First Solar Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 27, 2024

Key Takeaways

  • Record Production and Backlog: First Solar produced a record 12.1 GW of modules in 2023 (up 33 % YoY) and ended the year with a historic 80.1 GW contracted backlog at approximately $0.298/W base ASP.
  • Strong Financial Performance: Full‐year 2023 net sales reached $3.3 B (up from $2.6 B in 2022) with EPS of $7.74, exceeding guidance, and Q4 net sales of $1.2 B driving robust margins.
  • Robust 2024 Guidance: Guidance calls for 15.6–16.3 GW shipped, fleet ASP of ~$0.282/W, gross margin around 46 %, and EPS of $13–$14, reflecting continued margin expansion.
  • Capacity and R&D Expansion: First Solar plans to increase global nameplate capacity to over 25 GW by 2026—including a 3.5 GW Louisiana facility—and will commission a new R&D Innovation Center and perovskite line in 2024.
  • Policy and Trade Risks: Management warned that Chinese subsidization, dumping practices, and loopholes in U.S. and international trade policies continue to exert downward pressure on pricing and threaten domestic manufacturing viability.
AI Generated. May Contain Errors.
Earnings Conference Call
First Solar Q4 2023
00:00 / 00:00

There are 6 speakers on the call.

Operator

Good afternoon, everyone, and welcome to First Solar's 4th Quarter and Full Year 2023 Earnings and 2024 Financial Guidance 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.

Operator

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

Speaker 1

Good afternoon and thank you for joining us. Today, the company issued a press release announcing its Q4 and full year 2023 financial results, as well as its guidance for 2024. 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.

Speaker 1

Mark will provide a business update and outlook for 2024. Alex will discuss our financial results for the Q4 full year 2023, as well as our financial guidance for 2024. Following their remarks, we will open the call for questions. Please note this call will include forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statements contained in today's press release and presentation for a more complete description.

Speaker 1

It is now my pleasure to introduce Mark Widmar, Chief Executive Officer.

Speaker 2

Thank you, Richard. Good afternoon and thank you for joining us today. I would like to start by noting that this month marks the 25th anniversary of First Solar Sounding, making us one of the oldest and most experienced solar module manufacturers in the world. This is a remarkable milestone and a journey that has positioned us as the Western Hemisphere's leading solar module technology and manufacturing company. While we're not the only American solar manufacturer to come into existence at the end of the last century, we're the only one of scale to remain today.

Speaker 2

However, this is not simply a story of survival, but one about the value of long term strategic decision making underpinned by a differentiated technology and business model, driving value creation for our shareholders and our partners. Ours is a story of innovation, values, competitiveness and perseverance. And we are proud of our work towards leading the world's sustainable energy future. As our journey continues, 2 years have been as consequential to our long term growth strategy as 2023. Over the past year, we expanded manufacturing capacity, mobilized at our latest announced facility in Louisiana, produced and shipped a record volume of modules, expanded our contracted backlog to historic levels and increased R and D investment and continue to evolve our technology and product roadmap.

Speaker 2

Let's review the key accomplishments in 2023, beginning with Slide 3. From a commercial perspective, 2023 continued momentum established in 2022 as long term multiyear procurement continue to drive demand. We added 10 new customers and secured 28.3 gigawatts of net bookings at a base ASP of over $0.30 per watt. Despite industry macro challenges such as global oversupply and pricing volatility, we continue to see strong mid to long term demand, especially in the United States, as shown with 2.3 gigawatts of net bookings since the previous earnings call at an ASP of $0.318 per watt excluding adjusters or $0.334 per watt assuming the realization of our technology adders. Our total contracted backlog now stands at 80.1 gigawatts with order stretching to the end of this decade.

Speaker 2

While Alex will provide a comprehensive overview of our 2023 financial results, our full year EPS came in at $7.74 which is above the midpoint of our initial and Q3 2023 guidance ranges and included the impact of the sale of our Section 45X tax credits and the impairment of our investment in Cubic PV. These items, neither of which were included in our Q3 2023 guidance ranges, adversely impacted our full year EPS by approximately $0.48 per watt. From a manufacturing perspective, we produced a record 12.1 gigawatts in 2023, representing a 33% increase in production over 2022. As a result, we have now surpassed 60 gigawatts of cumulative production since we first began commercial manufacturing in 2,002. This growth was driven by manufacturing excellence at our Series 6 factories, which produced 9.7 gigawatts in 2023, an increase of 600 megawatts compared to 2022.

Speaker 2

And the successful ramping of our new Series 7 factories in the U. S. And India, which combined to produce more than 2.4 gigawatts in 2023. Our top production bin for Series 6 was 4.75 watts and our top production bin for Series 7 was 5.45 watts. We remain committed to progressing our technology and product roadmap in 2023, having recently achieved a 22.6% world record cad tel research conversion efficiency based on our CURE technology and launched the 1st bifacial thin film solar panel.

Speaker 2

In addition, we successfully completed our manufacturing readiness trial under our CURE program in the Q4 of 2023 and expect to begin manufacturing modules powered by this technology at our lead line in Perrysburg in the Q4 of 2024. It's vital that our supply chain and logistics operations keep pace with our manufacturing expansion plans and we've made meaningful progress on this front in 2023. Key achievements including entering into agreements with VITRO to supply American made front and back glass for our manufacturing operations in the U. S. And with AMCO and ICE Industries to supply steel back rails for our facilities in Alabama and Louisiana.

Speaker 2

We also signed agreements with Saint Gobain to supply the back glass for our modules in India. Regarding growth, we exited the year with 16.6 gigawatts of nameplate capacity. This marks an increase of 6.8 gigawatts from 2022, driven by the commencement of operations at our Series 6 factories in Ohio and Indiana In 20 excuse me, in India. In 2023, we announced a $1,100,000,000 investment in a new manufacturing facility in Louisiana, which is expected to add 3.5 gigawatts to our nameplate capacity in 2026. When combined with our Alabama facility and Ohio manufacturing footprint expansions, both of which are in progress, we expect 2026 year end nameplate capacity of approximately 14 gigawatts domestically with another 11 gigawatts internationally for a global nameplate capacity of approximately 25 gigawatts.

Speaker 2

We also continue to invest in our technology with our R and D Innovation Center and a perovskite development line, both under construction in Ohio. These facilities are expected to commence operations in the first half and second half of 2024 respectively. Additionally, in 2023, we acquired Evolar, a European leader in perovskites technology and as it transitioned its laboratory in Sweden to become our first R and D facility in Europe. These and other investments in R and D allow us to accelerate the cycles of innovation we believe are necessary to extend our leadership in thin film solar technology. Turning to Slide 4.

Speaker 2

As of year end 2022, our contracted backlog totaled 61.4 Gigawatts with an aggregate value of $17,700,000,000 or approximately $0.288 per watt. Through year end 2023, we entered into an additional 28.3 gigawatts of contracts at an average ASP of $0.305 per watt. After accounting for sales of 11.4 gigawatts in 2023, we began 2024 with a total contracted backlog of 78.3 gigawatts with an aggregate value of $23,300,000,000 or approximately $0.298 per watt. Since the end of 2023, we have entered into an additional 1.8 gigawatts of contracts, resulting in a total backlog of 80.1 gigawatts. These most recent bookings have an average ASP of $0.311 per watt pre adjuster or $0.339 per watt if contract technology adjusters are realized.

Speaker 2

Additionally, we have received security against 206 megawatts of previously signed contracts in India, which now move these volumes from contracted subject to conditions precedent, grouping within our future opportunities pipeline to our bookings backlog. A substantial portion of our overall backlog includes the opportunity to increase base ASPs through the application of adjusters. If we're able to realize achievements within our current technology roadmap as is expected timing for delivery of the product. As of the end of the Q4, we had approximately 39.1 gigawatts of contracted volume with these adjusters, which if fully utilized realized excuse me, could result in additional revenue of approximately $500,000,000 or approximately $0.01 per watt, the majority of which would be realized between 20252027. This amount does not include potential adjustments, which are generally applicable to total contracted backlog, both related to the ultimate module bin delivered to the customer, which may adjust the ASP under the sales contract upward or downward or for increases in sales rate or applicable aluminum or steel commodity price changes.

Speaker 2

I'll now turn the call over to Alex who will discuss our Q4 and full year 2023 results.

Speaker 3

Thanks, Mark. Starting on Slide 5, I'll cover our financial results for the Q4 and full year 2023. Net sales in the Q4 were $1,200,000,000 increase of $400,000,000 compared to the prior quarter. The increase in net sales was driven by higher volumes sold, including higher net sales of Series 7 modules as we continue to ramp production at our new facility in Ohio. For the full year 2023, net sales were $3,300,000,000 compared to $2,600,000,000 in the prior year.

Speaker 3

This increase was driven by $900,000,000 of higher module net sales, resulting from increases in both volumes sold and ASPs, which was partially offset by $200,000,000 of lower revenue from our residual business operations, primarily related to the sale of our Lusail Norte project in the prior year. Based on our vertically integrated differentiated manufacturing model and the current form factor of our modules, we expect to qualify for Section 45X tax credits of approximately $0.17 per watt for each module produced in the U. S. And sold to a third party, which is recognized as a reduction to cost of sales in the period of sale. In December, we entered into an agreement with Fiserv, which resulted in the sale of approximately $687,000,000 for 2023 Section 45X tax credits for expected aggregate cash proceeds of $659,000,000 Received an initial $336,000,000 of cash proceeds in January with the remainder expected by the end of April 2024.

Speaker 3

In connection with this transaction, we recognized a valuation adjustment of $28,000,000 within cost of sales during the Q4 to reduce the carrying value of the credits to the amount expected to be received from the transaction. For the Q4 and full year 2023, we recognized $229,000,000 $659,000,000 respectively for Section 45X tax credits including the effect of the aforementioned adjustment. Gross margin was 43% in the 4th quarter compared to 47% in the 3rd quarter. This decrease was primarily attributable to the adjustment associated with the sale of our Section 40 5X tax credits, a higher mix of modules sold from our non U. S.

Speaker 3

Factories, which do not qualify for Section 45X tax credits and the write off of certain legacy production materials, partially offset by continued module cost reductions. For the full year 2023, gross margin was 39% compared to 3% in the prior year. The increase in gross margin was primarily due to the recognition of Section 45X tax credits, the decrease in sales rates, demurrage and detention charges, an increase in module ASPs, continued module cost reductions and the net impairment and sale of our Lusail Norte project in the prior year, partially offset by increased underutilization costs charged in the period in which they are incurred associated with factory ramped in 2023. The ramp charges were CAD16 1,000,000 in the 4th quarter compared to CAD25 1,000,000 in the 3rd quarter. Our ramp costs for the full year 2023 were $89,000,000 compared to $7,000,000 in the prior quarter.

Speaker 3

Our 2023 ramp costs were primarily attributable to our new Series 7 factories in Ohio and India. SG and A, R and D and production start up expenses totaled $111,000,000 in the 4th quarter, an increase of approximately $7,000,000 relative to the prior quarter. This increase is primarily driven by fees associated with the sale of our 2023 Section 45X tax credits and an increase in incentive compensation, partially offset by lower than expected credit losses resulting from improved collections of our accounts receivable. For the full year 2023, SG and A, R and D and production startup expenses along with litigation losses were $450,000,000 compared to $351,000,000 in the prior year. As a reminder, we recorded a litigation loss of 36 $1,000,000 during the Q2 related to our legacy systems business.

Speaker 3

The remaining operating expense increase of $63,000,000 was primarily attributable to higher employee compensation due to additional headcount, to higher employee compensation due to additional headcount, higher professional fees associated with litigation, implementation of a new enterprise resource planning system, the sale of our 2023 Section 45X tax credits and higher material and module testing costs for our research and development activities. Our 4th quarter operating income was $398,000,000 which included depreciation, amortization and accretion of $90,000,000 ramp costs of $16,000,000 costs associated with the sale of our 2023 secondtpo FX tax credits of $35,000,000 dollars legacy systems related income of $7,000,000 production startup expense of $10,000,000 and share based compensation expense of 11,000,000 dollars Our full year 2023 operating income was $857,000,000 which includes depreciation, amortization and accretion of $308,000,000 dollars ramp costs of $89,000,000 costs associated with the sale of our 2023 SectionPoint index tax credits of 35,000,000 dollars legacy systems business related costs of $7,000,000 production start up expense of $65,000,000 share based compensation expense of 34,000,000 dollars For the Q4, we took a $23,000,000 impairment associated with a strategic investment in Cubic PV. Our investment thesis is anchored to their continuing development work on perovskites and tandem technologies.

Speaker 3

Outside of our investment thesis, they had planned to develop silicon wafer manufacturing capacity. This plan was recently abandoned due to surging construction costs and declining wafer prices, which triggered an impairment. Interest income in the Q4 was $24,000,000 roughly the same as the prior quarter and interest income for the full year 2023 was $98,000,000 an increase of $64,000,000 compared to the prior year, primarily due to higher interest rates on our cash and marketable securities. We recorded an income tax expense of $27,000,000 in the 4th quarter $61,000,000 for the full year. 4th quarter income per diluted share was $3.25 compared to $2.50 in the prior quarter.

Speaker 3

For the full year 2023 income per diluted share was $7.74 compared to a loss per diluted share of $0.41 in 2022. Next, turn to Slide 6, discuss select balance sheet items and summary cash flow information. The aggregate balance of our cash, cash equivalents, restricted cash, restricted cash equivalents and marketable securities was $2,100,000,000 at the end of the year, an increase of $300,000,000 from the prior quarter and a decrease of $500,000,000 from the prior year. Our year end net cash position, which includes the aforementioned balance of less debt was $1,600,000,000 an increase of $300,000,000 from the prior quarter and a decrease of $800,000,000 from the prior year. The increase in our net cash balance in the 4th quarter was primarily driven by module segment operating cash flows, including advanced payments received from future module sales, partially offset by capital expenditures associated with our new plants under construction in Alabama, Louisiana and India.

Speaker 3

Decrease in our net cash balance for the full year 2023 was primarily due to capital expenditures, partially offset by module segment operating cash flow. Cash flows from operations were $605 compared to $873,000,000 in 2022. This decrease was primarily driven by higher operating expenditures in support of our ongoing manufacturing expansion and lower advanced payments received for future module sales, partially offset by higher cash receipts from modules sold during the year. Capital expenditures were $347,000,000 in the 4th quarter compared to $286,000,000 in the 3rd quarter. Capital expenditures were $1,400,000,000 in 2023 compared to $900,000,000 in 2022.

Speaker 3

Now I'll turn the call back to Mark to provide a business and strategy update.

Speaker 4

All right.

Speaker 2

Thank you, Alex. A word about overall market conditions and the policy environment. As we enter 2024, while we continue to operate from a position of strength, leveraging our points of dimtration and strong contracted backlog, the continuation of Chinese subsidization and dumping practices has caused a significant collapse in cell and module pricing. Last month, Meijerberger, a European module and cell manufacturer announced that deteriorating market conditions in Europe resulting from such practices as forcing them to prepare for shuttering module assembly in Germany. Exemplifying the challenges to the EU stated goal of creating a self sustaining renewable manufacturing industry.

Speaker 2

In India, sudden and significant reduction in cell pricing and the non domestic content market segment has blunted the efficacy of the country's measures to address Chinese supply chain imports, distorting market pricing in the country and disincentivizing the ability of local suppliers to help achieve India's ambition to create broad domestic manufacturing to serve its domestic market. And here in the U. S. Notwithstanding the U. S.

Speaker 2

Department of Commerce's general determination of antidumping and countervailing duty circumvention by 4 Southeast Asia countries. The continued record level of cell and module imports from these regions poses a threat to the current administration's ambitions of scaling and securing a robust onshore solar manufacturing base. In light of the current and forecasted state of oversupply in these markets and the resulting headwinds to the ability of domestic manufacturers to scale, we call upon governments and policymakers to either reinforce the measures already enacted or move expeditiously to take action. For instance, here in the U. S, we have long taken the position that the Section 201 Safeguard bifacial exemption simply opened the door for a multi gigawatt scale Crysisilicon product to have unfettered access to the American solar market, threatening U.

Speaker 2

S. Solar manufacturing. Indeed, a recent report released by the U. S. International Trade Commission noted that a number of commenters cited the bifacial exclusion along with the 2022 executive order temporary blocking the U.

Speaker 2

S. Department of Commerce for imposing new tariffs on solar imports from Cambodia, Malaysia, Thailand and Vietnam as leading to increased availability of foreign made solar panels. We therefore advocate as the administration undergoes its current evaluation of the 201 tariffs that it closes this market distorting bifacial exemption, which has been exploited to eviscerate the intent of these measures to safeguard the domestic industry. In addition, with respect to the Uyghur Forced Labor Prevention Act, which addresses the scourge of utilizing forced labor within the solar supply chain. We similarly advocate for custom and border protection to utilize all of the tools in its toolbox to ensure a comprehensive enforcement strategy of law already on the books and to ensure that regardless of which port product is shipped into, the legal requirements in place are consistently enforced.

Speaker 2

In India, while the approved list of module manufacturers or ALMM has been effective in incentivizing domestic manufacturing investment, pauses in the application of this law and the related impacts to domestic pricing have put progress at risk. We are heartened that the ALM waivers currently in place are expected to expire at the end of Q1 and would encourage the federal government of India to not grant such waivers in the future and to also consider expanding the ALMM equivalent requirements to sell manufacturing. These actions we believe will foster India's ambitions of reducing their dependency on the Chinese solar supply chain. And in our view, incentivize further capital investment in this country. Turning to the EU, while we are pleased with this month's recent development to establish the Net Zero Industry Act, which will prioritize permitting and funding for technologies deemed necessary to help the EU achieve its goal of making the region climate neutral by 2,050, much work remains to be done.

Speaker 2

As we have continuously stated, investment in local manufacturing can only scale when sufficient measures are in place to ensure a long term consistent level playing field. Such measures require addressing loopholes in trade policies that create the current situation where an oversupply of Chinese modules is being sold at artificially low prices as well as the harmful impacts of the use of forced labor. First Solar has demonstrated the benefits to domestic economies and communities of establishing local solar manufacturing. This is illustrated by an economic impact study commissioned by us and conducted by the University of Louisiana at Lafayette that was released yesterday. This study found that First Solar supported over 16,000 direct, indirect and induced jobs across the U.

Speaker 2

S. In 2023. This excludes an additional 5,800 construction related jobs tied to our capital investments in 2023. As we scale to an expected 14 gigawatts of annual nameplate capacity in the U. S, the analysis forecasts that First Solar's operations alone will support approximately 30,000 direct, indirect and reduced jobs across the country by 2026, representing approximately $2,800,000,000 in annual labor income and $10,000,000,000 in total economic output to the 2026 U.

Speaker 2

S. Economy. This study estimates that every First Solar job, excluding construction, supported 6 jobs in 2023. And this ratio is forecasted to increase to 7.3 jobs by 2026. We believe this data defines in tangible terms value that domestic solar manufacturing delivers to the U.

Speaker 2

S. Economy and should provide a basis for bipartisan political support to establish and maintain the policies and trade measures necessary to provide a domestic solar supply chain and a level playing field. We now turn to Slide 7 to examine our pipeline. Despite the current oversupply of Chinese modules and loopholes and trade policies in our key markets, our pipeline of potential bookings remain robust as reflected on Slide 7. Total bookings opportunity stands at 66.5 Gigawatts, an increase of approximately 600 megawatts since the previous quarter.

Speaker 2

Our mid to late stage opportunities decreased by approximately 500 megawatts to 30 2 Gigawatts and includes 23.2 Gigawatts in North America, 8.5 Gigawatts in India and 0.3 Gigawatts in the EU. Included within our mid to late stage pipeline are 3.8 Gigawatts opportunities that have contracted subject to CP presidents, which includes 1.1 gigawatts in India. Given the shorter timeframe between contracting and product delivery in India relative to other markets, we would not expect the same multiyear contracted commitments that we are currently seeing in the United States. As a reminder, signed contracts in India are not recognized as bookings and so we have received full security against the offtake. Turning to Slide 8.

Speaker 2

We are pleased with our progress of our Ohio capacity expansions and new Alabama manufacturing facility, which are expected to be completed and begin commercial shipments in the first and second half of the year respectively. Once these projects are completed, we expect to exit 2024 with over 21 gigawatts of global nameplate capacity, approximately half of which is forecasted to be local in the U. S. Our new Louisiana facility is also on track and is expected to commence commercial operations in late 2025, bringing our expected total nameplate capacity to over 25 gigawatts by the end of 2026 with 14 gigawatts in the U. S.

Speaker 2

As a reflection of this expansion roadmap and continued optimization of the existing fleet, We have summarized our expected exit nameplate capacity and production for 2024 through 2026 on this slide. Our strategic expansion of manufacturing capacity in the U. S, which is supported by an extensive domestic value chain, enables our customers' efforts to begin from to benefit from the ITC and production tax credit domestic content bonuses under the Inflation Reduction Act. The resulting demand for First Solar's American made solar technologies combined with the eligibility of our vertically integrated manufacturing facilities for Section 45X tax credits is expected to contribute significantly to our financial performance in the coming years. In addition to progressing our manufacturing expansion plans, we expect 2024 to be a foundational year from the point of view of accelerating our R and D efforts in pursuit of our goal to develop and commercialize the next generation of photovoltaics.

Speaker 2

As previously noted, in addition to a new perovskite development line, we expect to commission our Ohio R and D Innovation Center this year. Located near our existing Perrysburg manufacturing facility and covering an area of approximately 1,300,000 square feet, It will feature a high-tech pilot manufacturing line allowing for the production of full size prototypes of thin film and tandem PV modules. This center will allow us to create an R and D sandbox separate from our manufacturing operations, which we expect will accelerate without taking manufacturing mission critical tools offline, which would impact throughput and cost. To close, as I mentioned at our recent Analyst Day, we established a goal to exit this decade stronger than we entered it. Reflecting on our progress, we entered we ended 2023 in a stronger position than we began it with a record contracted backlog, a significant pipeline of booking opportunities and continued robust demand in our core markets despite some of the current policy landscape challenges.

Speaker 2

We enter 2024 with new capacity of our most advantaged Series 7 product coming online, increased R and D investment and capabilities and continued momentum across the business driven by a focus on our points of differentiation and a balanced business model focused on growth, liquidity and profitability. I'll now turn the call over to Alex, who will discuss our 2024 outlook and guidance.

Speaker 3

Thanks, Mark. Before discussing our financial guidance, I'd like to reiterate 3 themes from our recent Analyst Day related to our growth and investment thesis, our approach to our backlog and bookings and our expansion into India. Firstly, from a growth and investment thesis perspective, we continue to focus on differentiation and are guided by an approach to our business model that balances growth, profitability and liquidity. This decision making framework informs our long term strategic direction. It guided our strategy to exit the systems business at the end of the last decade and significantly expand our module manufacturing business, evidenced in a doubling of nameplate capacity from 2021 to 2023 and the forecasted increase in nameplate capacity of over 50% in 2023 to 2026.

Speaker 3

This scaling capacity is supported by optionality in our R and D roadmap across energy attributes including efficiency, degradation, temperature coefficient and bifaciality. We've gone from deploying prototypes of early bifacial cad cell modules at a test facility in 2021 to converting our lead line at the end of 2023 with commercial deployment across a significant portion of our fleet plans for 2024. Additionally, in the Q4 of 2024, we expect to be in production of our 1st commercial cure modules on our lead line in Ohio. So relates to contracting this volume, we continue to prioritize certainty. Our reported backlog, which includes U.

Speaker 3

S. And Rest of World bookings with our typical contractual security provisions, but excludes contracts signed in India and less backed by 100% liquid security, is made up of 2 types of contracts. Those relate to a specific asset or project and frameworks, which are typically larger, multiyear therefore often have less certainty over delivery timing. Common across these contracts is a fixed price structure, which may include adjusted for technology improvements and which typically include adjusted for bin class freight risk and commodity. As of December 31, 2023, approximately 95% of the megawatts in our backlog had some form of freight protection, Approximately 85% had some form of steel and or aluminum commodity cost protection.

Speaker 3

As a reminder, a limited number of our contracts contain a termination to convenience provision often related to customer regulatory requirements or as a portion of large multiyear framework commitments, which generally requires substantial advance notice to be invoked and features a contractually acquired termination payment to us. This payment is generally set at a substantial percentage of the contract value and backstopped by some form of security. As of today's call, the percentage of megawatts in our contracted backlog that had a termination for convenience clause with an associated termination payment obligation is roughly equivalent to that given on our Analyst Day in September of 2023. Note, given this provision is one of many deal terms that is negotiated with our customers in the process of a module sale, we do not expect to provide updates on this metric. On our earnings call in February of 2022, we stated that as we significantly increased our nameplate capacity, we believe that this anticipated growth would generate significant contribution margin to drive operating margin expansion.

Speaker 3

In 2023, that thesis was validated as we saw significant year over year operating margin expansion. As we continue our capacity growth, we expect to continue to see operating margin expansion in 2024 as reflected in our guidance provided today. Secondly, as it relates to our contracted backlog, excluding India, we remain cumulatively oversold through 2026. This over allocation position is deliberate, provides us resilience due to uncertain timing of delivery inherent to some of our larger framework contracts, a natural tendency for delay in the project development process as well as the potential for incremental supply as we start up and ramp new factories. The further out the delivery time frame, the more comfortable we are with over allocation.

Speaker 3

The closer we get to delivery dates and as we enter any given year and undertake our annual planning process, the more we look to ensure that demand is able to be met with available supply. As of late Q4 2023, we have not seen significant customer requests for schedule changes beyond the typical daily and weekly balancing that occurs in our supply demand forecasting. As we concluded our planning process for 2024 through the 1st 2 months of the year, we have seen some requests from customers to shift delivery volume timing out as a function of project development delays. As we stated previously, including on our Analyst Day, we will work with our customers to optimize their project schedules, including moving delivery dates in the short and medium term where possible, balanced by the constraints of our production and shipment needs, including selling our full production in 2024, which we continue to expect to do. Our contractual business underlie and govern these relationships and discussions.

Speaker 3

In certain situations, our approach to over selling could expose us contractually, should we be unable to manage our over allocated position. This is where the strength of our long standing customer relationships is key, providing flexibility not just for our customers, but also often for First Solar delivery time lines. Given our supply demand balancing so far and our ability in the near term to supply modules from India to the U. S, we do not forecast any damages associated with over allocation in 2024. Contract provisions also protect us in the event of long term customer issues or disputes.

Speaker 3

For example, we were recently notified by a corporate customer they are experiencing significant delays to their project. And based on this and their current position of financial distress, they do not intend to take delivery of 3 81 megawatts of modules scheduled for delivery in 2024. We are working with this customer to optimize the outcome for both the customer and First Solar, but in this and other similar circumstances, we will continue to impose our contractual rights to termination penalties or other damages in the event of their contractual breach. As previously discussed on recent earnings calls and at our Analyst Day, we believe our approach to forward contracting has been validated in the past through multiple pricing and supply demand cycles in the industry. We've also previously stated that we expect the pace of bookings to slow after 2 record contracting years.

Speaker 3

Our current backlog cumulatively oversold through 2026 and with bookings extending to the end of the decade provides us optionality in periods of pricing and policy uncertainty. Put simply, if we did not book any more deals by the end of this year, we would remain sold out 2 years forward through 20252026. We do not expect this to be the case and we will continue to contract with customers who prioritize long term relationships and value our differentiation as reflected in our 2.3 gigawatts of bookings since the previous earnings call. But given the significant variables in the policy environment that Mark discussed earlier as well as the uncertainty around the 2024 U. S.

Speaker 3

Presidential and congressional elections and their potential impact on the renewable sector, we expect to take advantage of this position of strength and be highly selective in our contracting in 2024. Finally, as I relate to India, from a contracting perspective, as of our Q3 earnings call in October, we had 1.7 gigawatts of signed contracts within our mid to late stage pipeline. As a reminder, signed contracts in India will not be recognized as bookings until we have received full security against the offtake. As of today's call, that number is 1.1 gigawatts following a 600 megawatt default by a customer who has recently delisted from the New York Stock Exchange. We are seeking to enforce our contractual rights under this contract and are currently seeking to recover the contractual termination payments owed to us.

Speaker 3

From an ASP perspective, the temporary suspension of the LMM policy that Mark discussed earlier is having a short term negative impact on domestic market ASPs and gross margin, which is reflected in our 2024 guidance. We believe the expected reinstatement of the ALMM at the end of Q1 together with the ability to serve the domestic content market segment, which we are uniquely positioned to address given our vertical integration, provides a market opportunity with a gross margin profile excluding the Section 45x tax credit benefit comparable to the fleet average given the lower production costs in our Chennai facility. With this context in mind, I'll next discuss the assumptions included in our 2024 financial guidance. Please turn to Slide 9. As referenced in 2023, we have effectively completed the transition back to a module only company.

Speaker 3

We continue to have certain remaining risks, liabilities, indemnities, warranty obligations, accounts payable, accounts receivable, earn outs, cash collection, dispute resolution and other legacy involvement related to our former systems business. Consistent with 2023 reporting, we no longer provide segment specific guidance, but shall in the future note any significant impact from the other segment to our consolidated financials. So related to growth, our factory expansions and upgrades remain on schedule to increase our expected global nameplate capacity to 25 gigawatts by year end 2026. In 2024, growth related costs are expected to impact operating income by approximately $125,000,000 to 155,000,000 This is comprised of startup expenses of $85,000,000 to $95,000,000 primarily incurred in connection with our new factory in Alabama and estimated ramp costs of $40,000,000 to $60,000,000 at our factories in India, Ohio and Alabama. Anticipate these expansions, upgrades will contribute meaningfully to our production plans in 2025 beyond.

Speaker 3

Operationally, in 2024, we're expected to produce 15.6 to 16 gigawatts of modules. From a sold perspective, we expect to sell 15.6 to 16.3 gigawatts, of which 5.8 to 6.1 gigawatts is produced in the U. S. And 2 to 2.2 gigawatts is assumed to be domestic sales in India. For the full year, we expect to recognize a fleet ASP sold approximately $0.282 per watt.

Speaker 3

This includes India domestic sold volume, a non India base ASP roughly in line with our expectations from our September Analyst Day and the benefit of certain technology, commodity and freight adders. From a cost perspective, full year 2024 cost per watt produced is forecast to be in the range of $0.187 to $0.189 per watt, an approximately 2% to 3% improvement versus 2023. This is driven by expected improvements in throughput, yields and reduced inbound freight and variable costs as well as the benefit of an increased mix of lower cost India production, partially offset by increased costs related to the rollout of our bifacial product. As it relates to cost of what sold, watts sold, we are forecasting fleet average sales rate, warehousing ramp and other period costs of approximately $0.03 per watt, resulting in a full year 2024 cost watt sold reduction approximately 7% versus the prior year. As mentioned on our Analyst Day, approximately 3 quarters of the cost of our module is derisked given approximately 1 third of the cost is fixed and approximately 2 thirds of the variable costs are subject to forward contracting, long term agreements or have contractual mechanisms to pass costs through to our customers in the event that these costs change materially.

Speaker 3

Additionally, over 95% of our backlog has some form of sales rate protection leading to significant gross margin visibility. From a capital structure perspective, our strong balance sheet has been and remains a strategic differentiator, enabling us to both weather periods of volatility as well as providing flexibility to pursue growth opportunities including funding our Series 6 and Series 7 growth. We ended 2023 in a strong liquidity position and coupled with forecasted operating cash flows from module sales, cash from the sale of our 2023 Section 45X tax credits and anticipated module order prepayments, we expect to be able to finance our currently announced capital programs without requiring external finance. So relates to our 2024 Section 45X credits, we are forecasting to elect direct payments and are therefore assuming no discount to the value of these credits for a sale to a 3rd party, but we'll continue to evaluate options and valuations for earlier monetization. I'll now cover the full year 2024 guidance ranges on Slide 10.

Speaker 3

Our net sales guidance is between €4,400,000,000 and 4,600,000,000 dollars Gross margin is expected to be between $2,000,000,000 $2,100,000,000 or approximately 46%, which includes $1,000,000,000 to $1,050,000,000 of Section 45x tax credits and €40,000,000 to €60,000,000 of ramp costs. SG and A expenses are expected to total €170,000,000 to €180,000,000 versus £197,000,000 in 2023, demonstrating our ability to leverage our largely fixed operating cost structure while expanding production. R and D expenses are expected to total $200,000,000 to $210,000,000 versus $152,000,000 in 2023. R and D expenses are increasing primarily due to commencing operations at our R and D Innovation Center and perovskite development line and the expectation of adding headcount to our R and D team to further invest in advanced research initiatives. SG and A and R and D expense combined is expected to total $370,000,000 to $390,000,000 Total operating expenses, which include $85,000,000 to $95,000,000 of production startup expense, are expected to be between $455,000,000 to $485,000,000 Operating income is expected to be between €1,500,000,000 and €1,600,000,000 implying an operating margin of approximately 34% to 35% and is inclusive of $125,000,000 to $155,000,000 of combined ramp costs and plant start up expenses and $1,000,000,000 to $1,050,000,000 of Section 45x tax credit.

Speaker 3

Compared to an operating margin of 26% in 2023, this year over year increase demonstrates how we expect to leverage our business model against the largely fixed SG and A cost structure, which shows the value of growth in driving incremental contribution margin and operating margin expansion. Turning to non operating items, we expect interest income, interest expense and other income to net to €35,000,000 to €50,000,000 dollars Full year tax expense is forecasted to be $135,000,000 to $150,000,000 This results in a full year 2024 earnings per diluted share guidance range of $13 to $14 Though from an earnings cadence perspective, we expect a net sales and cost of sales profile, excluding the benefit of Section 45X tax credits of approximately 15% in Q1, 25% in Q2 and 60% in the second half of the year. We forecast Section 45X tax credits of approximately $190,000,000 in Q1, dollars 230,000,000 in Q2 and $600,000,000 in the second half of the year. With an operating expenses profile roughly evenly split across the year, this results in a forecasted operating income and earnings per share profile of approximately 15% in the first quarter, 25% in the second quarter and 60% in the second half of the year.

Speaker 3

Capital expenditures in 20 24 are expected to range from $1,700,000,000 to $1,900,000,000 as we progress the construction of our Alabama and Louisiana Series 7 factories, implement throughput upgrades to the fleet and invest in other R and D related programs. Approximately 2 thirds of our CapEx is associated with capacity expansion and 1 quarter relates to our R and D center and technology replication, with the remainder mostly related to maintenance and logistics. Our year end 2024 net cash balance is anticipated to be between $900,000,000 1,200,000,000 dollars Turning to Slide 11, I'll summarize the key messages from today's call. Demand has been solid with 2.3 gigawatts of net bookings since the previous earnings call leading to a contracted backlog of 80.1 gigawatts. Our opportunity pipeline remains strong with global opportunity set to 66.5 gigawatts, including mid to late stage opportunities of 32 gigawatts.

Speaker 3

We continue to expand our manufacturing capacity, exiting 2023 with 15.6 gigawatts of nameplate capacity I expect to exit 2026 with approximately 25 gigawatts of nameplate capacity, including approximately 14 gigawatts of nameplate capacity in the U. S. We are, as previously announced, adding a new dedicated R and D facility in Ohio, projected to be operational in the first half of twenty twenty four, which we believe will allow us to optimize technology improvements with significantly less disruption to our commercial manufacturing lines. Earnings diluted share was $7.74 in 2023 including the impact of selling our 2023 Section 45X tax credits and the impairment of our investment in Cubic PV above the midpoint of our initial and Q3 updated guidance. Forecasting full year 2024 earnings per diluted share of $13 to $14 Finally, we ended the year with a cash balance of $1,600,000,000 net of debt, expect to end 2024 with a cash balance of $900,000,000 to $1,200,000,000 net of debt.

Speaker 3

This net cash position together around monetizing our 2054 Section 45X tax credits places us in a position of strength in which to expand our capacity, invest in research, development and technology improvements and pursue other strategic opportunities as we march forward on our journey to lead the world sustainable energy future. With that, we conclude our prepared remarks and open the call to questions. Operator?

Operator

Thank We'll take the first question from Moses Sutton, BNP Paribas.

Speaker 4

Hi, thanks for taking the question and congrats on continued price momentum and this execution. At some point, should we see bookings, I want to say near 0 in a given quarter? I mean, simply can't book more till time passes naturally, and I think investors kind of think of that. Or conversely that you eventually lower that ASP into like $0.29 range, it went all the way 0.32, which is great to see. So just curious how that dynamic plays through the year.

Speaker 4

I know you could book some, but what should we expect more precisely?

Speaker 2

Yes. So I'll take that one I guess. And in terms of as Alex included in his remarks, I mean our plan is to be patient. The opportunities there you can see is the pipeline of opportunities that we represent both mid to late and obviously the early stage pipeline. Separating U.

Speaker 2

S. From India, you're going to continue to see bookings in India. Clearly, as we indicated, we've got a conversion that will happen of those contracted subject to CP. So that's going to continue on a cadence that you would expect, call it, 100 of megawatts, maybe a gigawatt on any particular quarter to sell through that in a position for 2024. So you'll see that momentum continuing.

Speaker 2

As it relates to the U. S, our strategy of being patient is largely how we're going to engage the market in conversations with our customers. I'm very happy with the bookings that we showed up at this last quarter. Great ASPs, good counterparties, technology adders associated with it. So and feathered into a period of time that's very constructive for us.

Speaker 2

A lot of that volume goes out into 27, 28, 29 and touches 30 even. So, AbbVie from that standpoint. We've got right now we've got a short window between now and the next earnings call. So you could see maybe a period of softness there outside of the volume that we would expect to continue to recognize for India. But I've got ongoing commercial conversations right now for north of 3 gigawatts of bookings here for shipments into the U.

Speaker 2

S. That are in late stage negotiations and actually as this call was ongoing, I got a text that about 10% of that now has been booked and will reflect in the next earnings call. So the momentum there is available to us. It's how we choose to engage and our strategy is to try to maintain ASPs and deliver the certainty that we provide to our customers. There's a lot going on right now when you step back and reflect.

Speaker 2

I mean there's a whole policy environment of issues that have to be resolved and uncertainty and there's potential change in the administration in D. C, which Alex highlighted as well. And if there wasn't a Republican administration, how would they choose to engage? And there's all kinds of conversations on how they think through IRA, sure. But I don't think that they would be any less lenient on the Chinese and I think they could get more aggressive, and with potential trade barriers that our customers are concerned about.

Speaker 2

And so they value the certainty of First Solar and looking to de risk their projects as far out as they can go. The other thing that's still driving some uncertainty in the marketplace is as you've seen recently with on an IP standpoint, especially as the market has transitioned to Topcon. Genco has indicated that they have a strong IP position for Topcon and they're going to enforce that IP. You've seen Maxion make statements as well that they've got an IP position around Topcon that they're also going to enforce. And as you know, there is a significant transition towards Topcon.

Speaker 2

So our customers also have to think through freedom to operate with their counterparties around intellectual properties. So there's a lot that they have to think through and there's a lot of uncertainty outside of engaging with First Solar. And so we'll be disciplined and measured in our negotiations. But I would not at all be surprised that as we finish out this year, we'll be somewhere around a one to one book to bill, which will have 16 gigawatts or so. That was our shipment profile.

Speaker 2

I wouldn't be surprised if our bookings is somewhat in that zip code. And largely that would fill out our pocket of opportunity in 2027. So we could exit this year with a comparable backlog we have right now and potentially have a very solid position going in through 2027 and continuing to think about how we book out through the end of the decade.

Operator

We'll take the next question from Philip Shen, ROTH Capital Partners.

Speaker 5

Hey guys, thanks for taking my questions. First one's on recent bookings ASPs at $0.32 almost. And can you talk through the dynamics influencing that pricing? You mentioned a bunch of it earlier, Mark, but I'd love to get a feel for how the customer conversations have inflected. Last year, it was very much an oversupply kind of price decline environment.

Speaker 5

And recently, a lot of this policy activity has kind of swung back in your favor as it relates to greater UFLPA enforcement or the potential for the 201 bifacial exemption being removed. Can you just talk through that customer conversation and how that may have inflected recently? And then also, do you expect that pricing momentum to remain steady through 2024? Or is there even potential that it could go higher? Or do you think there's risk that it could go lower?

Speaker 5

The second question here is around module volume that you talked about there's a customer that can't take delivery of 3 81 megawatts of product. Our checks on this suggest there could be as much as 1.5 gigawatts floating around. And so how many megawatts do you expect the market to transact in the secondary market, if you will, in 2024? So I know it's not your risk ultimately, but you do have to manage it at some level and your customers ultimately have to deal with it. But and you should have protections, but it's something that can be an issue to understand better as well.

Speaker 5

So thanks Mark.

Speaker 2

Yes. So let me I'll start with your second one and then I'll go back to the first one. Look, this 380 megawatts was to think

Speaker 3

of it almost as a

Speaker 2

one off transaction that I think we booked 2, 3 years ago, I'm trying to remember the exact timeframe. It was for and we specifically stated in the prepared remarks, it was for a corporate customer, who basically was going to use it for self generation, self consumption, right? And ultimately, it was looking potentially not just from to potentially leverage it beyond just the raw form of the electricity generation that it would provide. That customer has gone into some financial challenges that they're having to deal with. And so those megawatts are an obligation to the customer.

Speaker 2

We'll enforce the rights in the contract. We will also work with the customer to recontract that if that opportunity is available to us. If not, then there's an obligation for them to take delivery and then to pay for that. The particular project, it is a project that is cited in the state of permitting and I believe has an interconnection. That project asset itself is being marketed right now.

Speaker 2

And we'll see how successful that is to the extent that that transaction does happen, then the modules will go along with it. There'll be an assignment given our consent and we'll support that type of consent again with the spirit of honoring, reinforcing rights underneath our contract. So that one is that issue. Phil, to the other question because I know you've asked this a couple of times about markets and a product that's out in the secondary market. There are customers who are challenged right now from a development standpoint as it relates to interconnection positions.

Speaker 2

It's something that you are very well aware of. Our contracts and our customers are aware of the fact that they need to take delivery of those modules. And when I'm talking about this, this is 100 of megawatts. This is not a lot of volume in 2024. Their option is to find a warehouse and to put it into a warehouse or potentially they could look to try to transact with a 3rd party.

Speaker 2

We'll try to find the right possible outcome with our customers. We always have worked in the spirit of let's figure out a solution that can work. So I'm aware of that. I don't believe it will have any significant impact on our ability to continue to book any volumes that may be available in 2024 given schedule movements and those types of things.

Speaker 3

But we'll have to keep

Speaker 2

an eye on it. But I also want to just want to make sure that the one deal that we talked about was unique in its circumstances and is it necessarily reflective of maybe the other opportunities that you're hearing about in the marketplace. As it relates to pricing and ASP and momentum, policies clearly toggles back and forth and trends up and down. And right now, I think there is a lot of uncertainty from that standpoint. But other thing I want to continue to try to emphasize is the value of certainty of First Solar and the value of our relationship and our value proposition.

Speaker 2

I was having a conversation with 1 of our largest partners just last week, and they couldn't be happier to be partnering with First Solar. And it's the attributes we're talking about, the strength of the technology, the certainty of First Solar. But it also gets into the responsible solar aspects as well and our carbon footprint and our water usage and our energy payback and our circular economy. And when you that's inherent to their value proposition that they're selling to their contracted offtake customers like data centers who value that as well. This work that we're doing around economic impact, no different than that.

Speaker 2

I mean creating American jobs, I mean being closely tethered to that, supporting and investing back into America and American manufacturing, American technology, all that plays to our strength. And so yes, policy environment is helpful right now, but these other attributes are almost equally as important. And our partner said basically, look, I know I may have to pay a little bit more for First Solar. But when I look at the brand and the certainty and the value proposition that they are creating, more than happy to do that. And this is a counterparty that is almost 80 plus percent, 100 percent sole source into First Solar and we've got a deep relationship and multi gigawatts of opportunity still in front of us.

Speaker 2

And I don't see this as a unique one off. This is generally the engagement and conversations that we're having with our customers.

Speaker 3

And so you mentioned the pricing would stay steady. There's definitely some elasticity of demand related to pricing, which is why we want to be disciplined and why the position of strength that we put ourselves in is so important. We have no need to go out and chase deals. As I mentioned on the call, we could book nothing between now and the end of the year and still find ourselves 2 years forward sold out. So if there is uncertainty in the market, we can afford to step back and therefore we can manage to some degree some of that price erosion.

Speaker 3

So we'll continue to work with people that value the attributes the market brings. And therefore I think you'll see slower bookings, lower pace of bookings at pricing that we find acceptable in the long term. Clearly, if we wanted to sell a lot more and drop pricing, that would happen, but that's not the strategy.

Speaker 2

Yes. And I think this we just tether back to, look, if we can achieve a one to one book to bill this year, largely sell through our open position in 2027, I think that would be a great result and position the company very well as we exit 2024.

Operator

And everyone, that is all the time we have for questions today. This does conclude today's conference. We would like to thank you all for your participation. You may now disconnect.

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