$FSLR First Solar Q4 2024 Earnings Conference Call

Good afternoon everyone, and welcome to First Solar's Q4 and full year 2024 earnings and 2025 guidance call. This call is being webcast live on the investor section of First Solar's website at investor.firstsolar.com. All participants are in a listen-only mode. Please note that today's call is being recorded. I would now like to turn the conference over to your host, Byron Jeffers, Head of Investor Relations. Please go ahead.

Good afternoon, and thank you for joining us on today's earnings call. Joining me today are our Chief Executive Officer, Mark Widmar, and our Chief Financial Officer, Alex Bradley. During this call, we will review our financial performance for 2024, discuss our future business outlook for 2025. Following our remarks, we will then open the call for questions. Before we begin, please note that some statements made today are forward-looking and involve the risks and uncertainties that could cause actual results to differ materially from management's current expectations. We undertake no obligation to update these statements due to new information or future events. For discussion of factors that could cause these results to differ materially, please refer to today's earnings press release and our Form 10-K filing with the SEC. You can find these documents on our website at investor.firstsolar.com. With that, I'm pleased to turn the call over to our CEO, Mark Widmar.

Thanks, Mark. Beginning at Slide 6, in Q4 net sales were $1.5 billion, a $0.6 billion increase from the prior quarter. For the full year, net sales were $4.2 billion, an increase of $0.9 billion compared to the previous year, driven by higher volumes sold. Our Q4 net sales were benefited by $20 million from customer contract terminations, and our full year net sales results were benefited by $115 million from customer contract terminations and reduced by warranty charges of $56 million due to the Series 7 manufacturing issues discussed on our prior earnings call. Gross margin was 37% in the fourth quarter compared to 50% in the prior quarter. Full year gross margin increased 5 percentage points from 2023, leading to a full year 2024 gross margin of 44%. Our Q4 and full year gross margin was lower than forecast due to several factors. Firstly, in December of 2024, we entered into a transaction resulting in a sale of $857 million of Section 45x tax credits. In Q4 we discounted the carrying value of these credits by $39 million, which impacted Q4 gross margin by 3 percentage points and full year gross margin by approximately 1 percentage point to reflect a cumulative discount from the transaction. We received $616 million in cash proceeds in Q4, with the remaining $202 million expected to be received in Q1 of 2025. Secondly, warranty charges relating to manufacturing issues affecting the initial production of Series 7 modules are estimated to result in total charges ranging from $56 million to $100 million, $50 million of which was recognized in the third quarter and $6 million of which was recognized in Q4, primarily driven by additional impacted modules sold during the fourth quarter. Separate but related, we have taken corrective actions following the identification of the manufacturing issues in our initial Series 7 production that led to this warranty charge, which we believe has remediated these issues. While we continue to collaborate with customers to advance resolutions, there is the potential that formal disputes arise. In addition, certain shipments to customers of product identified as impacted prior to shipment have been delayed as part of this remediation process. This resulted in the deferral of the sale of approximately 250 megawatts of modules from Q4 of 2024 into 2025. In aggregate, the $6 million warranty charge, the 250 megawatt module sale delay, the aforementioned sale of approximately 40 megawatts of low bin inventory through a module distributor, and the aforementioned contract termination payments, in aggregate, negatively impacted the fourth quarter gross margin by approximately $16 million relative to our forecast. In addition, shipment delays both within the quarter and from Q4 2024 into 2025, in large part due to the aforementioned manufacturing issues, resulted in approximately $36 million of incremental demurrage, detention, grounding, warehousing, and other logistics costs in Q4. Note, as of year-end we held approximately 0.7 GW of potentially impacted Series 7 modules in inventory. Thirdly, our newest operating facility in Alabama experienced higher-than-anticipated ramp-related charges, including material usage and spare parts consumption amounting to approximately $4 million. Despite these unforeseen costs, the plant continues to exceed the ramp-up pace of all previous Series 7 facilities in achieving its full production capability, underscoring our commitment to supporting the rapid growth trajectory of U.S. manufacturing. In Ohio, we incurred approximately $18 million in unforecasted underutilization charges, yield losses, and other ramp-related expenses associated with the conversion to our CuRe technology on a high-volume manufacturing line. And lastly, in India we incurred an unforeseen cost of $5 million due to a recent clarification of import regulations that imposed a specific duty on cover glass entering India, which applied to our 2024 cover glass imports. SG&A, R&D, and production startup expense totaled $111 million in Q4, a decrease of approximately $12 million relative to the prior quarter. Note Q4 production startup was $9 million above the midpoint of our guidance range, largely related to our Alabama and Louisiana expansions. For full year 2024, operating expenses totaled $465 million, an increase of $14 million compared to the prior year. This included a $39 million increase in R&D expense, primarily driven by higher depreciation and maintenance costs, employee compensation due to headcount growth, and increases in material and module testing costs, in each case related to our significant investments in our R&D facilities and equipment. Additionally, startup expense increased by $20 million, mainly due to the ramp-up of our Alabama and Louisiana facilities and the implementation of the lead line for our CuRe program. These increases were partially offset by a $9 million reduction in SG&A expense attributable to lower performance-based compensation expense as well as the non-recurrence of a $36 million litigation loss from the prior year. Our fourth quarter operating income was $457 million, which included depreciation, amortization, and accretion of $124 million, ramp and underutilization costs of $39 million, production startup expense of $15 million, and share-based compensation expense of $6 million. For the full year 2024, operating income was $1.4 billion, which included depreciation, amortization, and accretion of $423 million, ramp and underutilization costs of $82 million, production startup expense of $84 million, and share-based compensation expense of $28 million. Interest income, interest expense, other income, and foreign currency losses totaled $10 million in expense in Q4 and $12 million of income for the full year. We recorded income tax expense of $53 million in Q4 and $114 million for the full year. Our tax expense in Q4 and full year 2024 included a reserve of approximately $6 million for state taxes in jurisdictions that do not follow the federal tax provisions of the Section 45x credit sale exemption. The residual increase in our tax expense is mainly due to a shift in the jurisdictional mix of our earnings towards higher tax jurisdictions and adjustments to our tax provision based on differences between estimated and actual tax liabilities. Q4 earnings per diluted share were $3.65 compared to $2.91 in the previous quarter. For the full year 2024, earnings per diluted share were $12.02 compared to $7.74 in 2023. Turning to Slide 7, I'll review select balance sheet items and summary cash flow information. Aggregate balance for cash, cash equivalents, restricted cash, restricted cash equivalents, and marketable securities was $1.8 billion at the end of the year, an increase of $0.5 billion from the prior quarter and a decrease of $0.3 billion from the prior year. Our year-end net cash position, which includes the aforementioned balance less debt, was $1.2 billion, an increase of $0.5 billion from the prior quarter, a decrease of $0.4 billion from the prior year. The increase in our net cash balance in the fourth quarter was primarily driven by the collection of $0.6 billion in proceeds from the sale of Section 45x tax credits and positive module segment operating cash flows, partially offset by capital expenditures associated with our Alabama and Louisiana facilities. The decrease in our net cash balance for the full year 2024 was primarily due to capital expenditures, partially offset by module segment operating cash flows. Cash flows from operations were $1.2 billion in 2024 compared to $0.6 billion in 2023. This increase was primarily driven by $1.3 billion in proceeds from the sale of Section 45x tax credits, partially offset by an increase in payments made to suppliers compared to the prior year and lower cash receipts from module sales in the current year. Capital expenditures were $314 million in the fourth quarter compared to $434 million in the third quarter, and capital expenditures were $1.5 billion in 2024 compared to $1.4 billion in 2023. Now I'll turn the call back to Mark, who will provide an update on technology and policy.

Thanks, Mark. Before discussing our financial guidance, I'd like to reiterate our growth and investment thesis and our approach to backlog and bookings. We continue to focus on differentiation and are guided by an approach that balances growth, profitability, and liquidity. This framework informs our long-term strategic decision-making. It guided our strategy to exit the systems business at the end of the last decade and to significantly expand our domestic U.S. R&D and manufacturing base. It also drives our approach to forward contracting volume, where we've built a significant contracted backlog totaling 68.5 GW of volume at year-end 2024 at an ASP of nearly 30 cents per watt. A reported backlog, which includes U.S. and rest-of-world bookings with our typical contractual security provisions but excludes contracts signed in India unless backed by 100% security, is made up of two types of contracts: those related to a specific asset or project, and frameworks, which are typically larger, multi-year, and therefore often have less certainty of a specific delivery timing, with customers having more flexibility to shift volume within and across delivery years. Common across these structures is a fixed-price structure which may include adjusters for technology improvements and which typically include adjusters for bin class, freight risk, and commodity risk. As of December 31, 2024, over 90% of our backlog had some form of steel and/or aluminum commodity cost protection, and substantially all of our backlog had some form of freight protection. This long-term approach to our business model and customer contracting is especially important during periods of macro and industry uncertainty such as we face today. As Mark discussed, we believe there are a number of drivers of sustained long-term growth in the demand for energy generation, and with its relatively low-cost profile and speed to power, solar is well positioned to be a fixture of the energy mix in advanced economies as we progress to the next decade. However, at present, continuing a trend that increased throughout 2024, there remains significant near-term uncertainty largely driven by the still unresolved policy environment following the U.S. elections in November. This uncertainty is also driving a pause in at least some domestic manufacturing expansions. Just one example: earlier this month, Indian solar manufacturer Premier Energies announced it is pausing plans to build a cell plant in the U.S. citing policy uncertainty. Given the multi-year lead time required to build and commission a cell manufacturing facility, the uncertain policy environment also has the potential to delay and increase the presence of domestic high-volume, high-value manufacturing competition. This uncertainty, however, is also driving customer caution, particularly as it relates to new procurements and a lack of clarity as to project timelines in 2025. This uncertainty is further reflected in our 2025 allocation position. Excluding India, we remain cumulatively oversold through 2026. As previously discussed, this oversold position is deliberate and, in addition to providing us with revenue visibility in an industry that has historically experienced volatile pricing conditions, provides us resilience to the uncertain timing of delivery inherent in some of our larger framework contracts, the natural tendency for delay in the project development process, as well as the potential for incremental supply as we start up and ramp new factories. The further out the delivery time frame, the more comfortable we are with over-allocation. The closer we get to delivery dates, and as we enter any given year and undertake our annual planning process, the more we look to ensure demand can be met with available supply. Therefore, whilst beneficial in the longer term, providing us with flexibility, the trade-off is that this over-allocation must be resolved in the near-term delivery window. As we progressed through 2024, and as discussed on our previous earnings call, we saw increasing requests from customers to push out delivery schedules as a function of project development delays. We also saw 0.6 GW of terminations for convenience and 1.8 GW of terminations for default, including 1 GW of terminations for default for India domestic contracts which were signed but not included in our bookings backlog, the majority of which incurred after the initial supply and demand allocation balancing for the year was completed. As mentioned in our third quarter earnings call, for terminations where we have not received the termination payment entitlement, we will litigate or arbitrate seeking to enforce our full termination payment rights under the respective contracts. While we enter 2025 in a strong position with respect to our U.S. production, we are in an under-allocation position for our Series 6 Malaysia and Vietnam production. This is driven in large part by two factors: one, customers employing module delivery shift rights, and the other, the previously mentioned contract terminations that occurred in 2024. To relate to module delivery shift rights, as previously mentioned, multi-year framework contracts typically have less certainty over specific delivery timing. As we enter the year, approximately 1 GW of contracts with shift rights allowing product to be moved out of 2025 have had this option exercised. In addition, customers with intra-year flexibility are in many cases requesting deliveries in the second half of the year, which we expect will drive a back-end weighting of our full revenue and shipment results. Additionally, due to the aforementioned contract terminations in 2024, we are not delivering international product that we intended to deliver in 2025 under those terminated contracts. While typically we would seek to mitigate the impact of these factors by reallocating shifted or terminated deliveries to other customers, our ability to do so in the near term, particularly as it relates to our Southeast Asia-produced product, is constrained by the policy environment in Europe, India, and the U.S. In Europe, the combination of China's strategy of product dumping and oversaturation with the aim of capturing the European market, combined with a lack of EU-level political action to employ responsive trade remedies to level the playing field, has resulted in the EU market becoming a less attractive destination for our international production. As a consequence of this environment, in Q4 we made the decision to shut down our EU-based sales operation, for which we incurred approximately $3 million in severance charges in Q4. In India, while we applaud the efforts of the Indian government to address China's efforts to dominate its domestic market and are encouraged by its tariff and non-tariff measures, including the expected 2026 expansion of the existing approved list of models and manufacturers to cover cells as well as modules, these measures have the effect of largely eliminating the Indian market as a destination for our Malaysia and Vietnam product. Finally, in the U.S., there is uncertainty relating to the post-election policy environment, including the increased prospect of tariffs and potential revisions to the IRA, currently subject to a reconciliation process which, according to public reporting, is not expected to be resolved until the second half of 2025. In this environment, our customers generally view our domestic modules as advantaged relative to our international products. While, taken together, these items create near-term headwinds for our international production, assuming current policy remains unchanged, we continue to see long-term opportunities to place international products in the U.S. and optimize our allocation position. The IRA domestic content bonus provisions create significant economic value for our customers. This is enabled by way of the more recently issued points-based domestic content bonus guidance. We believe the points-based guidance provides our customers with the clearest route to enable and finance their domestic content bonus qualification efforts. For First Solar, we expect the points-based guidance will provide us with greater supply chain flexibility in the U.S. and greater opportunity to optimize allocation across our entire fleet while maintaining the ASP and the original module sale agreement. In summary, while we're encouraged by the long-term opportunities to optimize the entirety of our global production fleet, the near-term combination of increased project delays and uncertainty experienced by our customers promoting their utilization of module delivery shift rights both inter- and intra-year, and the termination in 2024 of contracts that included modules expected for delivery in 2025, together with the imbalance demand for domestic versus international product given the current policy environment in key markets, leads to a challenging full-year and quarterly supply-demand allocation and balancing position as we enter 2025. So with this context in mind, I'll next discuss the assumptions included in our 2025 financial guidance. Please turn to Slide 10. As it relates to growth and production, our factory expansions and upgrades remain on schedule to increase our expected global nameplate capacity to 25 GW by 2026. In Ohio, we completed our footprint expansion in Q1 of 2024. In Alabama, our factory is expected to exit the ramp phase at the end of Q1 2025. Our newest facility in Louisiana is forecast to be in startup into Q3 of 2025 and to begin ramping production in the second half of this year. Combined, this leads to a forecast domestic production of 9.2 to 9.7 GW. Internationally, given the supply-demand imbalance for that Southeast Asian product just detailed and the impacts of the current Europe, India, and U.S. policy environment, we've made the decision to reduce output of Series 6 international product from our Malaysia and Vietnam factories by a combined total of 1 GW this year for a total forecast production of 5.8 to 6.1 GW. In India, we're forecasting 3 to 3.2 GW of production, approximately 70% destined for the U.S. market and the remainder for domestic sales. This leads to a combined full year 2025 production forecast of 18 to 19 GW. Growth-related costs are expected to impact operating income by approximately $110 to $130 million. This comprises startup expense of $60 to $70 million, substantially all in connection with our new factory in Louisiana, and estimated ramp and underutilization costs of $50 to $60 million across our factories in Alabama, Louisiana, Malaysia, and Vietnam. Note, in connection with the aforementioned 1 GW reduction in Southeast Asian production, we are temporarily deploying a portion of our experienced engineering and manufacturing associates to our new U.S. facilities. While contributing to growth-related cost, this is expected to support the startup and ramp of these factories. Combined with inventory drawdown, including India volume shipped to the U.S. in late 2024, we forecast module sales of 18 to 20 GW, of which 9.5 to 9.8 GW is produced in the U.S. and approximately 1 GW is assumed to be domestic sales in India. For the full year, we expect to recognize an ASP of approximately 29 cents per watt, including domestic India sales and the value of certain technology, commodity, and freight adders. Included in our ASP assumption, and within the guidance range, is approximately 1.4 GW of international product, approximately evenly split between Series 6 international and Series 7 India domestic product, which is forecast to book and bill within the year at an ASP below the current backlog average. From a cost perspective, full year 2025 cost per watt produced is forecast to be approximately 20 cents per watt, an approximate 1 cent per watt increase over 2024, driven by six key factors. Firstly, in Ohio, following on from the fourth quarter of 2024, we anticipate ongoing underutilization and yield loss impacts from our CuRe technology run on a high-volume manufacturing line, which is expected to conclude by the end of the first quarter. Secondly, in Alabama, as the factory exits the ramp phase forecast to occur in Q1 but continues to produce at less than normal expected production capacity as is forecast for the remainder of 2025, we expect to see an increase in cost per watt produced capitalized into inventory until such normal production capacity is reached. Thirdly, as it relates to our India factory, product destined for the U.S. market is made with a tracker mounting structure at a higher production cost point relative to the fixed-tilt structure used for India domestic sales. In 2025, approximately two-thirds of our India production is destined for export versus approximately half in 2024, leading to higher expected blended production cost at this factory. Fourthly, the scheduled reduction of 1 GW in total production at our Vietnam and Malaysia factories is expected to increase fixed costs per watt at these sites as a function of lower throughput. Fifthly, on a combined basis, we anticipate a negative impact of fleet cost per watt from the relative mix of higher-cost U.S. versus lower-cost international production, which increases both as a function of the 1 GW aggregate Malaysia-Vietnam production decrease as well as the increased U.S. capacity coming online. And lastly, we expect to see a cost headwind from the recently announced Section 232 tariffs imposed on aluminum imports into the U.S. at a rate of 25%. Given the aluminum frame rails for our U.S. Series 6 product are imported from a Malaysian supplier, after which they undergo a manufacturing process in our domestic machinery to produce the ultimate frame. The administration also recently announced that it is assessing the implementation of reciprocal tariffs on items from countries currently applying import duties to American products. Note, our module sale contracts for international product deliveries typically have some form of tariff protection. If new tariffs are imposed on the importation of modules into the U.S., whether in the form of First Solar right or tariff absorption that is either shared with the customer or exclusively borne by the customer. Related to the topic of tariffs, the word on the export controls concerning five critical minerals, including those containing thorium, announced by China's Ministry of Commerce earlier this month. Although thorium and products containing thorium, including among them cadmium telluride, are key raw materials used in our module production process, we have, over the past decade, employed a strategic sourcing strategy to diversify our thorium supply chain to mitigate a sole-sourcing position in China, and are undertaking additional measures to mitigate dependencies on China for certain products containing thorium. While we continue to evaluate whether there will be any operational impacts from China's decision, this latest development emphasizes the urgent need for the United States to accelerate the strategic development of copper mining and processing of its byproduct materials, including thorium. Moving to cost of goods sold, we're forecasting fleet average sales, freight, warehousing, ramp, underutilization, and other period costs at approximately 4 cents per watt, a reduction from 2024 but above our previous long-term cost assumptions. To relate to sales freight, although we've seen some increase in freight rates, we are largely contractually protected from these impacts. However, we do expect some incremental freight charges as we increase our volume sold from India to the U.S. We have seen an increase in our warehousing and storage needs driven by our increase in production capacity as well as the allocation balancing challenges referenced earlier in the call, which are expected to result in a back-ended shipment and sales profile in 2025. At the same time, warehousing rates have increased given capacity constraints driven by a combination of increases in domestic manufacturing combined with a surge of imports as manufacturers seek to mitigate the expected tariff risk following the November election. To relate to the aforementioned Series 7 manufacturing issue, we've estimated warranty losses of $56 to $100 million. As noted, as of year-end we held approximately 0.7 GW of potentially impacted Series 7 modules in inventory. The combination of production and period costs results in a forecasted full year 2025 cost per watt sold of approximately 24 cents. From a capital structure perspective, our strong balance sheet has been and remains a strategic differentiator, enabling us to both weather periods of volatility as well as providing flexibility to pursue growth opportunities, including funding our Series 6 and Series 7 growth. We ended 2024 in a strong liquidity position, and we forecasted operating cash flows from module sales, coupled with residual operating cash flow from the sale of 2024 Section 45x tax credits in December of 2024 and advanced payments from module orders, we expect to be able to finance our currently announced capital programs without requiring external financing. As relates to our 2025 Section 45x credits, we are not forecasting the sale of these credits in 2025 and are therefore assuming no discount to the value of these credits for a sale to a third party, but as in previous years we will continue to evaluate options and valuations for earlier monetization. I'll now cover the full year 2025 guidance ranges on Slide 11. Net sales guidance is between $5.3 and $5.8 billion. Gross margin is expected to be between $2.45 and $2.75 billion, or approximately 47%, which includes $1.65 to $1.7 billion of Section 45x tax credits and $50 to $60 million of ramp and underutilization costs. SG&A expense is expected to total $180 to $190 million versus $188 million in 2024, demonstrating our ability to leverage our largely fixed operating cost structure while expanding production. R&D expense is expected to total $230 to $250 million versus $191 million in 2024. R&D expenses increasing primarily due to commencing operations at our R&D innovation center and perovskite development line and the expectation of adding headcount to our R&D team to further invest in advanced research initiatives. SG&A and R&D expense combined is expected to total $410 to $440 million, and total operating expenses, which include $60 to $70 million of production startup expense, are expected to be between $470 and $510 million. Operating income is expected to be between $1.95 and $2.3 billion, applying an operating margin of approximately 38%, and is inclusive of $110 to $130 million of combined ramp costs and plant startup expense and $1.65 to $1.7 billion of Section 45x credits. Turn to non-operating items, we expect interest income, interest expense, and other income to net to zero. For tax expense, we forecast $100 to $120 million. This results in full year 2025 earnings per diluted share guidance range of $17 to $20. Note, from an earnings cadence perspective, we expect between 2.7 and 3 GW of module sales in the first quarter at a gross margin similar to the full year average, resulting in first quarter earnings per diluted share of between $2.20 and $2.70. Capital expenditures in 2025 are expected to range from $1.3 to $1.5 billion. Approximately half of our capex is associated with capacity expansion, the majority of which relates to our Louisiana plant, with the remainder driven by R&D programs, technology replication, and maintenance. Our year-end 2025 net cash balance is anticipated to be between $0.7 and $1.2 billion. Turn to Slide 12, I'll now summarize the key messages from today's call. With respect to 2024, while our full year diluted EPS came in below our expectations, this result was largely attributable to the incurrence of discrete costs in the pursuit of achieving the growth and liquidity principles of our strategic decision-making framework. Growth, in the case of ramp costs associated with our Alabama facility as we expand U.S. manufacturing, as well as lower throughput and higher yield losses connected to our initial conversion to high-volume CuRe manufacturing, and liquidity, in connection with the sale of $857 million of Section 45x tax credits, as we significantly strengthened our industry-leading balance sheet. The other cost driver impacting 2024 margin was similarly discrete, resulting from increased logistics costs associated with delayed shipments, largely in connection with the manufacturing issues affecting the initial production of Series 7 modules. That said, from a revenue perspective, full year 2024 net sales came within our guidance range for the year, and we exited the year maintaining a significant contracted backlog totaling 68.5 GW at an average ASP of nearly 30 cents per watt. In addition, our full year 2024 diluted EPS result represents a 55% increase over the prior full year result. As we enter 2025, we are in a position of strength with respect to our U.S. production, although, together with the rest of the industry, we are confronted with uncertainty in the current policy environment in key markets, leading us to an under-allocated position with respect to our international product and increased costs associated with the reduction in our Southeast Asian production. That said, assuming the current construct of the domestic content provisions remains unchanged, we are encouraged by the long-term opportunities to optimize the entirety of our global production fleet. For the full year 2025, we're forecasting an earnings per diluted share guidance range of $17 to $20, the midpoint of which would represent an approximately 50% increase over 2024. With that, we conclude our prepared remarks and open the call for questions.

Thank you. At this time, if you'd like to ask a question, please press star one on your telephone keypad. Our first question today comes from Brian Lee at Goldman Sachs.

Hey guys, good afternoon. Thanks for all the information and color. I wanted to start off, first question, just on the guidance range. It seems a little wider than usual. I know Mark and Alex, you talked through some of the uncertainties and moving pieces, but how much is really tied — and I'm focused kind of on the shipment and revenue guidance — how much is tied to selling the 1 GW of India volume left over from last year? Maybe walk through how that process is playing out, what ASPs you're expecting to realize. And then second question would be around just safe harbor potential. Are you seeing any of that? What are your customers doing in this uncertain environment? Is there even potential as you move through the year that you kind of turn output back up from Southeast Asia to allow customers to take advantage of safe harbor, maybe blend — just curious on your thoughts around if any of that is happening and what you would see as a potential impact if it did later through the year. Thanks.

Okay, Brian. On the shipment piece, so we guided 18 to 20, so it's a 2 GW range. We said there's about 1.4 GW of sold dependency for the year in there, and we said it's about half-half split between domestic India and international Series 6. So on top of that, you've got some uncertainty around U.S. I think the guide, we had 9.5 to 9.8 on U.S. So I would say in general, the other risk we run is that the year is very back-ended. We haven't given a split across the full year. We gave a Q1 number, but even from the Q1 you can see it's not a run rate if you were to divide the full year by four. And as you back-end and have more risk at the back end of the year, there's always risk of things slipping out. We also said that there's negotiations ongoing with certain customers related to follow-on questions from the warranty issue we disclosed. We believe those will get resolved, but that has also resulted in some delays in shipment. So generally I'd say there's 1.4 of international book and bill dependency for the year, there's a little bit of U.S., and then there's just the overall profile of the year which adds some risk.

The next question comes from Philip Shen at Roth Capital Partners.

Hey guys, thanks for taking my questions. A few topics here. First one on warranty. There was a lot of speculation on the street heading into the earnings about your warranty expenses and how they could impact your results. Can you confirm that you have indeed solved the production issues? In other words, are the Series 7 modules coming off the line today expected to perform as expected? Your 10-K suggests the warranty expense risk may be capped at $100 million. Is that indeed the case? And what is the risk that the overall warranty expense could be meaningfully higher than $100 million? And if so, can you quantify how much higher? Second topic here is about the guide. Just very simply, can you share to what degree tariffs are included in the guide? And then finally, back to warranty for a little bit. Some of the customers that have bought the modules that are impacted by lower production — they're sharing with us that some of the production might be like 5% lower for some of these systems. And just 5% to 7% lower production could bankrupt the project. So while you may be buying down the warranty, these customers may be left with underperforming projects and systems and may be reluctant to buy First Solar modules again. So what are your thoughts on this challenging situation that some of these customers, including tier-one IPPs and regulated utilities, may be left with underperforming projects?

We'll take the next question from Mark Strauss at JP Morgan.

Yes, good evening. Thank you very much for taking our questions. I want to go back to the difference between cost per watt produced and sold. The cost per watt produced in the 2025 guide of 20 cents — it seems like you're tracking ahead of your analyst day expectations from about a year and a half ago or so. Just trying to think about — I think at the analyst day you laid out 2026 targets as well. Just kind of how to think about that following this year, if you think you're still on track to outperform that number. And then the cost per watt sold, the extra 4 cents, a lot of that in my opinion seems to be fairly transitory. Looking out to 2026, not looking for formal guidance, but do you think 2026 cost per watt produced and cost per watt sold look closer? Thank you.

Yeah, so if you go back to — now, on a produced basis, I think we were somewhere in the mid-19s or high 19s. So it's potentially slightly over this year, but it's pretty close to where we expected it to be back at the time on the analyst day. And we do have some challenges on the produced side looking into this year that certainly weren't — we wouldn't have been aware of at the time in the analyst day. So you go back to making more product from India coming into the U.S. If you look at some of the tariff impacts we're seeing, there's a significant piece in the cost per watt produced related to sealing about 1 GW of production in our Southeast Asia factories. So it's not enough of a ailment that comes into a period cost of underutilization, but it does mean that our cost per watt produced is higher, so you see lower absorption of the fixed costs going into there as you've got lower throughputs. So on the produced side, we're relatively close to where we expected to be. What you're seeing is a significant expansion on the period costs relative to where we thought we would be. If you look at that, roughly 4 cents of period costs across 19 GW — that's $750 million or so. The sales freight historically for us has been around 2 cents per watt, so somewhere in the range of $400 million roughly of that in sales freight. That's about where the historical numbers would have been. If you look at, we've got about $55 million of ramp costs that we talked about specifically that's included in that number. It's a little bit of warranty — it's pretty small. And then you've got other period expenses that happen. So we have some overhead that sits above the line versus in OpEx, some scraps and LCM, some ongoing hedging variance and cycle count — all that noise that generally sits in that bucket. The big piece that has changed significantly is around warehousing. So if you go back to the analyst day, we didn't have a significant assumption of warehousing. If you look at this year, that warehouse number is going to be close to $250 million. And I think a significant portion of that, as you said, may be transitory. I say maybe because we do have a strategy of bringing product into the U.S. through distribution centers — we generally find that's the right approach in terms of optimizing across the fleet — but we are finding ourselves right now storing significant volume of product in inventory because of the back-end loading that we saw in 2024, some of the shipment delays that we saw at the end of Q4 as a function of customers looking to move things around and associated with the warranty issue that we talked about. And then as you get into 2025, we still have some of that lagging issue from the warranty happening. We have the fact that there was undersold volume from 2024 coming into 2025, and then we talked about in 2025 the shift rates that customers can deploy even within the year to try and push product back, which means that as we produce across the year in a relatively consistent rate at our factories, if we're not shipping at that same consistent rate, we're storing inventory and that's creating a lagging effect. So the sales freight piece is pretty standard. The residual piece within that cost per watt period cost is not unusual. The big change here is around warehousing.

And ladies and gentlemen, that does conclude our question-and-answer session. Also, this does conclude our conference for today. We would like to thank you all for your participation. You may now disconnect.