Good afternoon everyone and welcome to First Solar's Third Quarter 2021 Earnings Call. This call is being webcast live on the Investors Section of First Solar's website at investor.firstsolar.com. At this time, all participants are in a listen-only mode. As a reminder, today's call is being recorded. I would now like to turn the call over to Mitch Ennis from First Solar Investor Relations. Mr. Ennis, you may begin.

Thank you. Good afternoon everyone and thank you for joining us. Today the company issued a press release announcing its third quarter 2021 financial results. A copy of the press release and associated presentation are available on First Solar's website at investor.firstsolar.com. With me today are Mark Widmar, Chief Executive Officer; and Alex Bradley, Chief Financial Officer. Mark will begin by providing a business and technology update. Alex will then discuss our financial results for the quarter and provide updated guidance for 2021. 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?

Thank you, Mitch. Good afternoon and thank you for joining us today. Beginning on slide three, I would like to start by thanking the First Solar team for their dedication and continuing execution. Operationally, despite the challenging freight and COVID-19 environment, our associates continue to deliver on their commitments. In the third quarter, we produced over two gigawatts of modules and in October, we increased our top production bin to 465 watts, which represents a 19% glass area efficiency. In parallel, we started construction of the building of our third Ohio factory and began ordering equipment for our first factory in India. Commercially, we had a good quarter increasing our record year-to-date bookings to 10.5 gigawatts. From a financial perspective, while Q3 freight costs were higher than anticipated, our full year sales freight expectation is unchanged. Shipments, which we generally define as when the delivering process to a customer commences and the module leaves one of our factories, totaled 2.1 gigawatts in Q3, which was only modestly below our expectations. Despite this total shipment results, the global freight market continues to experience record levels of scheduled delays and reliability issues. As a result, approximately 820 megawatts of modules shipped, remained in transit at quarter end, nearly double that of the preceding four quarters and were therefore not recognized as revenue in the quarter. While we expect extended transit times to continue, we anticipate our in-transit volumes to improve in Q4 as a high percentage of our shipments are expected to come from our Perrysburg factory and US distribution centers. As a result, we iterate our full year 2021 EPS guidance. Turning now to slide four, I'll provide an update on our expansion plans. As it relates to our US expansion, we started construction in mid-August after successful groundbreaking ceremony, which…

Thanks, Mark. Starting on Slide 8, I'll cover the income statement highlights for the third quarter. Net sales in Q3 were $584 million, a decrease of $46 million compared to the prior quarter. The decrease in net sales was primarily due to lower systems segment revenue, which was partially offset by an increase in module segment revenue. On a segment basis, our module segment revenue in Q3 was $563 million compared to $543 million in the prior quarter. Systems segment gross margin in Q3 was $6 million, which was largely driven by a favorable settlement related to a legacy systems project. Module segment gross margin was 21% in Q3 compared to 20% in Q2. There are several positive and negative factors that impacted this Q3 result. Firstly, we recorded a reduction in our product warranty liability, which was primarily due to lower claims than previously estimated for our Series 2 and Series 6 modules. This resulted in a $33 million reduction of our warranty liability, a corresponding benefit to cost of sales. Secondly, certain of our legacy module sale agreements are covered by a collection and recycling program or a corresponding expense to the estimated future cost of our obligation was recognized at the time of sale. During Q3, we recognized an $11 million increase in our module collection and recycling liability due to changes in the expected value of certain recycling byproducts. Thirdly as mentioned, we're in the process of implementing factory upgrades in 2021, which requires downtime resulting in lower production and underutilization. In Q3, our module segment gross margin was impacted by $6 million of underutilization. On a net basis, these factors increased module segment gross margin dollars and percent by $16 million and three percentage points respectively. Separately, whilst we continue to navigate and partially mitigate…

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

Hi, everyone. Thanks for taking my questions. I have three groups of questions. The first one is around bookings and pricing. I was wondering, if you could provide a little bit more color on that. Looking ahead do you expect to accelerate or perhaps slow down bookings to maximize price? And then are you looking to make any changes to the way you structure your contracts, so you can maximize your pricing? Number two here, as it relates to the reconciliation bill, you have the $0.04 per watt thin film sell credit but then there's also the $0.07 module credit for the manufacturing production tax credit. Can you talk about -- do you think you get both added together, or do you think one or the other? And then finally as it relates to capacity expansion maybe talk to us about how you're thinking about it? And do you need that reconciliation bill before you guys think about the next leg of capacity in Ohio or elsewhere in the US and what conditions in general you think you might need to announce another capacity expansion? Thanks guys.

All right. Thanks Phil. I'll try to hit on all three of those. In terms of bookings -- and first of all what I'd like to say about the bookings if you look at our pipeline of opportunities that we highlighted in the presentation, we effectively -- if you look at our mid to late stage opportunities have doubled. I think our last quarter we were right around nine gigawatts now we're sitting at 21 gigawatts, so more than double that. And we've almost tripled the opportunities that we have in the US last quarter, we were six and change on the US for mid to late-stage in this quarter we're sitting north of 18. So I feel really good about the robustness and the opportunity for us. And then what's encouraging I somewhat indicated in my prepared remarks is that -- these are multiyear agreements, multi-gigawatt agreements a number of them are. And we are working a framework there that has construct that allows for optionality in our roadmap to make sure that we can be monetized. So we talked on the last call, for example, that we are looking to now enable bifaciality for CadTel. So to the extent that we do that then there's a predetermined value lever that is associated with that bifaciality and then it drives to accretion to the ASP. There's other components in there that are structured such that for domestic content requirements that may evolve with the ITC there's an associated value lever associated with that. So I'm really happy with the engagement that we're seeing right now, not only here in the U.S. but obviously in India. I mean to have a 17 gigawatts of opportunities in India already, just after only a little over a quarter or so since we've…

So the only other thing I'd add is that, we talked about the potential for putting some debt on the balance sheet associated with the additional factories we're looking at right now. Given the policy environment we're seeing the ASP environment we're seeing, if we added additional capacity, that would obviously be very cash-generative, but there may be a bridge where that would be helpful in terms of the timing of CapEx, let's say, with those new factories before they came online. So as we think about the balance sheet and how we look at funding the amount of capacity already, that might impact how we look at it, depending on whether we see the possibility for additional capacity beyond currently in our factories.

Your next question comes from the line of Julien Dumoulin-Smith with Bank of America.

Hey, good afternoon. Thanks for the time, guys. Appreciate it. So just to follow up on Phil's questions. First off, just looking at the year, the guidance, just confidence on shipments in 4Q? I know you said there was some already slipping from 3Q to 4Q. But just what are you seeing in port congestion, just the ability to deliver all together. I'll leave it open-ended. I know there's a lot of different pieces there, but clearly you're saying you've got some amount of visibility and confidence there. And then separately, I'll throw them all together here for ease of just going on the list. Coming back to the ability to qualify for certain subsidies here, how are you thinking about PLI in India, just as far as that goes in qualifying specifically for your expansion? And then lastly, any commentary on pricing, specifically on 2023. Again, I know that you just asked a little bit on maximizing it, but just aggregate level how much -- what trends are we seeing here on 2023 and especially 2024, as you start to see some of this backfilled and potentially contemplate ITC, et cetera?

Hey, Julien. I’ll start on the shipment fee. So I would say, we're seeing poor congestion and general issues in the shipping market, be as bad today as we've seen them. So I don't see any improvement, if you look at the cost of sales rate we indicated for the quarter, that's still raised. I would say though that absent -- we still see some issues around blank sailings. In general, I have good confidence in our shipment numbers for the year. The delta comes a little bit in how much will that will be put through the P&L in terms of revenue recognized. So if you look at Q3, we managed to hit our expected shipment numbers, but we were low to the tune of somewhere around 300 to 400 megawatts in terms of the expected volume of revenue recognized and that's a function of transit times. So if you go back to pre-pandemic times, we would normally see from factory gate to revenue recognition about two months from product leaving our Asia factories. That's increased by about 50%. So we're seeing closer to 90 days now for product coming from Asia into the US. So I think from a volume shifts, I've got a lot of confidence. And if you think about where we are today effectively for product coming from Asia, if it hasn't left the factory already, it's not going to get to destination, if it's the US by the end of the year. So we have reasonable clarity there. But again, the timing of the rev rec is a little bit different. Now we do expect to catch up a little bit on the rev rec side in the fourth quarter, partly of the mix shift. So we see a little more expected volumes to be revenue recognized coming from either Perrysburg or our US distribution center. There's also a slight mix shift in terms of income terms in there as well. So good confidence on shipments still a bit of uncertainty on revenue recognition.

Yeah. And I guess on the PLI Julien, first off, I'd just like to reference again as I said in my prepared remarks, it was a pleasure to get a chance to spend some time with Prime Minister Modi in D.C. And we talked through this a little bit and he's very encouraged that First Solar is making a commitment to India and creates basically a footprint of diversification that they're looking for, right? So we are completely decoupled from a Chinese supply chain. And we're a vertically integrated factory within the four walls. And so to truly enable kind of their focus on concern around overreliance, concern about energy independence and security we're really a strategic enabler of that accomplishing that. His commitment to me was during their conversation was that he would ensure we would get our fair share of the PLI. So I feel encouraged by that statement and that commitment. The PLI is still being worked through. There is some -- the first request for the PLI have been made. If you look at the scoring -- our current scoring would not necessarily indicate we would receive an allocation of PLI, but we are working through that. The -- his administration is also looking to expand beyond what was originally allocated to -- because there was such an overwhelming request to expand the funding requirements for PLI. So -- and there's also potentially another path that we could pursue that would give an equivalent PLI benefit even though it wasn't directly funded through the PLI program. So we're working on different options. As I said before, our business case was not predicated on receiving the PLI. If we received it, it was a benefit and an upside. We have other incentives that are moving forward. We're receiving an incentive for our CapEx that we're spending on the factory which is a 24% credits that we'll receive to offset the cost of that capital. There's other incentives that we're receiving related to labor. There's a 10-year incentive for a 20% rebate against our cost of labor and there are some other incentives that we are pursuing and those are all trending green. So PLI right now is still being managed. I still believe we'll be able to find an outcome that will be a positive outcome for us. But even without it we still are very confident with our business case in India and our relative competitiveness of our new product and our new factory in the India market. Pricing for 2023 what I would say is that where we are marking it currently right now is encouraging. And especially with the value levers that I referenced as potential upside as well. We are encouraged by what we're seeing and we feel very confident in our ability to see a very attractive pricing not only 2023, 2024 and then potentially into 2025 as we enter into some of these long-term agreements.

Yeah. The other thing I'd add just on that is its pricing and also risk terms. So there is a view of changing risk profile around sales rate for instance that we're looking at in 2023 relative to historical contracts. So may not necessarily influence the overall ASP but does change the risk shift especially in the market we're seeing sales rate being a higher cost today.

You said you're getting a premium ASP for your risk or you're not recognizing a premium for your risk factors?

We're looking -- we're changing the allocation of risk and contracts so that we have sharing or pass-through of certain costs to the customers given the uncertainty around shipment.

So, if you think of it this way. I mean look freight cost right now is up 70%, 80%, 90%. And so we've kind of created a level of which we're willing to accept but a high percentage of that will now be passed through directly to our customers versus us sharing or carrying that entire risk on our ledger.

Excellent. Great to hear that. Congrats again. Speak soon.

All right.

Your next question comes from the line of J.B. Lowe with Citi. Mr. Lowe, your line is open.

Good afternoon. How are you doing?

Well. thank you.

My question was on given all the moving parts we have between what you have booked for 2022, the ASPs that you have already locked in and kind of the moving pieces of costs that we have flowing through at this point shipping and otherwise, how do you think gross margin per watt should trend in 2022 versus 2021?

So, if you look through the various moving pieces across the year, so Mark in his prepared remarks mentioned that there'll be some impact from our timing around CuRe. There'll be some specific impact related to that timing. We also will see some impact from overall cost per watt. So, the factory upgrades not only impact CuRe, but impact overall cost per watt. Without them we have less watts. Therefore, we have less amortization of fixed costs going across the capacity we have. We've seen commodity price pressures. So, I think in the prepared remarks, we talked about our year-over-year cost watt produced being down about 5% versus our previous expectation of 9%. That's mostly bill of materials issues. On the long-term, we believe that gets resolved but we do see short-term pressure especially on the aluminum side. From a sales rate perspective, I would say that you're going to see the run rate you're seeing in the second half of this year most likely carry forward into next year. So, no sequential increase forecast today, but higher relative to pre-pandemic levels. If you look in 2022 overall as well, it's going to be the first year we don't have the US Systems business, although we will have some contribution from Japan on a company-wide gross margin level you're going to see some impact of that. And then I'd say the other piece you're going to see is the flip side of not having that US Systems business the strategic decision we made to exit was accompanied by a growth decision and you're going to see that come through later. But in 2022, we haven't yet got additional capacity in the US or in India online, but you are going to see the costs associated with that in terms of…

Awesome. Thanks. My other question was just on -- given all the pricing headwinds we've seen or cost headwinds we've seen, is there any change to the outlook for CapEx required to build the new facilities or timing of such?

Yeah. So look, there's a lot of moving pieces in the CapEx right now for both of the factories and some positive and some challenging, right? And one of the unfortunate reality of sales rate or freight in general I should say, carries itself all the way through our tool set and delivering of those tool sets to our factories, right? So we are seeing some higher costs there. We've seen some other benefits relative to our original assumptions around the equipment cost that are more favorable. So, as we review, which we do every month the status of those two expansions and then the relative CapEx relative to the goals and also what we committed externally. The numbers are still lining up. The thing that could impact schedule per se would be long delayed in transit delivery schedule of the equipment set. And so we are trying to get ahead of that and we're trying to move that forward. And we've accommodated for some longer in-transit delivery times. But everything we see as of right now, we're still on target basically within the budget which we've communicated externally as well as the schedule when those factories will be up and operational.

Helpful. Thanks.

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

Thank you. So if we did have the -- I don't know if we call it an as of manufacturing credit, but if we had that how do you guys monetize that is my first question. Can you use that yourself, or do you get a tax equity partner or how does that work? And then, how big do we think that is?

So first off, the way it's been structured right now, Ben, it's a refundable tax credit. So we don't have to have sufficient tax capacity to monetize it. To the extent we do have a tax liability then the credit would have offset that portion. And to the extent the credit was in excess of our tax liability then it would be a refundable credit that would be paid back to us by the US government. Ben, it's -- you can do the math, right? And the numbers can be pretty significant at $0.11 a watt. I mean you take $0.11 a watt across our US capacity, call it, three gigawatts for the US without the expansion. And then with the expansion you had another 3.3 gigawatts. So we're a little bit north of 6 gigawatts, in the way that it would work right now again with the module and the cell being additive, then you would be entitled to $0.11 for every watt of which we ship to produce and ship after beginning, let's say, it this way beginning January 1, 2022. So anything that we're producing right now would not be eligible for that even though it would potentially ship next year. But anything that we produce next year and ship then we would be entitled to a credit that as it currently is positioned would be a minimum of $0.11 a watt.

Got it. And then, just with the uncertainty with this not shipping costs and financing costs and everything else. But how are customers -- I get this question a lot like how much stuff gets pushed out to next year to wait and see or what have you? And thank you, guys.

So the one issue with us is that we're not seeing a lot of stuff moving. And the -- what's happening right now is unfortunately -- obviously not all of our customers are 100%. There are a couple which I do thank them very much. So the fact they're 100% committed to First Solar's technology but not all of them are. And they're getting reneged on or pushed out by our competitors. And so in some cases if they have a commitment with us on the books and the project discretely which that was associated with may be moving they're looking to take that volume and allocate it to another project that they're unable to get module supply for. So for us it's not much of an impact because nobody wants to give up the opportunity that they've got secured right now with us. And so what they're doing is taking delivery of modules and then using them in other projects. So I know others are seeing that impact. I know projects truly are slipping or getting pushed out. We're just not seeing much of that impact yet.

Thank you.

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

Hi. Thanks for taking my questions. Just on the Japan project could you just talk about how much of EPS sensitivity do you expect from that? And just in terms of certainty what are you thinking about it? And could you just also talk more about the CuRe delay and improvements and how much the impact there is? I think you spoke about $100 million previously. Just wanted to clarify that for 2022. Thanks.

Yes, this is Alex. I'll take quickly the -- we've guided to about $55 million to $70 million of gross margin assumption for Q4 associated with Japan assets.

Yes. As it relates to CuRe. So where we are with CuRe right now again there's two challenges, right? And one is our ability and the timing to replicate. We were in the process of upgrading our factories Malaysia, Vietnam to enable the CuRe production process which there are certain tools the oven in particular that has to be upgraded. And we have not been able to do that with the restrictions that have been placed on us because of the COVID pandemic and the Delta variant spread in the way that it has over the last several months things are getting better. So that's obviously all positive. But that's been a huge constraint and that delays our ability to roll out. Now before that even as we sit with where the solution development phase is right now we are behind where we want to be as it relates to -- if you think about the attributes of CuRe what's the value of CuRe? Well first and foremost is the improved long-term degradation rate. The other is higher efficiency. And then finally, it's the better temperature coefficient. So we've actually closed the gap between our existing product and the CuRe degradation rate which we highlighted on the call that now we're at a 0.3 annual degradation rate based off of the studies that we've done and further validation with third-party methodologies that we're at 0.3 and we'll go forward with 0.3 right now but that's still higher than our 0.2. It's best-in-class industry, but not to the level that CuRe was going to take us to. The efficiency, at least as we exit this year we're recovered about two bins on efficiency with our existing products. So we've closed a little bit of that gap, but we're slightly off on…

Thanks.

And this does conclude our allotted time for questions-and-answers. And this does conclude today's conference call. Thank you for participating. You may now disconnect.