Good afternoon, everyone, and welcome to the First Solar First Quarter 2018 Earnings Call. This call is being webcast live on the Investors section at First Solar's website at investor. Firstsolar.com. At this time, all participants are in a listen only mode. As a reminder, today's call is being recorded.
I would now like to turn the call over to Steve Haymore from First Solar Mr. Haymore, you may begin.
Thank you, Ashley. Good afternoon, everyone, and thank you for joining us. Today, the company issued a press release announcing its first quarter financial results. A copy of the press release and associated presentation are available on our Web site at investor. Firstsolar.com.
With me today are Mark Whitmar, 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 Most of the financial numbers reported and discussed on today's call are based on US Generally Accepted Accounting Principles. In the few cases where we report non These 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. Moment ago, we issued a press release announcing that first solar plans to construct a new Series 6 module manufacturing facility in Ohio, which will significantly increase our domestic production capacity. This decision is in response to the continued strong demand for allows us to better address within the global landscape. As highlighted on Slide 4, the Springfield Factory will have a nameplate capacity 1.2 gigawatts and will be built essentially next to our current manufacturing operations in Ohio.
Combined with our existing Series 6 factory in Ohio, which has a nameplate capacity of 600 megawatts, this additional facility will bring
the
at the largest U. S. Solar module manufacturer. We expect production to begin in late 2019, and the factory to be fully ramped by the end of 2020. The total capital expenditures to construct this facility are expected to be approximately 400,000,000 and will be incurred over the next 2 years.
The site selected could accommodate a second factory of equal size, and we will continue to monitor market conditions and our relative competitive position as we evaluate the potential for adding additional capacity. Are 3 major benefits to building a new fully integrated manufacturing facility in U. S. Firstly, recent U. S.
Tax Reform the favorable local and national business environment enhanced the economic rationale for U. S. Manufacturing. Secondly, The lower labor cost per watt of our Series 6 module reduces the labor arbitrage benefit of manufacturing in Malaysia or Vietnam relative to the U S. Lastly, by locating the factory near our existing U.
S. Manufacturing facility, will be able to efficiently leverage the capabilities and know how of our experienced R And D And Manufacturing teams. In terms of local economic impact, there will be a benefit from the capital spend to constructed facility. Which is in addition to the approximately 500 new high quality permanent manufacturing jobs that will be created directly by our operations. Also expect to significantly grow Furthermore, this growth will create economies of scale for our supply team partners to enhance their cost reduction roadmaps.
Turning to Slide 5. An important item to highlight is that 6 roadmap as we exit 2020. As shown on Slide 5, this new U. S. Factory 36 with this U.
S. New S. Factory Series 6 global nameplate capacity is expected to increase to 6.6 gigawatts. Combination with approximately 1 gigawatt of Series 4 capacity, we expect to have 7.6 gigawatts of total nameplate capacity as we exit 2020. Relative to the production plan that we provided at our Analyst Day in December, today's announcement, combined with the recent restarted 2 Series 4 lines in Ohio, is expected to add an incremental 1 point 2 gigawatts of supply over the next 3 years.
We will provide additional details on the progress of the latest Series 6 factory on future calls. Turning to Slide 6. I'll next discuss the progress we have been making to ramp our Series 6 factories. In terms of manufacturing readiness, which captures elements such as building preparation, tool installation, staffing and other activities, We continue to make excellent progress, and we scored our readiness as green across all four of our factories. The most notable achievement to highlight is the start of production at our Ohio factory at the beginning of this month.
To put this achievement in perspective, 18 months ago, when we announced the decision to accelerate our transition to Series 6, we were confident in the journey we had embarked upon. However, the new equipment and manufacturing process that needed to be designed and validated, we knew the journey would be challenging. The fact that we have been able to meet our initial target of mid-twenty 18 production and begin shipping modules to projects is a tribute to the capabilities of our associates and First Solar's commitment to delivering results. Next, in Malaysia, we achieved a significant milestone earlier this week as we produced our 1st complete module. The factory continues to move steadily closer to the start of production in Q3, elevated by the learnings from the initial ramp in Ohio.
We are likewise making good progress with both Series 6 factories in Vietnam. The front of the line of the first factory is now 90% installed and the construction of the 2nd factory is continued on schedule. While we are pleased with the manufacturing readiness progress, we are working through a number of issues related to our manufacturing ramp. For this reason, we have scored the 3 associated metrics of wattage, throughput and product readiness as yellow. The first thing to note is that the issues we are having are normal occurrences for the phase of factory ramp, which are proactively addressing them.
Related to module wattage,
we are encouraged by
the steady progress and ongoing improvements that we have been making since we started the line. The current production entitlement yield 90% of the modules being produced at or above 400 watts with a top bin of distribution at 4 20 watts. Over the next 90 days, we see a clear path to an average production bin of 415 watts a top our long term roadmap, which takes us beyond 4.25 lots per module, as we discussed at our last Analyst Day. Throughput, which measures the number of modules produced each day, is the area where we are currently placing the greatest focus and working improve equipment availability in order to increase production levels. Notably, the front end of the manufacturing line which includes the most complex and unique processes such as Deposition And LaserScribeMe is performing well.
However, the less technically challenged back end assembly processes are where the current constraints are. And therefore, we are placing the greatest focus on this portion of the line. As we indicated at the onset of the transition, we believe the greatest potential risk was not whether the core Series 6 module technology would function properly, but whether there would be scheduled risk given the 4 factories would be ramping in succession under an aggressive timeframe. To put the scheduled risk and context, it is not a matter if we, if, we will reach the expected output levels, but rather a question of when we will get there.
To the extent that some of
our existing challenges persist, 36 supply in 2018 could be on the low end of our expected range. As originally planned, we believe that any near term shortfalls in Series 6 can be managed and resolved effectively given flexibility that we have schedules to our own self developed projects. Overall, we are encouraged by how far we have come on this transition, but due to the complexities of the undertaking, the potential for near term production delays still exist through the ramp period. The 3rd manufacturing ramp metric provided is Series 6 product readiness, which captures product testing requirements, whether from the customer or other entities. While the product is meeting the design intent on all fronts, There is a score of yellow based on the completion of timing.
Target. However, we remain confident that it will not be a question of whether we obtain these certifications, but rather a question of time before it's completed. One other note on product readiness is that our EPC customers and structured ecosystem partners continue to familiarize themselves with Series 6 They continue to roadmap new innovative mounting structures and to request capabilities that enable lower total systems costs. First Solar is evaluating Series 6 frame design variance that can also bring mounting application capabilities in response to customer's input. In summary, while we're working through typical ramp and related issues, we are very pleased with our progress today.
The execution to reach this point has been tremendous, and we are encouraged by the manufacturing readiness of our factories and the current module wattage results. Next, I'll turn to Slide 7 to discuss our bookings activity since our last call. As I've mentioned previously, our decision to expand capacity was based on the strength of the demand for our Series 6 product. In roughly 2 months since our last earnings report, we have contracted 2 gigawatts of additional volume which brings our total year to date net bookings 10.6 gigawatts of future expected shipments at this time. Shipments between now 2020, combined with our mid to late stage pipeline, which I will discuss shortly, we feel confident in making the decision add additional capacity.
Live agreement with a leading U. S. Developer. Combined with a separate agreement signed last year, we have now contracted with this customer for over 1.2 gigawatts of modular deliveries in 20192020. Our other bookings for the quarter were primarily module sales and include deals with various U.
S. Customers as well as international bookings in Turkey, France and other locations. With more than 3.50 megawatts booked in Europe since the beginning of the year and over 580 megawatts booked during the past 12 months, we are making good progress in this region. Our continued progress in these markets is aided by our low carbon footprint, energy yield advantage, and focus on customer engagement. While not included as new bookings, since our last earnings call, we have signed EPC agreements with 2 customer for a total of 380 Megawatt DC.
In each case, a module supply agreement was already in place, and we've now added EPC scope. First of these agreements was with Vectren to construct a 60 Megawatt DC project in Indiana that is expected to power more than 11,000 households. Construction of the project is expected to begin in the second half of twenty nineteen with project completion in 20 20. This utility owned project will utilize Series 6 modules and highlights 1st Solar's plant design approach which is tailored to utility ownership values. We've also signed a EPC agreement with Long Grove Energy, for 315 Megawatt DC project in Texas that is expected to be completed in late 20 18.
We look forward to future collaboration with Long Road as they continue to build out their U. S. Development pipeline. In combination with our previously signed EPC agreements with Tampa Electric, we now have over 6 20 Megawatts BC of contracted EPC projects that we will construct over the next 3 years. In addition, with over 500 megawatts of EPC opportunities, that are not yet booked, we are still when we are still in discussions with customers.
Turning to Slide 8, I'll next discuss our mid to late stage booking opportunities, which have grown to 8.3 Gigawatts DC from 6.8 Gigawatts in the prior quarter. With 2 gigawatts booked during that time period, the actual growth increase in opportunities is approximately 3.5 gigawatts. In terms of the geographical mix, the largest increases were in the U S. And Asia Pacific. The increase in the U S.
Opportunities were a combination of both systems in module opportunities, these have progressed to the point where they are now included in our pipeline. The remaining increase in opportunities made up of potential module sales primarily in Japan and Australia. Similar to last quarter, the total potential opportunities includes deals that signed, but not yet counted as bookings. Approximately 1.2 gigawatts of such projects are included in the 8.3 Gigawatt total, and the final booking decision is and the final booking decision is dependent on the closing of financing or other CPs. The shipment timing of these projects is also noteworthy as more than 6 gigawatts or approximately 3.4 of the total mid to late stage opportunities have deliveries in 2020 or later.
The profile of these potential bookings matches up closely to the timing of the additional capacity that we have announced today and provides good visibility into the demand over the next several years. Lastly, we saw positive growth in the mix of system opportunities in our potential bookings versus the prior quarter. Systems project opportunities now comprise 1.9 gigawatts as compared to less than 1 gigawatt approximately 2 months ago. This increase is the result of the progress we are making in our project development pipelines in the U. S.
And Australia. Taking into account the fact that we have booked approximately 600 megawatts of development business and signed EPC agreements of 620 megawatt primarily since the beginning of the year, our recent momentum is building our systems pipeline is encouraging. Units of nearly 2 gigawatts, we have a strong foundation to meet our target 1 gigawatt per year assistance business. I'll now turn the call over to Alex who will provide more detail on our first quarter financial results and discuss updated guidance for 2018.
Thanks, Mark. Turn to Slide 10, I'll start by covering the income statement highlights for the first quarter. Net sales in Q1 were $567,000,000, an increase of $228,000,000 compared to the previous quarter. The increase was due to the sale of 155 megawatts of projects in India, 15 megawatts of projects in Japan and initial revenue recognition for sale of the Rosemont project in the U. S.
It was noting that although our first Series 6 modules produced will shift to the 2nd phase of our California flats project, which was sold in 2017, Rosemont is the first project we've sold that we'll use exclusively Series 6 modules. As mentioned on last quarter's call, there was a potential for a loss in Q1 if some or all of these projects did not close, but the execution of these deals was a significant contributor to revenue and earning for the quarter. 1st quarter revenue also included $55,000,000 related to the settlement of a California state sales and use tax examination associated with contracts. As a percentage of total quarterly net sales, our systems revenue in Q1 was 72%, as compared to 39% in Q4. Gross margin improved to 30% in the first quarter from 18% in the prior quarter.
The higher gross margin was primarily a result of the mix of higher gross profit projects recognized and the settlement of the sales and use tax examination. On a second basis, our 1st quarter systems gross margin was 40% and our module gross margin was 6%. The system segment margin was strong as a result of the India Japan and U. S. Projects sold in Q1.
The decline in the module segment gross margin was due to lower 4 ASPs associated with supply agreements that were contracted several quarters ago. The average ASP of module sales in Q1 is not reflective of pricing on more recent bookings, and we expect module segment ASPs to improve in coming quarters. Even as ASPs decreased, the module segment gross margin through the remainder of the year is expected to be low due to ramp related costs at the beginning of Q2. And because initial Series 6 module production is targeted the systems business. And as a reminder, our segment reporting was revised last quarter, and the module segment now includes only modules to third parties.
The system segment includes all revenue from the sale of Solar Power Systems, including the module. Q1 operating expenses were $99,000,000, an increase of $2,000,000 compared to Q4. Plant startup increased by $17,000,000 as a result of higher Series 6 production activities across Ohio, Malaysia and Vietnam factories. The higher start up expense is mostly offset by lower SG and A and R and D expense which results from a decrease in variable compensation as well as efficient expense management. Operating profit for the first quarter was 1,000,000 compared to an operating loss of 1,000,000 in the 4th quarter.
Increase in operating profit was a relative higher net sales and the higher mix of systems projects sold. Other income was $18,000,000 in Q1 as result of the $20,000,000 gain on the sale of certain restricted investments associated with the reimbursement overfunded amounts from our module collection and recycling trust. Income tax expense for the first quarter was $12,000,000 compared to $399,000,000 Reform, and as indicated previously, is subject to additional analysis and further interpretation and guidance from government regulators. We did not record any adjustments in Q1 related to our original provision, and we continue to expect to continue revising our provisional estimates until we file our 2017 federal tax return this year. Earnings per share for Q1 was $0.78 compared to a loss per share in the fourth quarter of $4.14.
Adjusted for the impact of U. S. Tax reform and the effects of restructuring and asset impairment charges, the non GAAP loss per share in Q4 was $0.25. Please refer to the appendix of the earnings presentation for the accompanying GAAP to non GAAP reconciliation. Moving on to Slide 11.
I'll next discuss balance sheet items and summary cash flow origination. Our cash and marketable securities balance ended the quarter of 2,900,000,000 a decrease of $110,000,000 from the prior quarter. Our net cash position decreased by $155,000,000 to 2,400,000,000. The lower cash balance is primarily due to increased capital expenditures in Q1 to support our Series 6 ramp, partially offset by the 102,000,000 received from the reimbursement of overfunded amounts from our module collection and recycling trust. Q1 net working capital, which includes the chain in non current project assets and excludes cash and marketable securities increased by $150,000,000.
The change was primarily due to an increase in inventories accounts receivable and lower accrued expenses from variable compensation payments. Total debt at the end of the first quarter was $38,000,000, a net increase of $44,000,000 from the prior quarter. The increase resulted from issuing project level debt in Japan and India. Essentially all of our outstanding debt is project related and will come off our balance sheet when the projects are sold. Cash flows used in operations in Q1 were $45,000,000 due to variable compensation payments and increases in inventory, partially offset by project sales.
Q1, customers or international projects assumed approximately $60,000,000 of liabilities related to these transactions. And if these sales have been structured differently, such that the project debt was not assumed by the buyers, operating cash flow would have been $60,000,000 higher. The following simplify example helps illustrate this point. If we were to sell a fully constructed unlevered asset for $100, would see a $100 increase in revenue, a $100 increase in net cash and a $100 increase in operating cash flow. If we sell that same asset for $100, but leverage to $80 of non recourse project level debt, we likewise see $100 increase in revenue $100 increase in net cash.
However, the $100 increase in net cash is comprised of which is assumed by the customer. And significantly, this means there is only a $20 increase in operating cash flow in this example. Therefore, the same asset sold with the same economic profile and the same revenue and net cash impact can show a significantly different operating cash flow profile depending on the transaction structure. Historically, we've sold either constructed unlevered assets or assets where the sale has occurred prior to construction and therefore prior to the drawing down a significant debt on the project Despite the visual effects of showing reduced operating cash flow as we develop assets and hold upon balance sheet for some portion of construction, especially in international markets, There are benefits to utilizing non recourse project leverage, including managing FX risk, optimizing construction equity working capital, and ultimately optimize an overall project value upon sale. Finally, capital expenditures were compared to $199,000,000 in the prior quarter as spending on Series 6 decreased slightly.
Depreciation and amortization expense was $24,000,000 in Q1. Continuing on Slide 12, I'll discuss our 2018 guidance. Our Q1 earnings provided a positive start to the year. Leaving our income statement guidance unchanged for the time being because of risks associated with project sales timing and potential cost impacts associated with steel and aluminum tariffs. The primary update we're making to our guidance of project timing pertains to the sale of our Barrel project in Australia, which was originally anticipated in 2018, which we now expect fleet and recognized revenue on in 2019.
While the revenue associated earnings to this project are moving to 2019, we're not lowering our income statement guide due to offsetting items in our Q1 results. Separately, our Ishikawa project in Japan, which is included in our guidance for the year, experienced weather related construction delays in recent months, these delays. However, given the size of this project and the expectation of the sale and therefore initial revenue recognition will occur near to or at COD of the project, we believe it's prudent to highlight the risk. If the project sale does move into 2019, there would not be any change in the expected project economics. However, we could fall to the low end of our 2018 revenue earnings and cash guidance ranges as a result.
Other potential risk to our 2018 guidance is higher steel or aluminum costs due to recent U. S. Tariffs. The tariffs have a direct impact on certain items such as posts and talk tubes used in construction assistance projects as well as on the frame on our Series 6 module. We're also seeing indirect impacts of these tariffs through higher commodity prices.
We continue to evaluate the potential impact of these tariffs and are also actively pursuing mitigation stress in order from the breakeven. But similarly to our guidance for Q1, this could change either positively or negatively depending on the timing of the closing of certain project sales. And the closing of the 8.3 transaction. A part of the reason we expect Q2 earnings to be lower is that Q2 total OpEx is expected to be the highest of any quarter of the year. This is due to both startup expenses peaking next quarter as well as the timing of some expenses that pushed from Q1.
We expect Q4 to be the strongest quarter of the year due to higher system sales. We're lowering our net cash guidance by 100,000,000 to a revised range of $2,000,000,000 to $2,200,000,000, primarily due to the incremental $150,000,000 of capital expenditures to support the new Series 6 factory included in this year's guidance. Note are the remaining $250,000,000 of CapEx for new factories expected to be incurred in 2019. Operating cash flow is $100,000,000 lower due to the updates we're making to the Vero project, which was originally assumed to be sold as an unlevered asset, but will now be financed with project level debt. This adjustment does not impact net cash as there's an offsetting financing cash inflow.
Lastly, as discussed previously, the structure of project sales transactions can have a significant impact on operating cash flows. In addition to the structure of project sales, the timing of a sale can also have a meaningful on operating cash flow guidance for 2018. For example, if we sell a project later in 2018 than anticipated, the project continues to draw down debt financing and intervening periods, the operating cash flow proceeds will be lower, assuming the debt is assumed by the buyer of the project. Even though the economic substance of the transactions are unchanged, the classification of cash flows may be different and this can impact our expectations for operating cash flow for the year. Finally, turning to Slide 13, I'll summarize the key messages from our call today.
Firstly, as Mark discussed, encouraged by the continued strong market demand for our Series 6 technology. With future contracted module shipments of 10.6 gigawatt and potential bookings opportunities at 8.3 gigawatts, we have strong demand visibility, which has enabled the decision to expand capacity. We're excited to add to our manufacturing presence in Northern Ohio, and we'll continue to evaluate further expansion of future subject to market conditions. Secondly, we're making progress on our Series 6 ramp, and we reached important milestones this month as we started production and began the 1st commercial shipment Thirdly, we're pleased with the results for the quarter and strong project sale execution and effective core OpEx management, which contributed to our earnings of share. Our net cash position remains strong at $2,400,000,000, even as we continue to invest in Series 6 capacity.
And lastly, we're maintaining our 2018 earnings guidance and updating our net cash guidance as a result of new capacity expansion announcements and project sales timing. And with that, we conclude our prepared remarks and open the call
And we'll take our first question from Sophie Karp Please go ahead.
Ashley, could you go to the next caller then please?
We'll take our next question from Philip Shen with Roth Capital Partners. Please go ahead.
Hey guys, it looks like you're making great progress on the Series 6 ramp up. When do you expect your 1st third party shipments if you said in your prepared remarks, sorry if I missed it, I know it's always been kind of perhaps back half of this year, but now that you're you have a clear line of sight to ship to your own projects. You mentioned something about certifications may slip a few weeks does the first shipment to third parties depend on that certification? And what was that original deadline? And were what is that date now?
And then shifting to, the progress you're making on Series 6, 90% of the modules at more than 400 watts. That's fantastic. Can you give us an update on what you're seeing in terms of the cost structure progress you're making back at the Analyst Day? I think you're in 2016, you talked about 40% lower than Series 4. So is that very much on target as well?
And then finally, how do you expect the bookings to trend with the success that you're having, with the Series 6 ramp up? Thanks.
All right. So a lot there. I'll try to hit on it. The, as it relates to 3rd party shipments for Series 6, and again, as we originally planned, the vast majority of the early was going to go into our own self developed assets. And that's what is happening.
The shipments to third parties really don't start to happen. And really the end of the year into the November December timeframe where we really start to see any meaningful volume starting to go into 3rd party shipments. So again, we've allowed this optionality and flexibility with our own self developed assets to absorb the volatility potentially around the ramp and potential indications that that may have or even the timing of various certifications. As it relates to the certifications, again, just third parties I see no impact at all of anything going to 3rd party. But the other thing I just want to put in perspective is that we have historically and we will do it again here.
Effectively do, in field certification. So when we've done this before with Series 4, we have continued to ship and then do the infill certification. And so the initial shipments that are going out right now to one of our self developed assets will use that same type of methodology. So I don't want you to feel like the timing around certification and the fact that it's slipping a little bit really will have any impact not only won't have any impact to 3rd party customer shipments because they're further out in the horizon, but even to our own self developed assets, it won't be an issue from that standpoint. Series, 6 volumes are the cost side of the equation.
But for what we're seeing right now with some potential, stress points on aluminum, mainly with what's going on with tariffs and in general, commodity price increases there's a little bit of friction from that standpoint. So if I look at it, where we stressed a little bit on our cost per watt assumptions around Series 6 is primarily related to the frame beyond that. I feel very good where we are. Again, we have to get to high volume manufacturing, much higher volume manufacturing, in right now, which will continue to out drive cost down as well. We feel good about that relative to the 40%.
Again, that was an exit end of 'sixteen type number. And we feel very confident with where we'll be with Series 6 once it is fully ramped. From a booking standpoint, and what that profile should look like. And when you look at it right now, as we indicated in the prepared remarks, the incremental capacity that we now added with Series 6 plus the decision we announced last quarter to run our two lines in, Perrysburg for actually restarting them because we initially had shut them down. The combination of the 2 of those will give us about 1.2 gigawatts of production over 2018, 2020.
If you look at that relative to what we said in the Analyst Day now says that we're annual or cumulative production of that horizon is about 15 gigawatts. You pull out 500 or some megawatts that we shipped right now through the first quarter, which says we've got another 14.5 gigawatts of production that will happen over several years. And against that, we have 10.6 gigawatts booked, which means we've got 4 gigawatts to continue to book. Against that number, I've got 1.2 that is signed right now in our mid to late stage subject to CPs. So you start to look at it a little bit north of 3 gigawatts to have everything sold through in that horizon.
When I look at the north of 8 gigawatts, back out 1.2 that leaves me 7 gigawatts of mid to late stage to realize 3 gigawatts or so of additional bookings to make sure we sell through all the way through 2020. A lot of work is still to be done, but could we be in a position by the end of this year that largely has gotten that accomplished and then starting to put more points on the board beyond 2020. I mean, that would be the goal and there's a path to say that, that's going to happen.
And we'll take our next question from Sophie Clark with Guggenheim Securities. Please go ahead.
Hello. Good afternoon. Can you hear me now?
Yes, please go ahead.
Hi guys. Thank you for taking my question. Just to follow-up on this discussion on the bookings. As you continue to book this volumes, how much of embedded pricing risk is there? Maybe other different contract types that you're signing in just how much of a I guess, price declines, can do you anticipate when you think about it?
Well, look, Tobey, the
way our contracts are structured and they have been through the horizon that we've been talking about building the contracted pipeline. Is there, there are firm fixed prices that also come associated with some form of payment security or down payment, whether in the form of an LC or cash or something along those lines. And they're enforceable and there's obligations the customer to take and there's obligations of First Solar to perform relative to those contracts, there are not any price adders or deltors per se, but for price adder for the bin. So if we contract at a 430 watt module and we deliver a 4.35 watt module, then there'll be a price adder. If we deliver a 4.25 watt module, there'll be a price deduction.
That's really the only variability in the ASPs. Other than that, other than the BIN that ultimately is are delivered to the customer relative to what was contracted provisions in the contract to allow for Delta on the contracted VIN, both up and down. Other than that, there's really no variability into the contracted ASP.
And we'll take our next question from Ben Kallo with Robert W. Baird. Please go ahead.
Hey guys, congratulations. Can you talk a little bit about guidance? I guess you had a big beat rate out to where you thought you'd be. And so you didn't raise guidance. I know there were some risks there.
You mentioned but just how you think about that all. On Series 6, I think, Mark, you were talking about basically, I mean, like huge bookings, I think, better than everyone expected, being sold out until 2020. Now, I think, you know, the street can look at that and say, okay, they have nothing left to do. So I guess, how would you counter that? What are we missing maybe on the margin side, or what's the next step you're going to expand capacity more?
Sorry, I always do this, Steve, but
Some upside to the quarter from the settlement of the sales and use tax examination, which was in our suite of risks and opportunities for the year, but not necessarily looked at as being in Q1. So that's an upside and that's been offset partially by, as I mentioned, we pushed out the Ferrell project. So we're currently in a sale process for that asset and we expect now to close that in 2019. Based on the current position in the sale process, we think we'll meet or potentially exceed our guidance expectations around that project. However, as we've always said, we will look to optimize total project value over making a specific quarter or even a specific year of guidance.
And right now, it's looking like we can optimize value on that asset by pushing it out. Also got a couple of risks for the year. So Mark talks a little bit about the potential impact to Series 6 around the aluminum on the frame. Also seeing steel aluminum costs potentially increase across the EPC business as a function of tariffs. And then the ancillary impact to the pricing of exempted or non steel only 1,000,000 as well.
And then lastly, we have the Ishikawa project in Japan, which has had some schedule challenges related to adverse weather. And then we have mitigation plan, and we still think we have a good path to selling that in 2018. But if you look at all of those in totality, the there's a lot of variability in the guidance for the year. And we think that keeping the range where it is today gives us some flexibility should we see increase in tariff costs or potentially a slip out of the Ishakal project into next year. So that's why we're keeping guidance for the year.
As it is. In terms of the guidance over the year, we guided to a first half that could be about a quarter of the earnings for the year. If you look at the first quarter that we recorded to take the sales and use tax piece out and the breakeven guidance we're giving for Q2, you get to about that same place. So guidance for the year not changed. There's still a lot of variability in the year, but we still we're pretty confident we have a good path to the bottom range of the guidance.
Yes, then I'll add this to the guidance thing. As you know, we're always going to be very prudent as it relates to when do we take up guidance. And I think we're still early in the year and there's a lot of moving pieces, and we want to always reserve that optionality it relates to, capturing better value for a development asset by selling it at the optimal time to capture that value equation versus trying to make it fit into a particular quarter or year. So we're always going to be a little balance in that regard. And we'll see how the year progresses and provide an update around that in our next earnings call.
As it relates to Series 6 and look, we're very happy with the bookings and we've added more capacity now. That reason and not only for what's contracted, but also for our what sits in our development or excuse me, our mid to late stage pipeline at this point in time. We're continuing to add EPC. So we've seen we were taking, we showed another 380 megawatts or so this quarter that we on top of a module agreement that was already contracted. We have another 500 megawatts of EPC that will be able to most likely add to additional volume that we have contracted, modules on and we're going to continue to look to that.
So that's going to be another adder. The other piece will be O and M on all the volume that we're talking about now close to a gigawatt that we've added EPC to or will add EPC to here over the next quarter. So we're also working to add additional O and M to that scope. So another revenue stream and earnings pool that will come on top of what we've already contracted on Series 6. The other piece of it is managing OpEx and scale.
I think the thing we continue and I want to make sure people continue to model and think through is contribution margin flow through against a relatively fixed cost OpEx. So we now have a roadmap that says that as we exit 2020, it will be north of 7 gigawatts. And when you start modeling that and looking at incremental contribution margin, again, sort of fixed cost OpEx that's relatively flat, it drives margin expansion and EPS expansion as well. So those are things I think that people need to look at. And thing I want to make sure people understand is it relates to Series 6.
We have a lot still in front of us. We're happy with where we started at this point in time, especially on the module wattage and efficiency. I'm extremely pleased with that. The risk that we all focused on the most was the front end of the line and the front end of the line is for performing extremely well. We got some issues on the back end.
We're trying to work through, and that's more of a throughput issue. But the reality though is that, think through the entitlement around the efficiency and ultimately where the costs can go for Series 6, it's not done. So I know fill out the question around 40% lower than where we were on Series 4. There's still a meaningful opportunity to continue to drive down the costs on Series 6 and to continue to drive the efficiency up and further enhance the overall competitiveness products. So those are all things that we'll give updates in the future.
But if you had to ask me, maybe where people need to think about the business model as we move forward, those are probably the main I'd mentioned.
And we'll take our next question from Brian Lee with Goldman Sachs. Please go ahead.
Hey guys, thanks for taking the questions. Maybe first off, Mark, you seem more constructive on on topping the 1 gigawatt in the systems business, Fogi, in recent quarters. I know there's some moving pieces in terms of specific projects this year, but given the recent trends and the EPC traction you're seeing, is that one gigawatt bogie still the right target for 2018, maybe less 2018, but thinking about 2019 and beyond. And then secondly, on the new Ohio plant, just a couple modeling specifics, if you could help us out, Alex. The $100,000,000 for this year, fair to assume the other $300,000,000 in CapEx comes in in 2019.
And then at Analyst Day, I think you guys had said $50,000,000 in startup and ramp penalty costs in each of 2019 2020. Related to capacity expansion. How does that change with this new plant for those years? Thanks.
All right. I'll take the systems business question, Brian, and Alex can take the other 2. Yes, look, I'm very happy with where we are right now. On the systems business, we've always said that the gigawatt is, the target annually and we could trend above that number in any given year. And we've also said that maybe over time as we continue to see more progress, maybe that commitment number goes up.
And there's what I'm seeing right now, there's clearly a potential that, that could happen, especially with what we're seeing in some of the international opportunities beyond just what we're doing here in the U. S. So I think the combination of the 2 says that there could be additional upside to the systems business as we look over over the horizon and we will be selective. I mean, there is a very unique and specific opportunity set that we're going out after and where we want to position ourselves in the market as well as the geographies of which we want to do, development in particular and assistance business in general. But subject to the kind of those guardrails, I'm very happy with the systems business momentum and there could be an opportunity that will do better than that over the next few years.
And Brian, on the numbers, so just to clarify, it's $150,000,000 of CapEx increase for this year and $250,000,000, which we'll spend in 2019 until approximately $400,000,000. And then on the startup side, we originally, the Analyst Day guided to $170,000,000 of both ramp and startup combined in 2018 and about $50,000,000 in 20.19. We're adding $10,000,000 to that number for 2018 today. So current guidance is $180,000,000 combined. We haven't update for 2019 or beyond yet, and we may do so later in the year.
But for now, the only update is $10,000,000 addition to 2018.
And we'll take our next question from Colin Rusch with Oppenheimer.
Thanks so much. Can you talk a
little bit about how many new co as you book business with this year, how many, opportunities you're seeing to actually bid into products that are adding capacity on existing projects And then if there are any incentives to offset the incremental expense on the Ohio capacity expansion?
Good. So, Colin, on new customers, we haven't historically reported on that specifically. But, what I can tell you, I'll just use, for example, some of the announcements that we just made in terms of customers. The veteran, it's first deal that we've done with veteran, Tampa Electric, which we announced in the first deal a quarter or so ago, first time we've done business with Vectren, the U. S.
Developer that we talked about 1.2 gigawatts that we've done 700 plus this year and 500 or so. Last year, that's essentially a new customer really hadn't done anything with that customer. Want to get out into the international markets, we highlighted volumes in Turkey, which again is a customer that we haven't done a lot of volumes with in the past. Australia and some of the momentum that we've got going on in Australia, we're expanding there. Japan, we're expanding there.
So when I look at the profile of new customers, While we don't report on it specifically, one of the things that's enabled us to grow the pipeline that we have and in terms of contracted bookings as well as the mid to late stage, it's a very diverse customer set and a lot of customers that we have not done business with historically. And part of it is because the excitement that's been created with Series 6. So the product that we have now is is looked at as competitively advantaged in the marketplace and there's even to some extent more of a pull versus a push with some of our customers wanting to come to us and to work with First Solar because of the technology that we're bringing to market from that standpoint. I didn't understand, I also talked to the incentives quite but you said something about adding capacity. Help me understand that in terms of customer.
I thought I heard you say customers adding capacity. I'm not sure of the question.
If there's existing sites where land has been used, what we have started to see a little bit of folks either replacing modules or adding capacity around those existing sites within existing interconnects.
So I'm just wondering if
there's a significant amount of activity in that?
Yes, we haven't seen, I mean, we haven't seen a lot of that. We've seen some we've actually done some of that in some of the international opportunities where we found ways to add incremental DC in certain cases. Clearly, there's opportunities where customers have done development of particular site and the interconnect has been sized to something that's larger than the actual capacity that was being built in the first phase and then gets expanded beyond that. But those really do happen from time to time. As it relates to any potential repowering, at least from
a first solar perspective, we haven't seen much much of that at all. Yes, Colin, on the Ohio side, so yes, so the range of state and county level local incentives, we haven't listed what those are. But they include a range of job creation incentives, training incentives, sales and property tax abatement. Most of which have been largely finalized, but have potentially gotten, either local boats or other things completely finalize those. So they're largely in place, and there's a wide range.
The other thing I'd say is that One of the reasons we can expand U. S. Manufacturing capacity is associated with the lower corporate tax rate, and tax reform and part of that tax reform has been the ability to immediately expend sales or equipment, so lesser direct incentive, but also another reason that's made this more competitive relative to international manufacturing
as what I said in my comments as well, I mean, look, I'm the relative competitiveness of U. S. Manufacturing right now is really exciting to me and really to some extent, overwhelmingly, in terms of its relative position. It's not just the corporate rate and incentives and everything else that have been brought to the table, but just the labor productivity and advantages that we can get here in the U S relative to what we can see in some of the international markets and just the general support we can get it at the state level, the federal level support where the tax structure or whatever it may be. The U.
S. Manufacturing coupled with our Series 6 product that, less labor content per module It's very competitive to do U. S. Manufacturing right now and it also helps us reduce the logistics. So the freight costs, delivering the customer here in the U.
S, our ability to serve our customers more timely responsiveness around that. We're very happy about the ability to add more manufacturing capacity in the U. S.
And we'll take our next question from Michael Weinstein with Credit Suisse. Please go ahead.
Hi guys. Thanks for taking the question. Could you talk about the state and local incentives and when you think they might start to flow in for the new factory?
Yes. So, Michael, there's not much update I can give you beyond the range of those and their process is being finalized, but we'll update you further on later calls as we get more clarity.
Yes, nothing I mean, I would just say and to some extent, some of the incentives that we're getting are comparable to incentives we would have had, when we first started manufacturing in Ohio. And a lot of them will relate to property tax, you know, abatements and other, reductions that will happen over time. So the numbers when we actually able to communicate them, there'll be a large number. But in aggregate, but you also have to look at it at the timeline of which you'll see the benefits. They'll carry on for many years.
And we'll take our last question from Edwin Mark with Needham And Company. Please go ahead.
Hey, thanks for squeezing me in. So, I guess 2 parts question. First on the U. S. Capacity, I think you talk about like for 6 and therefore lower labor costs.
But then I would suspect there might be some kind of higher potential other things that might be higher costs than just I was just thinking about, is it more costly to produce here or is it less costly to produce here? And then having that additional capacity in U. S, does it help you be more aggressive in bidding for system project. And then just one quick question on OpEx. If you take up your startup costs by 10,000,000, that means you'll actually lower your OpEx for the year, right, stock cost.
Is that correct? And kind of to Mark's point about the lapse ratio of the model long term, is this like $280,000,000 $3,000,000 OpEx a level that you think you can sustain even as you ramp to that 7 gigawatts power capacity that you eventually will be selling?
Yes, so I'll let Alex take a handful. I'll just take kind of the first one as it relates to, the competitiveness of U. S. Manufacturing. Yes, Series 6 is lower labor content per module produced.
So that helps, relative and again, you have better labor productivity in the U. S. So a combination of less labor content and then better productivity, effectively creates almost a level playing field with our manufacturing in Vietnam and in Malaysia. The other thing that we get though is the localization of the supply chain. And so having a local supply chain now that we have higher production volumes that we can run through the supply chain, which drives the economies of scale to our suppliers, which enables them to further reduce their costs, which drives flow through benefit to First Solar is extremely impactful as well.
So, and you couple that with lower freight costs to deliver And then the reality is that, yes, while we have a tax holiday, in Malaysia, when you look through that holiday period, you look at the normalized U. S. Tax rate relative to the normalized Malaysia or Vietnam tax rate, it's favorable from that standpoint. So there's many different aspects that has enhanced the overall competitiveness of U. S.
Manufacturing and And like I said, we're very happy to be able to expand manufacturing in Ohio.
Yes, right. So on the where the Series 6 in Ohio directly impacts our ability to bid on systems projects. I don't know that having more U. S. Manufacturing relative international manufacturing changes, our ability to build on the system side, I would say overall Series 6 is a very competitive product and having that product enables us to be more competitive and systems business, be it domestically or Internationally.
But one of the key things that we talked about OpEx and scale, so yes, we're going to be up about 10,000,000 start up this year, which does mean we are managing our core SG and A effectively. That will be down slightly from previous guidance. This year, we're going to be running still at around 10 per watt of OpEx. And if you look at our growth over time, we aim to grow the company up to that 7 plus gigawatts of capacity without significant increases in OpEx. There'll be minimal increases around some of our variable costs, including sales expense.
But outside of that, we would look to bring that number down by 50% or more to get down to, call it, the $0.05 per watt of OpEx number out when we're at that kind of 7 gigawatts range. And also remember, talk about that OpEx number, including freight and warranty in that number, which is, is not the same if you look at most of our to do apples to apples comparison, you'd
have to strip that out
of our number. So as Mark mentioned, there's clear value in scaling and the benefits of OpEx and the incremental contribution margin that we can get through managing that OpEx profile carefully.
And this does conclude the question and answer session and the First Solar's 1st Quarter 2018 Earnings Call. We thank you all for your participation and you may now disconnect.