第一太陽能 (FSLR) 2019 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to First Solar's First Quarter 2019 Earnings Call.

This call is being webcast live on the Investors section of First Solar's website at firstsolar.com.

(Operator Instructions) As a reminder, today's call is being recorded.

I would now like to turn the call over to Adrianna Defranco from First Solar Investor Relations.

Ms. Defranco, you may begin.

Thank you.

Good afternoon, everyone, and thank you for joining us.

Today, the company issued a press release announcing its first quarter 2019 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 2019.

Following their remarks, we will open the call for questions.

Please note, this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations.

We encourage you to review the safe harbor statements contained in today's press release and presentation for a more complete description.

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

Mark?

Thank you, Adrianna.

Good afternoon and thank you for joining us today.

I would like to begin by briefly discussing our EPS result for Q1.

As we emphasized on our February earnings call, we expected that the combination of lower quarterly Series 6 sales and the higher Series 6 cost per watt relative to the full year average as well as the timing of both ramp and start-up charges and the timing of project development sales would have the most acute impact to earnings in the first quarter.

Our EPS results for the quarter was in part driven by these factors.

However, the first quarter was also adversely impacted by some unanticipated non-Series 6-related costs.

Alex will go into more detail, but one key area where we have seen significant recent challenges has been containing costs in our EPC business.

These challenges include factors both external and internal to First Solar.

Externally, a higher-than-expected construction labor market and certain equipment supply issues produced a drag on profitability at several of our systems projects.

We also encountered certain weather delays for which relief was not available under the EPC contract, which in turn put pressure on required milestones and other completion dates and correspondingly increased costs.

From an internal perspective, our recent record of project cost management, including subcontractor and vendor cost management, failed to meet our expectations.

Our EPC capability delivers strategic value to the company but, following a recent evaluation of these issues, we determined that restructuring of the EPC organization was prudent given these issues.

Accordingly, we have installed new leadership of the EPC organization, merging our energy systems function with the engineering procurement and construction group.

In addition, we are reviewing certain supplier and subcontractor arrangements and potential remedies with a view to addressing certain of these costs.

Turning briefly to the market.

Catalysts driving increased PV penetration continued to point to a strong global demand in 2019 and momentum building thereafter.

For example, in the U.S., there's a growing impetus to decarbonize electricity.

In the past month, Washington State joined California, New Mexico, Hawaii, Puerto Rico and Washington, D.C. in an active legislation that mandates 100% clean electricity standard.

Additionally, over a dozen other states have put in place nonbinding goals, have introduced or are planning to introduce legislation with varying levels of clean energy commitments or are committing to studying clean alternatives to their power generation portfolios.

Corporate buyers are also increasingly looking for ways to decarbonize their electricity.

This is reflected in the fast-changing PPA landscape in the United States, which has seen an evolution in buyer types and transaction structures.

We see a significant rise in corporate and commercial industrial PPA structures with large technology companies dominating the market but with growing interest from other sectors such as health care, finance and even oil and gas.

As part of our focus to accelerate growth in this segment, First Solar has joined the Board of the Renewable Energy Buyers Alliance, which has committed to establishing a clear path to its members to procure GEOCARBON electricity.

This alliance's goal is to catalyze 60 gigawatts of new renewable energy for its members by 2025.

Internationally, Europe has continued on its growth trajectory with 2019 potentially being a record year for PV installations.

Initially, this year, First Solar celebrates 15 years in Europe with approximately 5 gigawatts of installed capacity across the region.

This year, we expect European growth to be largely powered by the resurgence of the utility scale market in Spain driven by economics and federal policy.

Spain is expected to add significant new capacity over the next several years.

Additionally, France continues to procure utility-scale solar as part of its grid program.

Globally, all indicators point to growth, underpinned by a combination of competitive economics of solar and a desire to decarbonize electricity grids.

Starting on Slide 4. I'll provide an update on our Series 6 capacity rollout.

As a reminder, we began production of our first Series 6 factory in April of 2018.

Since then we started production at 3 additional factories.

Reflecting over this relatively short period of approximately 1 year and the significant progress we have made, we are pleased with where we are at Series 6 in terms of schedule, performance and cost.

Since the February earnings call, we have seen significant operational improvements across our Series 6 factory.

When comparing the performance of the month of February, which includes the first full month of our production of our second Vietnam factory, to the performance of the month of April, meaningful improvements can be seen despite certain planned downtime during the period.

Megawatts produced per day is up 34%.

Capacity utilization has increased 21 percentage points.

Adjustment for planned downtime, the April fleet capacity utilization was 90%.

We expect higher-than-normal planned downtime to continue over the next couple of quarters as we continue to operationalize the full entitlement of our factories.

Production yield is up 2 percentage points to approximately 90%.

The average watt per module has increased slightly more than 1 bin or 6 watts.

And finally, the percentage point of modules with antireflective coating has increased by 15 percentage points.

There's another noteworthy highlight relative to our Series 6 production expansion is the success we have experienced ramping our second Vietnam factory.

The ramp has been accelerated relative to previous factories by applying accumulated learnings, including starting production with an improved model training tool.

This benefit can be seen when comparing the initial 3 months of production of our most recent Vietnam factory to our first Series 6 factory in Ohio.

Capacity utilization is 33 percentage points higher.

Production yield is 32 percentage points higher.

Average watts are up 19 watts or essentially 4 bins.

And the arc penetration is 48 percentage points higher, leading to an equivalent watts produced being 125% higher.

The progress we have made ramping our factories has been a key contributor in enabling us to achieve our first quarter Series 6 cost-per-watt objective.

While this is a significant accomplishment, there is a tremendous amount of work still in front of us to achieve our cost-per-watt roadmap for the year.

As we noted in our February earnings call, our expected Series 6 cost per watt will drop approximately 30% from Q1 to Q4.

These significant accomplishments can be credited to the outstanding work of our engineering and manufacturing associates.

Construction is continuing in our second Series 6 factory in Ohio.

As announced previously, we expect to start production in early 2020, and construction is thus far on track to our schedule with the first tools scheduled to be installed by the end of Q2.

Once completed, we will have 5 factories with an aggregate annual Series 6 capacity of 5.4 gigawatts, an impressive accomplishments since announcing the transition to Series 6 in November of 2016.

We continue to be encouraged by the progress we have made over the last year.

As noted previously, we planned portfolio production of between 5.2 and 5.5 gigawatts.

As a reminder, this targeted production includes approximately 2 gigawatts of Series 4 modules.

In order to meet these production commitments, we continue to roll out tool upgrades and optimize the production line throughput across the various sites.

This is a dynamic process that continues to incorporate learnings from each of the factories we have ramped and is moving according to schedule.

Turning to Slide 5. I'll next discuss our bookings activity since the last earnings call.

In total, our net bookings since the last earnings call were 1.1 gigawatts.

After accounting for shipments of approximately 900 megawatts during the first quarter, our expected future shipments are 12.2 gigawatts.

Our most recent bookings are across multiple customers and include a limited volume of Series 4 for delivery at the end of 2019.

The remaining Series 6 deliveries are split evenly between 2020 and 2021.

In terms of geography, approximately 900 megawatts of the 1.1 gigawatts is for delivery to the United States, with the remaining 200 megawatts flexible across the U.S. and certain international markets.

With these recent bookings, we have now added 2.3 gigawatts to the backlog since the beginning of the year.

We are pleased with this momentum to date and have increased confidence in exceeding our targeted 1:1 book-to-ship ratio in 2019.

As we mentioned on our last earnings call, we are largely sold out through the end of 2020.

With the current bookings now 50% of the anticipated Q1, 2021 supply has been booked.

As a reminder, given the timeframe for which we now have available product, we may see future bookings in 2019 to be weighted towards the back end of the year.

Slide 6 provides an updated view on our mid- to late-stage bookings opportunity, which now totals 6.6 gigawatts DC, a decrease of approximately 0.7 gigawatts from the prior quarter.

However, when factoring in the bookings for the quarter, approximately 0.3 of which were booked that were included in the opportunities in the prior quarter, our mid- to late-stage pipeline declined by 0.4 gigawatts DC.

As a reminder, our mid- to late-stage pipeline is reflective of those opportunities we feel could book within the next 12 months and is a subset of a much larger pipeline of opportunities, which totals approximately 12 gigawatts.

This includes approximately 2 gigawatts of opportunities in 2019 and 2020, which will provide demand resiliency to our near-term production, while the remaining approximately 10 gigawatts of demand would be for module deliveries in 2021 and beyond.

In terms of geographical breakdown of the mid- to late-stage pipeline.

North America remains the region with the largest number of opportunities at 3.9 gigawatts DC.

Europe represents approximately 2 gigawatts driven largely by resurgent markets in France and Spain with the remainder being across the Asia Pacific region.

In terms of segment mix.

Our mid- to late-stage pipeline includes approximately 900 megawatts of systems opportunities across the U.S. and Japan with the remainder being module-only sales.

I'll now turn the call over to Alex to provide more detail on our first quarter financial results and discuss updated guidance for 2019.

Thanks, Mark.

Turning to Slide 8, I'll start by covering the income statement highlights for the first quarter.

Net sales in Q1 was $532 million, a decrease of $159 million compared to the prior quarter.

The lower net sales were primarily a result of lower systems projects revenue in the U.S. and Japan partially offset by higher module segment revenue.

The percentage of total quarterly net sales of systems revenue in Q1 was 63% as compared to 83% in Q4 of 2018.

Gross margin was breakeven in Q1 compared to 14% in the fourth quarter of '18.

The system segment gross margin was 8% in the first quarter, and the module segment gross margin was negative 13%.

As a reminder, module segment costs of sales comprise of all third-party module cost of sales as well as Series 6 ramp-related costs which, as Mark mentioned earlier, expected to be felt most acutely during the first half of the year.

We experienced ramp-related charges of $36 million in the first quarter, approximately 70% of the midpoint forecast for the full year.

The system segment gross margin was impacted by $35 million related to the EPC business.

This includes approximately $20 million related to our projects with Tampa Electric, which were built with our Series 4 products.

Challenge with these projects included tight construction schedules, labor shortages, nonforce majeure weather-related work stoppages, failure by high-voltage transformer factory acceptance tests, the financial distress of a major subcontractor and certain rework.

We've had some higher-than-projected costs and incurred some liquidated damages for failure to meet certain milestones.

We had approximately $5 million of impact at our PV project for the inclusion of lower bid Series 6 modules, a consequence of the earlier-than-expected start of our second Vietnam factory.

Products initially produced in January was held pending release of our quality review process.

This fully functional but lower bin non-op product was used in our systems business as an alternative to scrapping it and incurring additional start-up expense.

Whilst this increased costs, these are more than outweighed by the strategic value of having placed the second Vietnam factory online earlier than previously forecasted, providing optionality in terms of whip sharing across factories as well as the ability to run more engineering test sites work at our Perrysburg site over the course of the year.

The remaining approximately $10 million impact to gross margin was across our other projects in construction and was a result of greater-than-projected balance of systems cost related to the installation of low-bin modules, higher-than-forecast labor costs and certain project-specific construction costs.

Operating expenses was $77 million in the first quarter, a decrease of $10 million compared to Q4 of 2018.

This includes a reduction of $5 million in core SG&A and R&D spending and a $5 million reduction in plant start-up expense, which decreased from $15 million in Q4 '18 to $10 million in Q1.

Given the anticipated start-up timing of our second factory in Perrysburg, we expect startup cost to increase each quarter over the remainder of the year.

We have an operating loss of $77 million in the first quarter compared to an operating profit of $11 million in the prior quarter.

The reduction in operating income was a result of lower systems revenue and a higher EPC and ramp costs mentioned previously.

Other income was $4 million in the first quarter primarily from the gain on sale of certain restricted investments associated with our module collection and recycling program partially offset by the impairment of a strategic investment into Perovskites technology.

Despite providing us with valuable insights into the development of Perovskites, the investment was unable to hit certain internal milestones required for continued investment resulting in an impairment of $5 million in the quarter.

We took a mark-to-market charge of $5 million related to the fair value of certain interest rate swap contracts for some of our project assets in Japan and Australia.

This is a timing impact based on movement of interest rates within the quarter, and we expect to see a corresponding increase in project value recorded at the time of sale.

We recorded a tax benefit of $1 million in the first quarter compared to a tax benefit of $4 million in Q4 of 2018.

Combination of the aforementioned items led to a first quarter loss per share of $0.64 compared to earnings per share of $0.49 in the fourth quarter of 2018.

To summarize the key P&L themes from the quarter, we had a mix of expected and unexpected.

As expected, we had our lowest revenue quarter for the year, our quarter with the lowest percentage of Series 6 sales relative to total module sales, the highest Series 6 cost per watt relative to the full year average and the highest quarterly combined ramp-related and start-up expense.

Not anticipated were the higher-than-forecasted ramp in EPC costs, the Perovskites investment impairment and interest rate-related mark-to-market swap cost impacts referenced above.

I'll next turn to Slide 9 to discuss select balance sheet items and summary cash flow information.

Our cash, restricted cash and marketable securities balance ended the quarter at $2.3 billion, a decrease of approximately $400 million from the prior quarter.

Our net cash position decreased by approximately $500 million to $1.7 billion.

The decrease in our cash balance is primarily related to capital investments in Series 6 manufacturing capacity, Series 6 manufacturing ramp and associated working capital inventory costs and the timing of cash receipts from certain systems project sales.

Total debt at the end of the first quarter was $571 million compared to $467 million at the end of Q4 of 2018.

Debt issuance was, of course, primarily associated with project development in Japan.

And as a reminder, all of our outstanding debt continues to be project-related and will come off our balance sheet when the projects are sold.

Net working capital in Q1, which includes the change in noncurrent project assets and excludes cash and marketable securities, increased by $272 million versus the prior quarter.

Change is primarily due to an increase in accounts receivable and inventories.

Cash flows used in operations were $303 million in the first quarter primarily driven by the timing of systems business spend and cash receipts as well as increased spend ramping the Series 6 module business.

And finally, capital expenditures were $149 million in the first quarter compared to $129 million in the fourth quarter of 2018 as we continued Series 6 capacity expansion.

Continuing on to Slide 10.

I'll next discuss the updated assumptions associated with our 2019 guidance.

Firstly, our guidance continues to assume a back-ended Series 6 module sale profile with approximately 75% of Series 6 third-party module sales occurring in the second half of the year as well as a steep Series 6 cost-reduction profile over the year with Q1 and Q2 cost per watt approximately 30% and 5%, respectively, above the full year average.

Secondly, we continue to see ramp-related and start-up charges weighted approximately 60% for the first half of the year.

Thirdly, we assume the majority of system sales both in the U.S. and internationally will take place in the second half of the year.

With regards to our U.S. assets currently for sale in 2019, we continue to assume a full sale of these projects in 2019 with the majority of revenue being recognized by year-end.

As highlighted on our last earnings call, there remains uncertainty around both timing and value especially related to assets with offtake agreements with FCE given the circumstances surrounding the bankruptcy of PG&E.

Recent developments in California have been positive, and we're also pleased with the progress we've made in the sale process.

However, given the continuing uncertainty in the colorful market, should the market not reflect what we believe to be appropriate risk profiles and values to these assets, we would look to finance the assets and hold them on balance sheet through the period of uncertainty rather than selling our prices below what we believe to be fair value.

So whilst unlikely, should this change in sales timing occur, it could result in full year EPS approximately $0.50 below the low end of the current guidance range.

And lastly, in addition as highlighted in our December 2018 guidance call, our guidance continues to not take into account any potential impact to the continued class action lawsuit filed in 2012 or any resolution of that lawsuit.

With these factors in mind, we're updating our 2019 guidance as follows.

We are raising our net sales forecast to revised range of $3.5 billion to $3.7 billion.

This $250 million increase above our prior net sales guidance related to both the modules and systems segments.

With respect to the module segment, while total expected shipments for the year are unchanged, the earlier-than-anticipated transfer of control of the modules sold results in revenue being recognized in the fourth quarter of 2019 was otherwise anticipated to be recognized in the next fiscal year.

With respect to the system segment, we're projecting the earlier sale of certain development assets in the U.S. and Japan driven by the opportunity to optimize exit valuations to these projects and reduce risk across the entirety of the global development portfolio.

Our expected gross margin has been lowered by 150 basis points to a revised range of 18% to 19%.

The reduction is used to previously discussed higher-than-projected EPC costs incurred in Q1 as well as an increase in projected Series 6 ramp-related costs.

The operating expense forecast has been lowered by $5 million to a revised range of $370 million to $390 million as a result of decreased plant startup expenditure now forecast to be $70 million to $80 million.

Operating income and earnings per share guidance remain unchanged.

Our net cash forecast has been increased by $100 million to $1.7 billion to $1.9 billion as a function of the timing of project sales and cash receipts as well as increased prepayments for third-party modules being sold to enable ITC safe harbor benefits.

CapEx and module shipment guidance numbers also remain unchanged.

And as discussed previously, we expect the majority of earnings to be in the second half of the year with Q2 close to breakeven and potentially in a loss position.

However, the timing of project sales between quarters can have a material impact on the quarterly earnings profile.

Finally, I'll summarize the key messages from our call today on Slide 11.

Firstly, we continue to be pleased with our bookings momentum.

With year-to-date 2019 net bookings of approximately 2.3 gigawatts, we continue to strengthen our contracted pipeline.

Secondly, we continue to make good progress on our Series 6 capacity roadmap and remain on track for our combined Series 4 and Series 6 production target of 5.2 to 5.5 gigawatts.

And lastly, we've increased our full year revenue and cash guidance and maintained our full year EPS range.

And with that, we conclude our prepared remarks and open the call for questions.

Operator?

(Operator Instructions)

Your first question comes from Ben Kallo with Baird.

So first, could you guys just talk about on the bookings side, I think bookings were down sequentially.

But was that just on the EPC side?

And can you talk about pricing on the new bookings there to the extent you can, how they compare with maybe the last quarter when you talked to us?

Yes.

So Ben, if you look at the bookings for the quarter, it's 1.1 gigawatts year to date bookings, 2.3, right?

So and again, the 1.1 that we're referencing, it's just from the February earnings call.

So if you look at it for a 2-month period, we booked 1.1 gigawatts.

For the first 2 months of the year, we booked 1.3 kind of number, 1.2.

So they're very comparable.

And if you look at the momentum, which we'd say we carried, if we carried that forward to the balance of the year, we'll be booking somewhere close to 7 gigawatts.

So I don't see really any slowdown in the momentum of bookings.

I feel it's a robust number to start off the year.

As we indicated, I think the start of there is positioning us to exceed our targeted 1:1 book-to-bill ratio.

So that would point us to a number, 6 gigawatts plus trends pointing us to north of that number, which I think is a positive indicator of what's going on and continued momentum in the business.

ASPs, I continue to be extremely pleased with ASPs.

The profile of the bookings, the 1.1 relative to what we booked in the first 2 months of the year.

ASPs are steady.

They still have a three-handle type of ASP that we've referenced before.

I know there's some indications in the market of pricing being much more aggressive than that.

We continue to be able to be patient given that we're sold out through the end of 2020 and now we're effectively 50% sold for the first quarter of 2021.

We can be selective, we can engage with customers, we could make decisions on where to walk away.

We're not being held by volume overhang that we haven't already been committed to from a customer so that helps us tremendously in how we're engaging the market and actually have been very pleased with the corresponding pricing that we're realizing.

Your next question comes from Philip Shen with Roth Capital Partners.

First is around shipments of Series 6 modules.

Can you share how many megawatts you shipped in Q1 and then what that ramp rate might be for Q2?

And then secondarily, some of our recent checks suggest that you may be focusing some resources on 3- to 5-year kind of cost-out plan and CapEx-reduction plan.

Is there any truth around this?

Are you having people that, for example, have been otherwise focused on near-term capacity ramp-up challenges now switch over to longer-term opportunities?

In other words, does this highlight potentially that you've solved a lot of your near-term issues and you have an ability to focus on the longer-term or medium-term set of problems or cost-outs ahead?

So from a shipment standpoint, I think we indicated that we shipped about 900 megawatts for the first quarter.

You can take from that, that we got 2 gigawatts of Series 4. Think of it as being that sort of profile being relatively linear.

So you kind of get to a position of the shipment profile around 50-50 between the two, maybe slightly more Series 4 shipments than Series 6 shipments.

The ramp profile is going to increase significantly.

The forecast for the year is 5.5.

So we got about 4.5 gigawatts now shipped over the remainder of the year.

And again, that entire ramp is associated with Series 6. The Series 4 profile is going to be consistent across each of the remaining quarters of the year.

The -- Phil, I guess for the -- we are very happy, we highlighted that on the call around the progress that the team has made for Series 6. And we cannot take our eye off of it, though we got to continue to stay focused from both a schedule standpoint, performance standpoint and a cost standpoint.

So there's -- we haven't really come up for air yet.

We're starting off this quarter very well.

April has been a strong month.

The first day of May has in fact been a record for us with all of our plants performing extremely well, we continue to have to take some amount of planned downtime, which that planned downtime will adversely impact utilization rates.

But we'll -- as we currently see it going forward, a lot of the major efforts that we need to take planned downtime have effectively happened now through the first 4 months of the year.

There's still efforts that will continue, but a lot of the major lifting has been done so far, at least what we currently have -- we currently anticipate.

But what I will say is that we never relax when it comes to how do we think about continue to take more costs out.

How do we think about CapEx.

How do we think about throughput and how do we try to capture current nameplate capacity of a factory is 1.2 gigawatts.

We're continuing to challenge ourselves around how we do we get more throughput out of every factory.

One thing that I will say in that regard, while it will be relatively small, we are -- even our second factory in Perrysburg that we'll launch, we'll have some additional CapEx investments associated with it, relatively nominal, that will enable us to increase the throughputs from that factory once it's started up and currently anticipated to be in 2020.

We'll see the success of that effort and determine how quickly we roll out across the remaining fleet.

We'll also continue to challenge ourselves around how do we, again, optimize throughput across every factory.

And the benefit by doing that is you effectively are just -- it's variable costs.

So it has not only impact utilization and throughput benefits, but you're now looking at your cost per watt of that incremental throughput as being more or less favorable cost and some de minimis CapEx, not an overly significant commitment for the most part.

But there's tremendous leverage in value creation for us to do that.

Have there been efforts where we're continuing to evolve those?

Surely, there are.

But I don't want anyone to take from this that we are taking our eye off at all on both from a schedule performance and a cost standpoint.

So a lot of work in front of us as it relates to Series 6 and delivering against our commitments for the year.

Your next question comes from Jeff Osborne with Cowen and Company.

Just one clarification and then 2 quick questions.

Mark, I think you've mentioned the pricing of the 2.3 gigawatts in backlog.

Is all of that have a "three-handle" as you said?

So that includes the 1 gigawatt for 2021 through '23 that you announced last quarter?

Yes.

We're very happy with the profile of ASPs as they go across that horizon.

And yes, we're seeing very good pricing from that standpoint.

I think when you look at the Q, if I'm not mistaken, for what truly was recognized in the -- and they'll come out tomorrow, but what's truly been recognized in the first quarter, calendar quarter, the ASP metric, I think, will effectively be the same.

They'll stay steady.

I think it's around $0.36, something in that range, right?

Yes.

If you do the math, you'll see it stay at $0.36.

And if you do the comparison to last quarter the incremental is going to show you actually booking at $0.40 per watt now.

As we know that's rounded for gigawatts and dollars billion.

So going to take that with things yourself but if you look at it today, yes, you're still going to see the backlog and module in bookings being averaged at $0.36.

Your next question comes from Brian Lee with Goldman Sachs.

I'll try to get 2 in here.

Maybe, first off, just given the demand environment and the more stable pricing trends as of late across the industry.

Just wondering if you can update us on your thought process around Malaysia 1 and converting that from Series 4 to 6.

And then second question would just be around the new gross margin guidance.

Just want to make sure I understand the ins and outs of that.

But it implies about $50 million is coming out.

Alex, you talked about $35 million of EPC and then the incremental $10 million in ramp costs.

So all of the gross margin headwinds relative to the original guidance concentrated here in Q1 results or am I being too cute there?

Are there more cost impacts as you move through the year?

Yes.

I'll get the gross margin question.

So yes, you're generally right that you're seeing the impacts in Q1.

It's about $35 million related to EPC business and that $10 million of ramp, $5 million of which is true increase for the year and $5 million of which is you can think of a move from startup to ramp and you see a corresponding reduction in startup of $5 million.

And that gets you -- that bridges you roughly from where we were to the new gross margin percent guidance.

Brian, as it relates to the demand environment, again, we continue to be very happy with the demand that we're seeing here in the U.S. but globally as well.

We're happy with our pipeline.

And one of the things we try to bring into the mix this time was not just the early and mid-stage pipeline -- or, excuse me, the mid- to late-stage pipeline but we brought the kind of the total pipeline in and highlighted that we have about 10 gigawatts of opportunities in different phases that are for '21 and beyond.

So very encouraged with the team and our ability to continue to engage with customers and find those opportunities.

And our hit rates have been very good, and I'm happy with that.

As it relates to our last -- our first factory in -- actually in KLM, which is currently not committed to our capacity plan, our capacity roadmap includes about 6.6 gigawatts of Series 6, which would have 2 factories in Malaysia, 2 in Vietnam and 2 in the U.S. We haven't made a commitment yet on that last factory.

There's a handful of things that will weigh into our decision-making.

1 of them is still momentum around safe harbor and how long do we run Series 4. So we could potentially even run Series 4 into Q1 of next year because, as you know, the safe harbor window allows for deliveries that go through April of 2020.

So that could be a decision maker that will influence our timing and how we think through a conversion to the extent there's a conversion.

The other one that I think is important, though, is just anything we do will clearly be driven by market.

So as we continue to build our backlog, that will give us more confidence.

The other one is I somewhat alluded to in what we're trying to do with our second factory in Ohio.

One of the things we'd like to do is optimize the footprint to capture as much capacity out of the existing production that we have before we make additional conversions because the CapEx per megawatt of volume is significantly lower by just debottlenecking incremental CapEx and existing capital versus a new round fill type of conversion and entire equipment set.

And then obviously dealing with cost of ramp and everything else that goes along with that.

So there's a lot of moving pieces that will play into our mix in that regard.

We'll probably have a much better sense of where we are on that last factory in Malaysia.

As we exit the end of this year, we'll be probably getting better indication of what our plan will be for that facility.

We have a follow-up question from the line of Jeff Osborne.

Yes.

I was just going to ask about the TECO challenges.

How much of your backlog is in TECO?

And are they placated with the resolution that you've had?

So the impact of the last project that we have is like Hancock, we'll be complete here as we exit this quarter.

So the items, the portfolio has been largely built now, constructed issues have been encountered obviously reflected in our first quarter.

Obviously, we still have some remaining work to be done to complete the last project for Tampa Electric, but we're only a matter of month or 2 out before that will be completed.

Got it.

And then Alex was very specific about Q1 and Q2 and cost of Series 6. Is there any change to that slide that you had multiple quarters as it relates to the second half of the year with the declines relative to the full year average?

Yes.

That slide generally holds so -- and I think there's a question around capacity as well.

If you look at that, that still holds, so the decline in cost for the year going from 130% of the full year average down to minus 10 at the end of the year and then the production being about 75% weighted to the second half of the year in terms of module-only Series 6 sales still holds.

Your next question comes from Julien Dumoulin-Smith with Bank of America Merrill Lynch.

Wanted to follow up a little bit on the backlog question and understand a little bit how it fits with the -- some of the safe harboring activity.

To what extent are -- is some of the incremental hedging and locking in of sales just fulfillment and sort of extension of some of the initial safe harboring activities that you've already committed to in '19?

Or to what extent is this truly novel customers that aren't necessarily trying to lock in '19 or following in on some of the '19 safe harbor stuff they've already done?

Just want to understand the composition given the pricing discussion we have.

So Julien, there's a good portion of -- and what we said of the 1.1 that was booked, 900 of it was in the U.S. and a couple of hundred megawatts would be for projects outside of the U.S. Potentially U.S., but most likely outside so the customer has opportunities both in U.S. and outside.

They have an option to determine which projects they want to use that for.

They're current -- they currently are envisioning international opportunities but that could change as well.

The -- given that there's not much volume, there's still some element of this that is somewhat tied to customers' view of around safe harboring.

And they may already have -- in some cases, the may already have volume that's on our books that enables them to safe harbor.

And now they're fulfilling kind of the period in the future, which they need to complete the project.

So the 5% may already be in a part of the backlog portfolio that we've already booked in prior year.

And now they're saying, "I need to fill this opportunity out in 2021." And so we're engaging with the conversation for those deliveries.

So the way I look at it, it's indirectly related to safe harbor because they're anchoring in with the safe harbor opportunity that's already in the backlog and now they're looking to complete that commitment with volumes that are going to be delivered in 2021.

So the pricing isn't necessarily directly related.

So it's not that you would say these shipments have to happen now, and therefore, you're leveraging that window, which in that window if something is being shipped between now in the safe harbor window, ASPS are very strong.

And that's one reason why we are looking at potentially how long do we run Series 4 because I think you can get some economics and hence a lot -- makes more sense there.

And -- but when you go beyond that window, it's largely wasn't the competitive dynamics or alternative options that a customer may have for modules that could be delivered in 2021.

And so the window can be more competitive and is more competitive than something that's going to be delivered between now and April of next year.

I think there's clear indication in the market that market is tight here in the U.S. especially through our higher efficiency, higher-performing product.

There's not as much mono or mono PERC in the marketplace during that horizon, so you're seeing pretty far pricing.

Unfortunately, they don't have as much supply that allows us to play that in that window.

But when you go beyond that and you're delivering something in 2021, and it's -- our technology stands on its own competitive merits relative to other options our customers may have for deliveries in 2021.

Your next question comes from Colin Rusch with Oppenheimer.

Can you talk a little bit about how far out you're booked at this point and how much capacity you're trying to sell over the next several quarters?

So we are -- what I tried to indicate a little bit is that we're 50% booked now for a targeted capacity in the first quarter of 2021.

And so if you look at our capacity roadmap, it would basically tell you it's going to be Series 6 2021 capacity of around 6.6 gigawatts.

You can kind of look at the profile of how much would be available in each quarter.

We're about 50% booked against that.

That's a great position to start the year off.

If I look at it across the entire year, the numbers are closer to about 1/3.

30% or so is actually booked at this point in time.

And against that, we've got -- if you look at our 10 gigawatts of opportunities '21 both early as well as mid- to late-stage, we've got a lot of opportunity now that it starts filling in that window in 2021.

Now clearly, we have some bookings, as we mentioned on our last call, that actually go out into 2023.

But feel really encouraged by the opportunity set that's in front of us and continuing engagement that we're having with customers.

And hopefully, as we progress, the only real window we have a little bit of tail at the end of 2020 to deal with on Series 6. But really, the bookings as we go forward to the balance of this year and if we achieve our 1:1 or greater than 1:1 of course somewhere in the range of 6 or 6.5 gigawatts, the remaining, call it, 4 gigawatts will start filling out that '21 window.

Relative to where we are right now, if we can be successful doing that, not all that will sit directly in '21, but we'll be able to fulfill a big portion of that supply requirement by the end of this year if we're successful.

Our final question will come from Travis Miller with MorningStar.

A bit of a higher-level question here.

When we look out you talked about some of the policy momentum that certainly we're seeing across the industry more demand from outside of policy.

But if you look out kind of 2 to 3 years, what do you see in the competitive landscape?

Who do you see as competitors?

And do you see enough demand out there that perhaps you can fill all capacity and have pricing power in that market?

The -- look, there's a tremendous amount of momentum.

There are numerous catalysts that are driving the global opportunity for PV.

The issues -- the demand is going to continue to grow, isn't any concern.

The real question is how much supply comes to the marketplace.

That's something I can't control.

If you look at LONGi now, I think they're making commitments at the model wafer level, I think, going up to 65 gigawatts by 2021, which I think the last numbers that I remember were something closer to 45.

Yes.

So those numbers, they continue to add capacity.

And so it's hard to determine what's going to happen on the spot.

What we do, though, and what our objective is we need to create technology advantage in separation to have the lowest-cost products in the marketplace and to have the highest energy entitlement that drives to a profit pool opportunity that we are able to capture that our competitors can't.

And that's what we continue to do.

We've been successful doing that in the past.

The challenges in front of us are probably even greater than maybe they have been historically.

But that's why we made the decision to shift to Series 6, which gives us the best potential position of strength and to grow this company and to capture scale and drive through and leveraging our fixed operating cost and manage the business from -- continue to manage the business on a balanced business model of growth, liquidity, profitability.

And that's the core tenets of what we try to do and we're staying the course in that regard.

As we look across the horizon, we feel very comfortable but we know this will continue to be a very challenging and demanding market.

This concludes today's conference call.

You may now disconnect.