Stephen Haymore - First Solar, Inc. Mark R. Widmar - First Solar, Inc. Alexander R. Bradley - First Solar, Inc..

Philip Lee-Wei Shen - ROTH Capital Partners LLC Chirag Odhav - Merrill Lynch, Pierce, Fenner & Smith, Inc. Tyler Charles Frank - Robert W. Baird & Co., Inc. (Private Wealth Management) Vishal B. Shah - Deutsche Bank Securities, Inc. Brian Lee - Goldman Sachs & Co. Colin Rusch - Oppenheimer & Co., Inc. Sophie Karp - Guggenheim Securities LLC Pavel S.

Molchanov - Raymond James & Associates, Inc..

Good afternoon, everyone, and welcome to First Solar's Second Quarter 2017 Earnings Call. This call is being webcast live on the Investors section of First Solar's website at firstsolar.com. At this time, all participants are in a listen-only mode. As a reminder, today's call is being recorded.

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

Thank you. Good afternoon, everyone, and thank you for joining us. Today the company issued a press release announcing its second quarter 2017 financial results. A copy of the press release and associated presentation are available on the Investors section of First Solar's website at firstsolar.com.

With me today are Mark Widmar, Chief Executive Officer; and Alex Bradley, Chief Financial Officer. Mark will provide a business and technology update, then Alex will discuss our second quarter financial results and provide updated guidance for 2017. We will then open up the call for questions.

Most of the financial numbers reported and discussed on today's call are based on U.S. Generally Accepted Accounting Principles.

In the few cases where we report non-GAAP measures such as free cash flow, adjusted operating expenses, adjusted operating income or non-GAAP EPS, we have reconciled the non-GAAP measures to the corresponding GAAP measures at the back of our presentation.

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?.

Thanks, Steve. Good afternoon, and thank you for joining us today. Our operational and financial results for the second quarter were resilient and market demand for our technology continues to be robust.

We've had a number of highlights since our last earnings call, including the arrival of our first Series 6 equipment at our factory in Ohio, record quarterly shipments of nearly 900 Megawatt DC and strong bookings of 1.5 Gigawatt DC.

In addition, our financial results for the quarter were solid, with non-GAAP earnings per share of $0.64 and an ending net cash balance of $1.9 billion. The sale of Switch Station and higher module sales to third parties were important contributors to the quarterly results.

As a result of our first-half performance, improved visibility into systems project sales and an increase in expected shipments, we have raised our full year 2017 net sales, EPS, operating cash flow and net cash guidance.

Entering 2017, we knew it would be a challenging year for us with the uncertainty of the global supply-demand balance and our product transition to Series 6. Despite these challenges, we have made great progress in the first half of this year.

Firstly, following the receipt of a waiver under the ROFO agreement with 8point3 for interest in the Switch Station project, we were able to leverage the continued vigorous market demand for our high-quality systems projects and selling interest in Switch Station at a significantly higher valuation versus selling to 8point3.

We also received waivers of our California Flats and Cuyama projects, and similarly, given current market indications, we expect to realize considerably higher valuations for those projects. Secondly, we have been very successful realizing the energy advantage of selling through most of our remaining anticipated supply of our Series 4 product.

Lastly, we've made great strides with the product and commercial readiness of our Series 6 product.

While there are still many challenges ahead, we are pleased with our progress over the first half of 2017, and we'll continue in the future to apply the same disciplined approach balancing growth, liquidity and profitability that we believe provides our shareholders the greatest long-term value.

Turning to Slide 4, I'll discuss our bookings since our last earnings call. In total, we have booked 1.5 Gigawatt DC in the past three months, bringing our year-to-date bookings to approximately 2.1 Gigawatt DC. After deducting year-to-date shipments through June of approximately 1.2 Gigawatt DC, our remaining expected shipments are 3.7 Gigawatt DC.

Our 1.5 Gigawatt of bookings were geographically diversified in the quarter with the strongest results in the U.S., India, Asia-Pacific and Europe. We also booked new volumes in both Latin America and Africa.

The strong quarterly bookings and increase in our mid-to-late stage bookings opportunity, which I will highlight in my comments later, are the result of several factors. First and foremost, the increasing affordability of solar continues to be a fundamental driver of global demand.

We continue to see substantial demand in established markets and the emergence of new markets with significant growth potential. In order to capitalize on the growth of the global solar market, we began investing in international sales teams several years ago.

We've also entered into strategic partnerships which allow us to serve markets where we do not have a physical presence. The bookings for the quarter are the result of these multi-year strategies to focus on sustainable markets and develop long-term relationships with key customers.

Certain developments in domestic and international markets, including demand – strong demand in China, especially for Tier 1 and high efficiency products as well as the Section 201 case in the U.S., have created an acceleration of procurement timing among customers.

While neither serve to change the underlying fundamental demand in the global market, both have impacted near-term module availability. Both have also served to firm-up module pricing in the near term. However in the long term, and for as long as the global module supply-demand imbalance exist, we expect the global market demand to remain aggressive.

For this reason, we remain focused on executing a successful transition to Series 6, which is expected to provide us with the most competitively differentiated product. Relative to the regional highlights for the recent bookings, the United States was our strongest market for bookings with new module volume of over 1 Gigawatt DC.

Demand was highly diversified with projects in California, the desert Southwest and the Southeast. The largest of the bookings was an agreement to supply modules to the 328 Megawatt DC Mount Signal project in California. Demand in India was strong in Q2. We booked over 350 Megawatt DC of module supply agreement.

The booking strength was a result of both our strong energy advantage in this region and key customer relationships that we have developed over the past several years.

By working with established customers who have experienced the benefits that our modules bring in India, we are able to maximize the realized value of additional energy that our modules provide.

Our bookings in Asia-Pacific were diversified across more than seven countries, highlighted by an additional 41 Megawatt DC of project bookings in Japan, majority of which will utilize Series 6 modules.

This brings our contracted portfolio of systems projects in Japan to over 220 Megawatt DC, with an even larger number of potential bookings opportunities. In China, we booked approximately 60 Megawatt DC of module supply agreements since the beginning of the year, which represents our first substantial volume supplied to this market.

In Europe, our bookings this past quarter were primarily in Turkey as a result of our partnership agreement with Zorlu. In France, we continued to secure additional module supply agreements under the most recent tender process. Now turning to Slide 5, I'll provide an update on our remaining Series 4 supply.

Our anticipated Series 4 supply across 2017 and 2018 remains between 3.6 Gigawatts and 3.8 Gigawatts, depending on when we see Series 4 production at our Ohio plant.

With 1.2 Gigawatt DC of volume shipped through the end of June, and combined project and module bookings of 2.1 Gigawatt DC, we have a remaining Series 4 supply of between 300 Megawatt DC and 500 Megawatt DC. Entering the year, our goal was to sell the majority of our remaining Series 4 supply by mid-year.

With our recent bookings momentum, we have largely been able to achieve that objective. With our transition to Series 6, we see the sell-through of our remaining Series 4 supply as positive. However, we're also aware of the significant customer demand remaining in the market and our focus on meeting our customers' needs.

For that reason, we are evaluating our options that would provide flexibility to extend Series 4 production beyond the current anticipated shutdown schedule, while not impacting our planned rollout of Series 6. We're still in the evaluation stage.

And if any decisions are made, which will be driven by visibility to secured and contracted demand, updated plans will be communicated at the appropriate time. In addition to strong bookings in the quarter, we've also seen a significant increase in our mid-to-late stage booking opportunities as shown on Slide 6.

Note this metric includes all of our advanced opportunities which shipping dates that extend over the next several years. Since our first quarter earnings call, bookings opportunities have grown to 8 Gigawatt DC, a substantial increase of 5 Gigawatts.

The increase in opportunities is a meaningful accomplishment given the strong Q2 bookings of 1.5 Gigawatts, the vast majority of which were included in the Q1 mid-to-late stage opportunities of 3 Gigawatts. The increase in potential bookings highlights a couple of important trends.

Firstly, we continue to see strong demand of our Series 4 product which gives us confidence in our ability to sell through our remaining supply.

Secondly, this points to the fact that our efforts to prepare the market for our Series 6 product launch is beginning to bear fruit as a substantial portion of the total opportunities presented are for Series 6 module deliveries.

During our last two earnings call, we focused in detail on ongoing efforts to work with ecosystem partners and customers to ensure a seamless acceptance of Series 6. While these efforts are ongoing, this is an indication that we're beginning to see the impact of this engagement.

It's also important to recognize that 1.9 Gigawatt of these mid- to late-stage projects are potential systems project booking.

Year-to-date, the vast majority of our bookings have been third-party module sales utilizing our Series 4 product, but this was expected due to the focus on selling out Series 4 by mid-year, and, more importantly, the relatively longer selling cycle of development opportunities.

The higher third-party module bookings does not mean there's any change in our view around project – future project development opportunity.

If you take our contracted systems pipeline with CODs over 2018 and into 2020 timeframe, plus the 1.9 Gigawatts of potential bookings mentioned, this comes to a potential combined systems business annual average of approximately 950 Megawatts.

This estimate does not take into account any opportunities from our much larger earlier stage development project opportunities, which are not included in our view on Slide 6, but could be converted into bookings.

We are actively continuing to evaluate – we are also actively continuing to evaluate opportunities globally to acquire development assets or pipelines. Putting these pieces together and consistent with our previous long-term indications, we continue to have visibility to maintain a systems business of approximately 1 Gigawatt per year.

The underlying demand drivers for project development opportunities in the United States and selected international markets such as Japan and Australia are very encouraging.

For example, in the U.S., over the past year alone, we have observed a greater than 50% increase in utilities' stated plans to deploy solar as part of their targeted resource mix. We estimate that over the next four years, this represents a greater than 10 Gigawatt opportunity for solar.

It is important to note that this is fundamentally driven by economics and not solely by renewable or solar-specific mandate. The decision to install solar has moved from a political mandate to an economic decision.

Additionally, further acceptance of solar is being enabled by utilities' increasing awareness of the capabilities of utility-scale solar to contribute to grid stability and reliability. We feel we are well-positioned with utility customers and to be a trusted partner as they add increasing amounts of solar resources in the upcoming years.

Likewise, corporate customers are an increasingly important source of utility-scale solar demand as they look for ways to hedge their energy costs and improve their band. Our multi Gigawatt portfolio of development and module supply opportunities with corporate customers continues to grow.

And notably, we now have over 800 Megawatts of projects where we have been short listed. With both our Switch Station and California Flats project, we have already demonstrated the ability to meet the needs for large-scale off-site renewables.

Our financial strength and ability to provide integrated solutions, enhanced by our Series 6 module, uniquely positions us to meet the needs of this growing market segment. Continuing on to Slide 7, I'll provide an update on our Series 6 transition.

We are encouraged with our progress thus far in meeting the key milestones we have provided at the beginning of this year. Through the first half of this year, we are on track and, in some cases, ahead of targets provided. Since our last update we reached a major milestone with the arrival of our first Series 6 equipment at our Ohio factory.

As shown on Slide 8, our first vapor transport deposition coater has arrived on-site and is in the process of being installed. Additional equipment is being validated at our supplier sites and continues to arrive in Perrysburg as scheduled.

We are steadily moving forward in assembling the front end of the line, which is expected to be completed in the fourth quarter. We are also targeting our first complete module off the production line by the end of 2017 or early 2018.

In regards to our Series 6 factory in Malaysia, as we've mentioned during last quarter's call, we stopped productions on eight lines of Series 4 manufacturing at the beginning of April. All major production tools have been ordered for this location, and we expect the first tool to arrive in the fourth quarter of this year.

In addition to our efforts in Ohio and Malaysia, we are preparing our existing, but never equipped, Vietnam factory for Series 6 production. Moving to Vietnam versus Malaysia for our third Series 6 factory provides two benefits. Firstly, it avoids ramping down production and therefore allows us to potentially continue production of Series 4.

Secondly, the Vietnam building is a copy exact of the KLM 5-6 building, which will facilitate an accelerated and cost-effective implementation. While we have not provided the time line for the Vietnam ramp, the key milestones for this location will follow approximately one quarter behind those of the Malaysia site.

The Vietnam factory will have 1.1 Gigawatts of production capacity once fully ramped. I'll now turn the call over to Alex who will now provide more detail on our second quarter financial results and discuss updated guidance..

Thanks, Mark. Starting on Slide 10 I'll begin with the second quarter operational highlights for our Series 4 products.

As planned, module production was lower in the second quarter at 513 Megawatts DC, a decrease of 28% from the prior quarter and 35% from the same period last year, as we ramped down Series 4 production in our Malaysia facility in preparation for Series 6.

Capacity utilization, which excludes the lines taken out of service, remained high, and increased slightly to 99% in Q2 versus 98% in the prior quarter. Our full fleet conversion efficiency improved to 16.9% in the second quarter, a 20 basis point increase from the prior quarter and an impressive 70 basis point improvement versus Q2 of 2016.

Module conversion efficiency in our best line averaged 17% in Q2 to 10 basis points sequential improvement and a 60 basis point improvement year-over-year. Going forward, we expect the Series 4 fleet average efficiency to level off near our current 17% efficiency as future technology improvements and investment are focused on Series 6.

However, keep in mind that the current 17% efficiency level is not indicative of Series 6 efficiency, which will be higher at the time of product launch and is expected to continuously improve thereafter as we execute our technology road map. As a reminder, our record cell efficiency standard is 22.1%.

In the past, we've demonstrated a consistent ability to translate record cell and record module efficiencies into production our regular cadence and we expect this process to continue with Series 6. Name plate efficiency also does not tell the entire story and the energy yield advantage of our modules must also be kept in mind.

Whilst our focus remains on realizing the potential of Series 6, our Series 4 product remains very competitive from both an efficiency and energy advantage standpoint. Turning to Slide 11, I'll discuss some of the income statement highlights of Q2.

Note that I'll be discussing some non-GAAP measures such as adjusted operating expenses, adjusted operating income and non-GAAP earnings per share and please refer to the appendix to the presentation for the accompanying GAAP to non-GAAP reconciliations.

Net sales in the second quarter were $623 million, a decrease of $269 million compared to the prior quarter. The decrease in net sales resulted in primarily from lower systems project sales partially offset by higher third-party module volume. The reduction in system projects sales was primarily a result of recognizing 100% of the Moapa project in Q1.

In the second quarter, we sold Switch Station to EDF Renewable Energy and recognized a large percentage of the revenue. We will recognize revenue on a percentage-of-completion basis until the project reaches COD expected in Q3 of this year.

Switch Station is an example of how First Solar can work jointly with utilities and commercial customers to meet their needs for clean, affordable solar power. This is the first project we sold to EDF Renewable Energy, and we look forward to future partnership opportunities.

Also with the sale of this project, we now recognize another important component of our guidance for 2017. As a percentage of total quarterly net sales, our solar power systems revenue, which includes both our EPC revenue and solar modules used in systems projects decreased to 63% from 92% in Q1.

Third party module sales were $228 million in Q2 versus $71 million in the prior quarter. Note that third-party module volume recognized in the quarter was meaningfully lower than third-party shipments based on timing of meeting all revenue recognition criteria. Gross margin improved to 18% in the second quarter from 9% in Q1.

The increase in gross margin resulted primarily from the different mix of systems projects recognized between the quarters. The lower Q1 gross margin was related to the sale of our Moapa projects, which as we've indicated in the past had a gross margin profile lower than we would normally expect from a systems sale.

The sale of Switch Station in Q2 is more representative of our targeted gross margin range on a system project sale. Gross margin in our Components segment was 17% in Q2 versus 26% in the prior quarter. Operating expenses excluding restructuring and asset impairment charges were $79 million in the second quarter versus Q1 adjusted OpEx of $72 million.

The sequential increase in operating expense is primarily due to higher plant start-up costs associated with Series 6. We expect plant start-up costs to continue to increase in the second half of the year as Series 6 work in Ohio and Malaysia intensifies.

Highlighting the impact of the OpEx reduction initiatives we've undertaken, our OpEx, excluding restructuring and plant start-up, has decreased by 27% versus the same period in 2016. Restructuring and asset impairment charges to accelerate our Series 6 transition were $18 million in Q2, a decrease of $2 million from the prior quarter.

The Q2 charges primarily related to net losses on the disposition of Series 4 and Series 5 manufacturing equipment. Excluding restructuring-related items, adjusted operating income in the second quarter was $32 million compared to $12 million in Q1.

The increase is due to higher gross margin on Q2 sales partially offset by the increase in production start-up expense. On a GAAP basis, our operating income for the quarter was $14 million. We had a tax benefit of $40 million in the second quarter compared to $6 million of tax expense in Q1.

In Q2, we recognized a $42 million discrete tax benefit resulting from the acceptance of our election to change the tax basis of a foreign subsidiary. As we indicated on our last earnings call, this amount could have been up to $55 million and was not reflected in our guidance at the time.

Note also that both quarters have tax benefits associated with restructuring charges. Second quarter EPS was $0.50 on a GAAP basis, and excluding restructuring and asset impairment charges, $0.64 on a non-GAAP basis. This compares to Q1 GAAP EPS of $0.09 and non-GAAP EPS of $0.25.

Relative our indication on the prior earnings call, Q2 non-GAAP EPS was higher than anticipated due to both the $42 million tax benefit and the initial recognition of the Switch Station projects. I'll next discuss select balance sheet items and summary cash flow information on Slide 12.

Our cash and marketable securities balance ended the second quarter at $2.2 billion, a decrease of approximately $217 million from the prior quarter. Our net cash position declined by $261 million to $1.9 billion.

The decrease in our cash balance is primarily timing related as we'll receive payment for the majority of the Switch Station's project sale in Q3. Q2 net working capital, which includes the change in non-current project assets and excludes cash and marketable securities increased by $171 million.

Change was primarily due to an increase in accounts receivable from higher module sales in the quarter, and the timing of payment from the Switch project sale. Total debt at the end of Q2 was $321 million, an increase of $44 million from the prior quarter.

The increase resulted primarily from issuing project level debt for projects in Japan and Australia. Cash flows used in operations were $166 million in Q2 versus cash flow from operations of $493 million in the first quarter. Free cash flow in Q2 was a negative $271 million compared to positive free cash flow of $380 million last quarter.

Capital expenditures were $105 million compared to $113 million in the prior quarter. Moving on to Slide 13, I'll review our updated full year 2017 guidance. As it relates to project sales in our guidance, our expectation of selling both the California Flats and Cuyama projects in the second half of the year remains unchanged.

Both projects were offered to 8point3 earlier this year, but have since received a waiver of the negotiation period from 8point3, providing First Solar the right to offer and sell these projects outside of the yieldco in accordance with the terms of the ROFO agreement.

In the case of Cuyama, we've recently entered into a sale agreement for the project, which we expect will close in the third quarter. The sale of California Flats is progressing well and we're in late stage negotiations with a buyer.

In terms of international projects, our guidance also assumes we sell a small number of our Japan projects and some India projects in the second half of the year.

As we progress further into the sales process on Switch Station, California Flats, Cuyama and certain of our international projects, our expectations for the sale value of these projects have increased.

This additional information, plus an increase in expected volume of third-party module sales have led us to increase our net sales guidance range by $150 million, to a revised range of $3 billion to $3.1 billion.

We're raising the midpoint of our gross margin guidance 400 basis points to a revised range of 17% to 18% as a result of the expected increase in the sale value of projects and based on continuing cost improvements. We've revised our GAAP operating expense range to $370 million to $395 million.

The low end of the range has increased as we now have better line of sight to remaining operating expenses. Note that total plant startup expense of 2017 is still anticipated to be around $50 million. We've lowered the top end of the operating expense guidance range by $10 million as a result of a reduction in our expected restructuring charges.

The revised range of restructuring related items is now $40 million to $55 million with approximately $38 million of charged incurred through the first six months of the year.

The low end of our non-GAAP operating expense range has also been raised by $10 million resulting from higher variable compensation and higher project related transactions structuring and sales costs, which have driven higher project values. Our non-GAAP operating expense excludes the impact of restructuring and asset impairment charges.

We're raising our EPS guidance by $1.75 as a result of better economic value expected from project sales and improved operational performance. In addition, we're raising EPS as a result of the $42 million discrete tax benefit in Q2. Our revised non-GAAP EPS range is now $2.00 to $2.50 and our GAAP EPS range has been revised between $1.55 and $2.20.

Note that our non-GAAP EPS assumes a full-year tax benefit of between $25 million and $30 million. As it relates to the second half of the year, the quarterly earnings profile will be highly dependent on the timing of the sale of California Flats and various international projects.

Depending on the project close timing, particularly for California Flats, second half earnings could be much more heavily weighted to Q3 versus Q4. The fourth quarter is also expected to have relatively higher plant startup expense and lower module shipments.

In terms of cash, we've raised our ending 2017 net cash guidance range to $2.1 to $2.3 billion, a $600 million increase versus prior guidance. Expected higher net cash balance is a result of several factors. Firstly, approximately $125 million of the increase is attributable to the higher expected value of project sales.

Next, an additional $125 million is a result of our lower 2017 CapEx spend. Keep in mind, the CapEx reduction is timing related and we expect to spend that capital in 2018. Additionally, we expect project development spend in 2017 to now be around $200 million lower primarily due to timing.

Some cases where our updated plants to use Series 6 modules, we will now complete more development work on those projects in 2018. The remaining updates to our net cash guidance is a result of improved working capital, primarily associated with our module business.

Operating cash flow guidance has likewise been increased as a result of the expected higher project sale pricing, lower development spend and improved working capital.

This expected working capital benefit is attributable in part to our plans to recycle capital faster from our systems business and is also a reflection of the decreasing capital intensity of our project business as costs continue to decline. Overall, we're very pleased with the cash generation of the business during this transition period.

This provides us with great flexibility to invest in the future of our technology and manufacturing capacity, while still having adequate capital for our systems business and other priorities. I'll now summarize our second quarter 2017 progress on Slide 14.

We had solid financial results in the second quarter, boosted by our sale of our Switch Station project. Our net sales were $623 million and non-GAAP EPS was $0.64. Our ending cash balance was $2.2 billion with $1.9 billion of net cash. We raised the midpoint of our GAAP EPS by more than $1.80 and our non-GAAP EPS by $1.75.

Our Series 4 module efficiency remained solid with a full fleet average of 16.9% and lead line efficiency of 17% in Q2. Our bookings for the quarter were impressive with 1.5 Gigawatt of new business contracted and mid-to-late stage opportunities of over 8 Gigawatt.

Our Series 6 transition is progressing well with the arrival of tools at our Ohio and installation is underway. And with an increase in Series 6 mid-to-late stage opportunities, we're pleased with the initial response from our customers around Series 6. With that, we conclude our prepared remarks and will open the call to questions.

Operator?.

Thank you. And we'll go to Philip Shen..

Hey, Mark, Alex. Thanks for the questions. The first set of questions I have are around capacity. You mentioned in your prepared remarks that you were evaluating maintaining Series 4 capacity beyond the Gigawatt that you've talked about.

Can you give us a sense of how much that might be? And then, as it relates to Series 6, once you get Terra zero, 1, 2 and 3 up and running, I believe you'll be at 4 Gigawatts of capacity.

When do you think you could hit that 4 Gigawatt? Could we get there in 2019? What is your base case expectation for 2019?.

Yes, so I'll take the first one on the Series 4 capacity, and I'll let Alex talk to the Series 6 and what the first three Terra plants capacity-wise provides to us and the timeline of expected production in 2019.

As it relates to Series 4, one of the things that we said in the call, and I want to make sure people understood as well is that we have not made a decision instead of doing the third Series 6 plant in Malaysia, we're actually moving that now to Vietnam.

So as you all know I think, or most of you know, we have a building in Vietnam that we never began production in, but we will now move Series 6 third factory to Vietnam. And that provides capability then to look at our KLM plant 3 and 4, as it relates to the timing of how long we'll continue to run that production.

So we have optionality in really the first four plants in KLM, KLM 1-2, KLM 3-4, as it relates to continuing Series 4 production into 2018 or through all of 2018. Our current plan assumes that all that production would be stopped in the middle of 2018. We also have capability in two lines in Perrysburg. We had six lines in Perrysburg.

We've actually shut down production of the south building which maintained four production lines. We've had that production, obviously have ramped that down so we can ramp up Series 6. But we still have the other two lines in Perrysburg that we can evaluate.

So we have, call it, 10 lines as it relates to decisions that can be made as it relates to Series 4 and how long we continue that production. We're evaluating alternatives right now. There's a lot that's going into our decision making as it relates to running Series 4 production.

Part of it is underlying project economics, module economics, making sure we can capture what we think is fair value for that product. The other is obviously most important is making sure none of it has any impact to distracting or delaying the roll out of Series 6. If there's anything that would cause a delay in the Series 6, we would not do that.

We're 100% committed to getting the most competitively differentiated product into the market as fast as possible. So we don't want do anything with Series 4 that would jeopardize our Series 6 launch. The other thing I would say is that as it relates to Series 4, I want to capture as much of the value stream as possible.

So I'm not just looking to capture module sales, per se. If I could find a way to continue to run Series 4, capture all the way through development or through EPC, through O&M, but capture more of the value chain, those are the things that will inform our decisions around what we do.

We feel very fortunate to have the optionality around Series 4m but, again, the top priority is we won't do anything to jeopardize the launch of Series 6. So I'll pass the Series 6 question over to Alex..

Yes. So as it relates to Series 6, the plan we've laid out, which is about $1 billion of capital spend, has us with the first line in Perrysburg at 550 megawatts and then a full high-volume manufacturing line at about 1.1 gigawatts. So we will go first to KLM and then, as Mark said, over to Vietnam for the second Terra factory.

If you look at that spend now, that gets us to about 3.5 gigawatts of production in 2019 and has us leaving exiting 2019 just under 4 gigawatts of capacity..

Operator, we can go to the next question..

We'll go to Krish Sankar, Bank of America Merrill Lynch..

Hey, guys. This is Chirag Odhav on for Krish.

Could you just comment a little bit on any changes in customer activity resulting from the ongoing Suniva trade case? And have you noticed an increase in customers looking to secure longer term pricing as a result?.

Yes, so there's two sides on the customer activity. One is fundamental demand for solar and solar power plants.

Obviously, 201 hasn't changed that demand profile at all, and what we said in our prepared remarks is that there is a tremendous increase in demand for solar, driven by utilities and looking at long-term integrated resource plans and understanding the affordability and the competitiveness of solar. So that's obviously driving more demand.

We're seeing a global increase in solar demand. Again, it's driven off of demand elasticity so as the prices of solar come down, we've seen a significant increase in demand associated with that. We're also starting to see, as we said in our prepared remarks, a pretty significant increase in utility scale commercial and industrial opportunities.

There's a pretty robust pipeline from that standpoint. So the fundamentals as it relates to solar hasn't been impacted or is not at all driven by anything that may happen on a trade case. The trade case here in the U.S.

– is it driving potentially customers to make their procurement decisions sooner than they would otherwise? I think there's probably some of that. I think people are trying to get access to supply in advance of any ruling that may be made. You know, trying to protect their projects as it relates to their embedded economics and secure a module supply.

So I do think that that is happening in the marketplace and depending on how the trade case plays out, we may see more of that activity here over the next quarter or so..

We'll next go to Tyler Frank, Robert Baird..

Hey, guys. Good quarter, and thanks for taking the question. Can you just talk about how sustainable you think current economics are? You mentioned both on the project side seeing better value for the projects that 8point3 gave you a waiver for, and then, obviously, on the module side, it seems like prices have firmed up.

So as we look out two to four quarters from now, what are your expectations for overall the demand and supply balance? And how should we think about the long-term sustainability of the current pricing profile?.

I'll take the discussion around module and Alex can take more discussion on the systems side. Look, I think the reality is that the module prices have – and I use the U.S. as an example – are such a relatively insignificant component of the overall levelized costs of energy. As we said before, cost of capital is even a more significant impact.

Right? But the balance of system costs now are getting to be more impactful to some extent. If you look at the impact of inverters and trackers, you're seeing a more significant component of the overall LCOE.

If you look at the module as an example, it will vary upon regions that you're in, but the fact it will be somewhere in the range of, call it, around $0.03 of module price drives about $1 of PPA price. So if you're thinking – you're pricing at $30, and you see a module price move by $0.03, that adds about $1 to the PPA price.

That's not going to change the fundamental demand associated with procurement decisions. Right? A dollar of PPA price isn't going to change somebody's decision around whether they're going to move forward and procure. So I think that – look, it's a competitive market.

Obviously, as we've said before, there is excess supply and oversupply in the industry. It is a little bit tighter on the higher-efficiency, higher-quality products so that you have to bifurcate the market a little bit that way.

But as I look over the next few quarters, yes, things will continue to be competitive, but I think we're in a relatively tight range of module pricing. The other thing I would say is that where we saw some of the more aggressive pricing behavior from some of our Chinese competitors in particular, I think there are some signs of fatigue.

I think some have even made statements that they've reduced shipment guidance for the year because they're going to focus on profitability. So, look, this industry moves very quickly. So to try to make a definitive call for something two to three quarters out is never easy.

But I would say at least for the second half of this year, we're probably in a relatively tight range relative to where module prices will move..

And Tyler, on the systems side, I'd say that the outlook is I think fairly sustainable. For us, there are really two things at work here. One is we are seeing a lot of interest in U.S. asset ownership at a time when there are relatively few large-scale quality assets available in 2017 and into 2018.

So despite some potential headwinds around tax reform and interest rates, we're not seeing a significant change in cost of capital at the moment, and we're seeing a lot of money in the infrastructure space and in the tax equity space looking to go to work. So we're seeing a lot of interest there.

I think the second thing for us, and this relates a little bit to 8point3 is the competitiveness of the yieldco and it specifically relates to the assets that we have this year in the ROFO process and the values associated with those and California Flats is a big driver of our guidance change right now.

When we started marketing that asset, we were aiming to structure a deal for – to keep a residual interest for 8point3. As we progressed through that, it became clear that the structuring itself was creating a loss of value and at the same time, the yield profile of 8point3 was changing.

So when you combine those two it meant that 8point3 was clearly not the best buyer for that asset. And we took that back out to market and we found a simpler and less structured deal with a much higher value that informs not only California Flats but how we think about other assets in the future.

So I look at those two I think partly there's just a very robust market for U.S. asset sales today and the amount of capital and the cost of capital available is very good, and secondly, the yieldco is not really a viable buyer today for new U.S. utility scale assets, as currently capitalized..

Vishal Shah with Deutsche Bank..

Yes, hi. Thanks for taking my question. Just a question on the gross margin outlook. I know you guys have previously talked about how margins could be potentially under pressure until Series 6 is up and running in the second half.

With the current module pricing environment – what's your current outlook on component market margins? And then, for Series 6 are you still looking at about a Gigawatt of 2018 shipments? And then finally, as far as your capacity allocation is concerned for projects that you intend to complete and sell in 2018, can you maybe talk a little bit about what that number would look like? This year, for example, I think you have about a 0.5 Gigawatt of capacity that's been allocated to internal projects.

How would that number change in 2018? Thank you..

Vishal, I'll take the gross margin outlook and talk a little bit about the project side of 2018 and Mark can talk on Series 6 2018 shipment.

On the gross margins, what we said before and remains true is that as we stop looking to improve the Series 4 module and focus on the Series 6 module, that module is going to be most challenged just before we ramp it down. So right now if you look at our gross margins you can see that this quarter is a little lower than we've seen in past quarters.

Part of that is due to ASP declines from volumes that were booked in previous quarters.

And then there's a small impact from under-utilization costs as well so as we've taken down our KLM 5 and KLM 6 line, which was one of our lowest cost locations, the blended cost when you include our Perrysburg factory being a larger component of the total, Series 4 increases slightly.

So I'd say that on the module side, I think the margins you're seeing today are probably are relatively sustainable over the next few quarters and we've seen pricing firm up in the U.S. a little bit.

On the project side, we haven't guided for 2018, so we don't have numbers to give you today but if you look through the Q that'll come out later and it'll give you a view to what's in the pipeline and the COD dates can give you a rough guide to what we're looking at in 2018..

Relative to Series 6, we still are on target for about a Gigawatt of production for next year. You know, so that lines up to everything's on schedule and progressing as anticipated.

So as we think about 2018 that still what our expectations are and again the constraint isn't necessarily our own ability to ramp, it's actually getting the tool sets from our vendors and there's a relatively long lead time from that perspective.

The other thing I would say around the capacity allocation is this is what we haven't guided as Alex indicated but we did indicate in the call, and I think it's the right way to look at it is that when you look at our contracted pipeline which you'll be able to see more around that in the Q when it's filed plus our late-stage opportunities that we're pursuing right now, call it 1.9 Gigawatt, we are lined up very well for 2018, 2019 and 2020 on an average basis to be approximately a Gigawatt of systems business.

So I think that's the right way to look at it. We will continue to optimize the timing of the shipments and the recognition around those assets to optimize value creation from that perspective. But I do, I feel very comfortable where we are right now with maintaining that annual volume around a Gigawatt for our Systems business..

Brian Lee, Goldman Sachs..

Hey, guys. Thanks for taking our questions. I had a couple of them. Maybe first off, Mark, can you comment on the pricing environment for modules in the U.S., but also globally? I know there's a bit of a difference there. And have you raised prices in the U.S.

specifically and by how much if you can comment? And then just maybe lastly on that point, how are you pricing bookings especially for deliveries in 2018 given some of the trade case uncertainty? The follow-up I'd have is just around the systems visibility for the raised guidance.

Can you quantify how much of a margin improvement you are seeing from the structuring change you mentioned, Alex? And then whether you think margins on systems are better than modules in the second half of the year given some of the price bifurcation we're seeing in the market? Thanks..

All right. I'll take the first two and have the last one. As it relates to the pricing environment, let's talk to U.S., clearly things have firmed up, right? I said that in my prepared remarks as well. So the pricing has firmed up in the U.S.

Again, there's a tremendous amount of demand right now across really all segments of the market, which is firming up that pricing. Internationally, it depends on the market. Some, I would argue, are stabilizing and firming up a little bit.

Others I would argue are still very aggressive, so it's hard to give you a generic statement relative to the international side of the house, but on average, I would say the global, if you take the U.S.

combined with the international markets is relatively – the pricing has firmed up over the first half of this year relative to where we exited the end of last year.

In terms of how we're thinking about the trade case and how we're selling forward, we continue to try to best position our pricing in the marketplace relative to the competition and sell through the differentiation and value creation that we have inherent in our model, which is the energy yield advantage.

As it relates to the trade case, it's still an uncertainty at this point in time as it relates to, A, if it's going to happen, B, to what extent there would be an impact. So we haven't really informed our pricing decision, per se, as it relates to if something were to happen.

I think as we get closer and we see better line of sight, we'll evaluate that. One thing I will say though is our general approach, especially as we position Series 6 into the marketplace, is we will capture fair value for the technology that we provide to our customers.

But I'm not looking at this as some opportunistic ASP grab that we could get into the marketplace.

I mean, we're going to engage customers from a relationship standpoint and a long-term partnership perspective and capture the right appropriate value for the product, not necessarily trying to be overly optimistic because of a potential trade dispute that may happen or may not happen..

Brian, to your second question, if you look at the EPS guidance, we're raised that $1.75. There's a tax benefit in there of about $42 million. The rest is associated mostly with the systems business. On Cal Flats, there are two things at work.

One, and we brought this up, I think, on a previous call, is there was a specific development related risk item that was not in our guidance before, which has now been resolved relative to property tax.

So that provides significant uptick to value and then the remainder of that then comes from the structuring and taking the deal out of the yieldco and selling to a third party. But from a value perspective, I would look at the EPS raise minus the tax as mostly attributable to the systems business..

I think, too, one thing that Alex did say I think, Brian, you're asking what does the second half margin profile look like between systems and modules, one of the things that Alex indicated in his comments as it relates to – as we ramp down production of Series 4, again, there's an under-absorbed, underutilized cost structure there that will create a little bit of a headwind on our Series 4 costs, all right, so that by default then what we would potentially expect is to have lower gross margin, which we saw in Q2 versus Q1 because of the impact.

And if you use a penny as an example, if there's a penny under-absorbed costs that now has to be weighted down towards Series 4, you're talking something that's going to be 3% to 4% gross margin. So a small delta could have a significant impact to gross margin percent, and we saw a little bit of that here in the second quarter..

Colin Rusch, Oppenheimer and Company..

Thanks so much, guys.

Can you talk a little bit about the impact of lower energy storage prices on demand overall for projects at this point? And how you're developing, going forward, in lieu of what we're seeing in terms of that cost decline on energy storage?.

Yes. So, especially in certain markets, the impact of storage, and really it's interesting because not only in mature markets that maybe have a more fundamental issue that they're trying to deal with right now, and everyone, generally, we refer to it as the duck curve phenomenon.

It's not only there where there's an increased interest on storage and integration of PV with storage.

We're even starting to see – as we see some of the demand now migrate into the southeast, as an example, and some of the utilities are early on in their journey for solar, and it's now strategic and integrated into the long-term resource plan, so they want to understand storage as part of that long-term solution.

So we're seeing it on both sides for more mature markets, but even in more emerging markets, as well.

The other thing that is a continued concern and is around grid reliability and stability, and when you see increased renewal penetration, and we've demonstrated through our work with Cal ISO and Edrolin (50:55) reports that we've issued and validated by others, is that utilities feel solar, obviously, can improve – it can provide services that actually improve reliability and stability of the grid.

And that's another item that a lot of the utilities are asking a lot more about, and trying to have a better understanding of what are the proper power plant controls that can enable that. And we feel very good about our offer in that regard. It's clearly going to be another inflection point for demand generation.

It enables a much higher solar penetration in a number of key markets, and what's happened with the battery side of the equation, the costs have come down significantly, and you're seeing very compelling PV plus storage. And we're actively engaging and participating in a number of RFPs.

In some cases, even more almost bilateral negotiations with a couple of customers to make sure that we can demonstrate our innovation and thought leadership in this area. But I do think it's going to have a significant impact on demand as we look forward in the next five years to ten years..

Sophie Carp, Guggenheim Securities..

Hi. Good evening, and thank you for taking my question.

Can you comment a little bit on your strategy with 8point3 Energy Partners at this point? Are you still pursing the sale of (52:12) and the situation with pricing and the project values that you see, are they impacted in any way?.

Yes. I mean, I can't go into a lot of details as it relates to 8point3, but we are still exploring strategic alternatives, which would include the sale of our interest. Specifically, it could include something more than that depending on the interest from a market perspective.

I think as Alex indicated, and I said in my prepared remarks as well, is that we've captured tremendous upside by selling our high-quality assets outside of 8point3.

And if you look at the delta of where the share price would have to be to effectively give us equivalent economics on an asset like Switch Station, it would actually have to trade above where the IPO was. And there's no indication of anything in that range.

And I don't think we'll ever see the yield that we saw at that point in time coming back anytime soon. So I think where we stand we know that we can capture better – we can get better value capture for our assets with other buyers. It creates more of a competitive dynamic for the sell-down process.

So I don't think strategically anything has changed from our perspective relative to 8point3. Our strategic valuations are still ongoing. I have no other updates beyond that..

Our final question from Pavel Molchanov, Raymond James..

Thanks for taking the question. Let me go back to the tariff issue. There have been some estimates from the SEIA and others that if this Suniva request were granted, it would cost something like 100,000 jobs in the U.S. solar value chain.

Because you guys are both hardware vendors and project developers, I guess my – the way I would frame it is what do you think is the optimal outcome? Are you rooting for Suniva's request to be granted or not?.

So, it's interesting. We're part of SEIA. We love SEIA. But I can take you back to the first trade cases, the anti-dumping cases that were put in place 2012-2014 timeframe, same argument was there. This would be a complete destruction of jobs. All these jobs that were being created were going to be a tremendous risk.

We're going to lose hundreds of thousands of solar jobs. If you take that time and move it forward, nothing more than – the only thing that happened is the industry is continuing to thrive. Nothing fundamentally changed and disrupted the demand profile for solar. There were no jobs loss. There were jobs created over that period of time.

So I know the rhetoric there and people like to lead with that, but I think you've got to step back and look at the reality. And I think if you look at the most recent history, you would argue that the reality is something much different than maybe what people are saying. What I would say is go back to statements we said in our last call.

There is a tremendous oversupply in the industry, right? We believe in free and fair trade to the extent there's not fair trade then there's an element of enforcement potentially that needs to be put in place. We're not a part of the trade case. We're not anticipating to be a part of the trade case.

You know, the process of the way it rolls out right now, there's still an evaluation of an injury of the termination. That'll be made sometime by the mid to late September. Once if there is a determination of injury at that point in time, they'll move forward into a remedy phase which lasts, again, another six weeks to eight weeks.

We would potentially, if we do get involved, potentially be involved as it relates to input around remedies. I do think that a modest type of – if there is a determination of injury, a modest type of remedy will not be harmful at all to the industry and I think it'll continue to thrive and more jobs will be created.

If the current proposed recommendations around minimum prices in tariffs go up into the $0.40 tariff range of minimum price is close to $0.70, I think that could have an impact. Something more modest, let's call it, $0.10 to $0.12, maybe $0.15. I already said $0.03 of module price is $1 of PPA price. So if you add $0.10, we have $3 of PPA price.

Something going from $30 to $33, I don't think will be destructive at all to the underlying demand profile for solar. It won't change the – it won't create any type of risk to job creations and I think the industry will continue to thrive. We already referenced the storage impact.

That's another kink in the curve of making solar more competitive and viable and sustainable. So look, we'll continue to evaluate. We'll continue to provide input as it gets to a remedy standpoint. But I don't see that there's – that the rhetoric that there's going to be some tremendous destruction of job creation in the U.S.

I don't think that's going to happen. And hopefully what it will do is enable more manufacturing jobs in the U.S. I think that's another opportunity that this could result in and whether we do it in our plant in Ohio or others potentially bring more manufacturing in the U.S., I think that'd be a great thing..

Thank you, Mr. Haymore. And that does conclude today's conference call. We thank you all for your participation and have a great day..