates remain at $0.05; should they rise to $0.06, the freight adjuster will also increase, as we typically only account for $0.025 of the total sales rate risk that customers assume. Additionally, in 2023, we expect contributions to the average selling price through technology and platform adjusters. We’ve made contracts based on a baseline product, which is the 465 standard CuRe product we currently produce. Improvements in this product due to advancements in technology will also begin impacting in 2023. However, exact product delivery cannot be reflected in our contracted backlog until realized over time, which will ultimately enhance our contracted backlog.
Operator, Operator
Thank you. Our next question is from Ben Kallo with Baird.
Ben Kallo, Analyst
Hi. Thanks for taking my question. Have any of these freight costs doubling changed any of your thoughts around doing long-term contracts, as you look out into 2024? And can you talk to us about how you’re selling products from India? Is it more localized when you get out that far? And then my third question and final question is just can you talk to us about going to bifacial and how you make that decision and what it means on both ASP and a cost perspective? Thank you.
Mark Widmar, CEO
Before addressing your question, Ben, I'd like to revisit the previous inquiry about Europe and our observations there. We've had ongoing discussions about Europe, where the situation is evolving similarly to what we've experienced in India and the US regarding the development of domestic manufacturing capabilities. We're actively engaged in conversations about manufacturing opportunities in Europe, which we're assessing alongside possibilities in the US and India for future expansion. Regarding our freight costs, think of it this way: I'm informing our customers that our base price is X, and there's an additional $0.025. As we move into increased volumes in 2024 and 2025, any fluctuations in these costs will influence a variable average selling price, keeping it around $0.05. There will be an incremental average selling price adjustment so that our customers cover the additional freight costs. We believe this approach is manageable as we negotiate contracts moving forward, and our partners agree that there should be some risk-sharing, especially considering market uncertainties. On the topic of our pipeline in India, there's significant activity and opportunity. Booking timelines in India are typically shorter; they usually secure modules about a year in advance of expected delivery. We're focused on the second half of 2023, more than a year before our factory becomes operational. We're being cautious about committing to large volumes early on due to potential delays or unforeseen events that could impact the project schedule or equipment installation. Hence, we’re keeping the first quarter open until we have more certainty in our construction and tool installation progress. This doesn’t reflect a lack of interest or demand; rather, we have several opportunities lined up, and we anticipate multiple gigawatts of bookings in India before the year concludes. Regarding bifacial technology, it offers energy gains. Our bifaciality might be slightly lower than current crystalline silicon levels, yet we expect it to yield approximately 1% to 2% more energy, correlating to a premium in average selling prices ranging from about three-quarters of a penny to a penny and a half. Hence, the average selling price opportunity for bifaciality lies between a penny and a half and $0.03. Similar to crystalline silicon, there will be trade-offs involving balance system costs which could diminish some of the advantages of bifaciality. Nevertheless, we anticipate that this technology will enhance our average selling prices, adding to our value in energy, which we are committed to selling.
Operator, Operator
Thank you, presenters. That’s all the time that we have for today. This concludes today’s conference. Thank you again for your participation and have a wonderful day. You may all disconnect.