First Solar, Inc. (FSLR) Q4 2018 Earnings Conference Call Transcript

First Solar, Inc. (FSLR 0.43%)
Q4 2018 Earnings Conference Call
Feb. 21, 2018, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants
  
  See all our earnings call transcripts.

Prepared Remarks:

Operator

Good afternoon, everyone, and welcome to First Solar's Q4 2018 Earnings Call. This call is being webcast on the Investors section of the First Solar's website at firstsolar.com. At this time, all participants are in a listen-only mode. If you would like to ask a question during this time, simply press * then the number 1 on your telephone keypad. If you would like to withdraw your question, press the * key. 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.

Steve Haymore -- Investor Relations

Thank you. Good afternoon, everyone, and thank you for joining us. Today, the company issued a press release announcing its fourth quarter and full year 2018 financial results. A copy of the press release and associated presentation are available on First Solar's website at investor.firstsolar.com.

With me today are Mark Widmar, Chief Executive Officer; and Alex Bradley, Chief Financial Officer. Mark will begin by providing a business and technology update. Alex will then discuss our financial results for the quarter and full year, and provide the latest updates around 2019 guidance. Following their remarks, we will then have time for questions.

Please note, this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statements contained in today's press release and presentation for a more complete description.

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

Mark Widmar -- Chief Executive Officer

Thanks, Steve. Good afternoon, and thank you for joining us today. I would like to start by briefly discussing our EPS results for 2018. EPS of $1.36 came in slightly below the low end of the guidance range we provided at the time of our Q3 earnings call. Alex will provide a more comprehensive overview. I wanted to highlight two items that had material impact on the quarter.

Firstly, late in the year, we incurred increased EPC costs in order to meet deadlines for certain U.S. projects. Inclement weather and delayed shipments of the materials to sites adversely impacted plan construction and project commissioning schedules. The potential of project completion delay was particularly acute at one of our projects in California. To ensure the project's capital structure proceeded as planned, we incurred significant acceleration costs to meet keys schedule milestones. While the project owner shared in a portion of these costs, the acceleration costs impacted Q4 results by more than $10 million. Maintaining a strong relationship was a key priority, and therefore, we made an investment in our partnership and long-term relationship with this customer.

Secondly, in Q4, we continued to make good progress with our Series 6 factory, start-up, and ramp. As a result, we started production at our second Vietnam factory the first week of this year, three months ahead of our original plan and 45 days ahead of our latest expectation. The continued factory ramp across all sites, combined with the earlier than planned start-up of our second Vietnam factory, put pressure on our supply chain to support the accelerated schedule. To maintain continuous operations across the entire fleet, we decided to air freight certain raw materials to our factories, which adversely impacted the fourth quarter by more than $10 million. Accelerating the Vietnam start date helped to provide resiliency to our 2019 Series 6 production plan. The production could lead to additional revenue, but more importantly, it creates optionality for downtime investments to increase throughput via tool upgrades or production buffers, or to run engineering test articles to increase module efficiency.

Turning to slide four, I'll provide additional comments on 2018. Despite a year where the solar market faced excess capacity and pressure on module pricing, primarily as a result of policy changes in China, we were able to make steady progress and strengthen First Solar's competitive position. In 2018, we added to our contracted pipeline with strong net bookings, a 5.6-gigawatt DC, a greater than two-to-one book-to-ship ratio, which provides improved future visibility as we grow our Series 6 production over the coming years. Distance projects were a significant portion of these bookings, and we signed 1.3 gigawatts DC of new PPAs last year. In addition, we added EPC scope to 500 megawatts of previously booked module sales, which, combined with our development bookings, positions us to meet or exceed our targeted one gigawatt per year systems business.

Our 2018 bookings also highlighted the strong demand for utility via solar from CNI customers. Approximately 500 megawatts of our total 1.3 gigawatts of development project bookings were PPA signed with utilities, where corporate customers are the intended consumers of the energy to be generated by these projects. Additionally, this trend has continued into 2019, with our recent booking of a nearly 150-megawatt PPA with a corporate customer. We expect corporate demand for solar projects to continue to grow in coming years, and we believe that our strong reputation and ability to offer turnkey solutions will position us to compete effectively for future opportunities.

International wins were a meaningful portion of our 2018 bookings, with more than 700 megawatts booked, primarily in Europe. While strong domestic demand for our Series 6 product has limited our ability to support international market opportunities, we expect international bookings to grow as we continue to invest in our regional sales team and add plans to reach 6 capacity.

2018 was a record year for O&M bookings, as we added nearly 3.5 gigawatts of new business, bringing our total O&M fleet under contract to over 11 gigawatts at the end of the year. We remain encouraged by the opportunity to continue growing O&M and to leverage the fixed costs associated with this business.

From a manufacturing perspective, we made progress starting and ramping Series 6 capacity over the course of 2018. During the year, we started production at three Series 6 factories, which collectively manufactured a combined 0.7-gigawatt DC of modules. The production run rate of these factories at the end of 2018 was over two gigawatts, which is a significant achievement, considering the initial production did not begin until April. Construction of our fourth Series 6 factory was completed in late 2018 and recently started production. Lastly, our fifth factory is under construction and progressing according to plan, with an anticipated start of production in January 2020.

To concurrently manage all the activities related to the construction, start-up, and ramp of the five different factories was a major undertaking that has positioned us to meet our strong demand for Series 6 in 2019. Also of note is in late 2018, we reached the 20-gigawatt shipment milestone. This reflects cumulative shipments since the founding of First Solar and highlights the extensive deployment of our cad tell technology worldwide. Overall, over operational financial results in 2018 have created a solid platform as we move into 2019.

Turning to slide five, I'll next discuss our most recent bookings in greater detail. In total, our net bookings since the prior earnings call in late October were 1.6 gigawatts, including 1.3 gigawatts which were booked since the beginning of January. After accounting for shipments of approximately 900 megawatts during the fourth quarter, our future expected shipments, which now extends into 2023, are 21.1 gigawatts.

Our most recent bookings include two PPAs that were signed, totaling more than 300 megawatts DC. The first of these PPAs was signed with MCE for the expansion of the Little Bear project in California. The second PPA was signed with a major utility customer in the Western United States, and the project will support a collaboration between the utility and its corporate buyers to meet their renewable energy objectives.

Included in our new module bookings is a greater than 1-gigawatt agreement with a major customer in the United States for shipments in 2021 and beyond timeframe. This booking highlights the continued strong demand for Series 6 in the United States, particularly as certain customers look for opportunities to Safe Harbor modules to preserve the higher ITC.

While we are pleased with our 2018 bookings of 5.6 gigawatts and the greater than two-to-one book-to-ship ratio, it is important to put our 2019 bookings expectations into perspective. Relative to our module competitors, we are in an extremely favorable position, essentially being sold out over the next eight quarters. Generally, our customers, particularly in international markets, do not contract for module supply multiple years in advance, given the project development cycle and the time horizon in which they have project certainty. While we are encouraged by our bookings year-to-date and target a one-to-one book-to-ship ratio in 2019, our bookings may be more backend-loaded, given our available supply is in the 2021 and beyond period.

On the O&M side, as we highlighted earlier, in 2018, we added nearly 3.5 gigawatts of new projects. A high percentage of these bookings was attributed to third party wins, defined as projects where we are not the developer, but in which many cases include our module technology. Third party O&M not only expands our addressable market, but also helps to create economies of scale for our O&M business.

Some of the reasons for our continuing success in winning third party business are highlighted by an example of how we were able to leverage our O&M expertise to address a customer's need in a way our competition was not able. In 2018, we were approached by a customer seeking help with two large utility-scale solar power plants in his portfolio that were under contract with a competing O&M provider and were underperforming. These projects utilized a competing module technology and were not constructed by First Solar EPC. Based on the customer's experience with our O&M services, they asked us to investigate the cause of the underperformance.

By leveraging our industry-leading expertise of our O&M team, we identified the root cause of the underperformance and created a detailed action plan to improve performance. The recommended corrective actions are expected to improve the annual energy output of the combined plants by approximately 3%, which translates into more than $1 million of annual revenue to the owner. As we continue to leverage our significant O&M experience to meet customer needs, we expect that third party wins will continue to be a key part of our growing O&M fleet.

Slide six provides an updated view of our mid-to-late stage bookings opportunity, which now totals 7.3-gigawatt DC, a decrease of approximately 500 megawatts from the prior quarter, primarily as a result of our strong recent bookings. However, when factoring in the booking for the quarter, 1.4 gigawatts of which were included as opportunities in the prior quarter, our mid-to-late stage pipeline actually grew by approximately 900 megawatts DC.

North America remains the region with the largest number of opportunities, at 5.5 gigawatts DC. However, Europe has shown a meaningful increase since the prior quarter, driven by resurgent markets in France and Spain. Opportunities in Asia-Pac region have remained relatively stable. Even with the more than 300 megawatts of recent systems bookings, our potential systems opportunities remain strong, at 1.8 gigawatts DC. These potential systems bookings are comprised of projects in the U.S., and over 300 megawatts in Japan.

Continuing on to slide seven, I'll next provide an update on our Series 6 capacity rollout. The most notable achievement to highlight since our prior earnings call is the start of Series 6 production at our second Vietnam factory, our fourth Series 6 factory in total. As mentioned previously, production commenced in early January, several weeks ahead of our target start date. Similar to our first Vietnam factory, the initial ramp has been accelerated relative to the previous facility's by applying the cumulative learnings, which including starting production with an improved module framing tool. Construction is continuing at our second Series 6 factory in Ohio. As announced previously, we expect to start production in early 2020, and construction is on track to our schedule. Once completed, we will have five factories with annual Series 6 capacity of 5.6 gigawatts, an impressive accomplishment since announcing the transition to Series 6 in November of 2016.

Since the third quarter earnings call, we have seen steady improvement in our Series 6 throughput and wattage across our entire fleet. When comparing February's month-to-date performance to the month of October, you can see the significant improvements made. Note, our second Vietnam factory is excluded from this comparison, as it was not operational in the base comparison period. Megawatts produced per day is up 65%. Capacity utilization has increased 30 percentage points. The production yield is up seven percent points. And finally, the average watt per module has increased two bins, or 10 watts. Since October, the percentage of modules with antireflective coating has increased 33 points. These significant accomplishments can be credited to the outstanding work of our engineering and manufacturing associates.

We are encouraged by the meaningful progress we have made over the last months of 2018 and how we started 2019. We continue to plan for full year production of between 5.2 and 5.5 gigawatts. As a reminder, this target production includes approximately two gigawatts of Series 4 modules. In order to meet these production commitments, we continue to roll out tool upgrades and optimize the production line throughput across the various sites. This is a dynamic process that continues to incorporate learnings from each of the factories, as we have ramped, and it is according to schedule.

I would like to make one final point before I hand the call over to Alex. I mentioned in October, First Solar was a sponsor to an innovative study by E3, which highlighted the value of flexible solar to utilities in the form of expected reduced fuel as maintenance cost for conventional generation, reduced curtailment of solar output, and reduced air emissions. Since the study has been published, we have been pleased with the positive response and feedback from across the industry. For example, Public Utilities Fortnightly, a leading industry publication, recognized the study as one of their 2018 top innovatives.

Our efforts to demonstrate our thought leadership are not only limited to the United States. Recently, we supported a study by Solar Power Europe that provides evidence to support the benefits of utilizing low-cost utility-scale solar to keep the European grid stable and reliable. Efforts such as this will take on increasing importance in order for the European Union to meet its 2030 renewable energy targets, and we look forward to remaining engaged in that process.

Whether in the United States, Europe, or other regions, we will continue to provide support and thought leadership to advance the understanding of how utility-scale solar enhances the reliability of power grades around the world.

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

Alex Bradley -- Chief Financial Officer

Thanks, Mark. Before reviewing the financials for the quarter in detail, I'll first provide additional context around the factors that led to the 2018 results falling below our guidance. There were four key issues that impacted our ability to meet earnings guidance. Firstly, 2018 net sales were $100 million lower than the midpoint of our guidance due to the timing of module sales and delays in systems revenue recognition. Below our systems revenue was associated with inclement weather and also material delivery delays for some projects.

Secondly and thirdly, as Mark mentioned earlier, we experienced increased EPC costs across several U.S. projects, partially driven by schedule acceleration to achieve yearend customer milestones, and we experienced elevated inbound freight costs to expedite raw materials for Series 6 production. And fourthly, 2018 ramp and related costs were $113 million, compared to our guidance of $100 million.

So, with that context in mind, I'll begin by discussing some of the income statement highlights for the fourth quarter and full year on slide nine. Net sales in the fourth quarter were $691 million, an increase of $15 million compared to the prior quarter. The high net sales were primarily a result of the sales of two projects in Japan. The full year 2018 net sales were $2.2 billion. And as mentioned, relative to our guidance expectations, net sales were lower due to the timing of both module sales and delays in system revenue. As a percentage of total quarterly net sales, our systems revenue in Q4 was 83%, which was nearly flat compared to Q3. For the full year 2018, 78% net sales came from our systems business, compared to 73% in 2017.

Gross margin was 14% in the fourth quarter, and was impacted by ramp charges of $44 million, as well as inbound freight costs and EPC acceleration costs. For the full year, gross margin was 18% and included $113 million of ramp and related charges, which equates to a five percentage point impact.

The systems segment margin was 22% in the fourth quarter, and the module segment margin was a negative 25 percent. As it relates to the module segment gross margin, keep in mind that sales are composed almost entirely of Series 4 volume, and Series 6 volume continues to be allocated almost entirely to our systems business. However, the module segment cost of sales is composed of both Series 4 cost of sales and Series 6 ramp-related costs of $44 million. Adjusted for the impact of ramp-related costs, Series 4 module gross margin was in line with our expectations.

Operating expenses were $87 million in the fourth quarter an increase of $17 million compared to Q3. Q3 expenses benefited from a reduction to our module collection of recycling liability, while Q4 was impacted by higher SG&A from project rates and expenses. For 2018, operating expenses were $352 million, near the midpoint of our guidance range. Highlighting our efficient management opex in 2018, our combined SG&A and R&D expense decreased approximately $30 million, or 10%, versus 2017.

Operating income was $11 million in the fourth quarter and $40 million for the full year. Compared to our guidance for the year, op income was lower than planned, as a result of the lower revenue and higher cost of sales discussed.

Other income was $32 million in the fourth quarter from the gain on sales with certain restricted investments. Investments sold associated with our module collection and recycling program almost all in parts reimbursed over funded amounts. Note that a smaller side of restricted investments for similar purposes was completed earlier this year in 2019 and will be reflected in our first quarter results.

We recorded a tax benefit of $4 million in the fourth quarter. For the full year, we recorded a tax expenses of approximately $3 million. Fourth quarter earnings per share was $0.49, compared to $0.54 in the third quarter. For the full year, earnings per share was $1.36. EPS was below the low end of our guidance range due to the timing of revenue recognitions for certain module and systems sales, and the higher EPC affrays and ramp costs discussed earlier.

I'll next turn to slide 10 to discuss select balance sheet items and summary cash flow information. Our cash and marketable securities balance at yearend was $2.5 billion, a decrease of approximately $183 million from the prior quarter. Our net cash position decreased by a similar amount to $2.1 billion, at the midpoint of our guidance range. The decrease in our cash balance was primarily related to capital investments and Series 6 manufacturing capacity, factory ramp activities, and the timing of cash receipts from certain systems projects sales.

Total debt at the end of the fourth quarter was $467 million, virtually unchanged from the prior quarter. Within the quarter, project debt issued to fund ongoing project construction in Japan and Australia was essentially offset by liability assumed by the buyers of two Japan projects sold. Nearly all of our outstanding debt continues to be project-related and will come off our balance sheet when the project is sold.

Net working capital in Q4, which includes the change in long current project assets, and excludes cash and marketable securities, increased by $178 million versus the prior quarter. The change was primarily due to an increase in module inventory, which is related to our capacity ramp and unbilled accounts receivable.

Cash flows used in operations were $186 million in the fourth quarter, and $327 million for the full year. As a reminder, when we sell an asset with project-level debt that is assumed by the buyer, the operating cash flow associated with the sale is less than if the buyer had not assumed the debt. In Q4, viable projects assumed $124 million of liabilities related to these transactions, and for the full year, that total is $241 million.

Capital expenditures were $129 million in the fourth quarter, compared to $238 million in the prior quarter, due to the timing of spending on Series 6 capacity. For the full year, capital expenditures were $740 million, compared to $662 million invested in Series 6 capacity expansion. Cumulatively, Series 6 expenditures incurred at the end of 2018 were $1.1 billion.

Continuing on slide 11, I'll next discuss the updated assumptions associated with our 2019 guidance. We're largely maintaining our guidance ranges for the year, with minor adjustments to ramp and start-up costs, which have an offsetting impact from gross margin and operating expenses. While these changes are relatively small, there are a couple important points to highlight.

Firstly, there's been recently significant focus around the PG&E bankruptcy and impacts to companies that have contracted off-take agreements with PG&E. First Solar has one 75-megawatt AC project where PG&E is the contracted off-taker. However, we believe any risk associated with this asset is limited, given the project's size, total development capital invested to date, and competitive BPA price. Where First Solar could potentially have greater exposure is in several unsold projects where SCE is the contracted off-taker. We're currently in the process of marketing some of these assets for sale, and to the extent that buyers of these projects assume any increased risk premium associated with SCE as the off-taker, this could result in lower project value. So, while we don't see this as a significant risk to the sale value of these projects, given their competitive BPA prices and the key market interests for contracted solar assets that we've seen in recent competitive sale processes, it is an item we think should be highlighted.

Secondly, we're lowering our gross margin guidance by 50 basis points to a revised range of 19.5 to 20.5 percent as a result of higher expected ramp costs. Offsetting the decrease in gross margin is a $15 million reduction to start-up costs within our operating expense guidance. The increase in ramp costs and offsetting decrease in start-up costs are a result of the earlier than planned start of production of our second Vietnam factory. The revised range of ramp-related charges is now $35 to $45 million, and plant staff at the $75 to $85 million. Combined ramp and start-up costs of $110 to $130 million are unchanged from our prior forecast.

Thirdly, as we emphasized here on our December outlook call, the profile of earnings is expected to be weighted toward the second half of the year. Slide 12 contains two charts, which illustrate, from a revenue and cost perspective, some of the factors that are expected to impact the quarterly earnings distribution. In both cases, we are not providing the actual volume sold or actual module cost per watt, only the relative percentages.

The first chart shows Series 6 third party module sales by quarter. Notably, only 10% of the volume sold is in the first quarter, and only 25% in the first half of the year. Not surprisingly, as our supply increases over the course of the year, we expect to see the volumes of sales increase in Q3 and Q4.

The second graphic shows the quarterly profile of our Series 6 module costs per watt produced, relative to the 2019 full year average. The data illustrates the cost per watt for the first quarter of 2019, which has the lowest throughput and module wattage levels for the year, which are projected to be approximately 30% higher than the 2019 full year average. Module cost per watt is expected to improve in the second quarter, but will still be 5% higher than the average. The greatest benefit to our improved ramp and efficiency is anticipated to be in the second half of the year. In the third quarter, the cost per watt is expected to be 5% below, and in the fourth quarter, 10% below the 2019 full year average.

In addition to the Series 6 sales and cost per watt profile, there are two additional factors which we expect to contribute to lower earnings in the first half of the year. The first is the timing of ramp and start-up charges, which are heavily weighted to Q1 and Q2. We expect more than $40 million of combined ramp and start-up in the first quarter.

The second factor is the timing of project development sales. Similar to expectation at the time of our December outlook call, project development sales are expected to be weighted to the second half of the year, and we also expect to close the sale of two projects in Japan in the fourth quarter.

Taking all these factors into account points to why we expect both a loss in the first quarter, as well as low earnings in Q2, with the majority of earnings coming in the second half of the year. For the full year, we still see EPS guidance in the range of $2.25 to $2.75, driven by Series 6 production ramp and cost per watt improvements as the technology continues to scale.

Finally, I'll summarize our fourth quarter and 2018 progress on slide 13. Firstly, we had earnings per share of $1.36 and yearend net cash of $2.1 billion. Secondly, we had continued success adding to our contracted pipeline in 2018, with net module bookings of 5.6 gigawatts. With year-to-date 2019 module bookings of approximately 1.3 gigawatts, we're off to a positive start for the year.

Thirdly, we continue to make good progress on our Series 6 capacity roadmap. Earlier this year, we started production of our second Vietnam factory ahead of schedule, and we continue to make steady improvements in both throughput and module wattage at our other Series 6 factories. Our progress thus far in 2018 and in 2019 indicates we remain on track to our combined Series 4 and Series 6 production target of 5.2 to 5.5 gigawatts.

And lastly, our 5% net neutral movement between ramp and start-up costs between COGS and opex, while maintaining our financial guidance ranges for the year, including our EPS range for 2019 of $2.25 to $2.75

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

Questions and Answers:

Operator

At this time, I would like to remind everyone, in order to ask a question, press * then the number one on your telephone keypad. In order to allow time for everyone to ask a question today, please limit yourself to one question. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Philip Shen with ROTH Capital Partners. Your line is open.

Philip Shen -- ROTH Capital Partners -- Analyst

Hey, guys. Thanks for the question. Just wanted to check in with you on your shipments to customers now that you're shipping externally. Some of our checks indicate that you may be falling five watts per module short in your shipments to customers versus contractual requirements or obligations, and this may be resulting in extra costs. We could be wrong on this one, but wanted to just check in with you on this. Can you comment on whether or not this may or may not be happening, and if true, and you provide some color on this and perhaps talk about how long the issue remains here ahead? Thanks.

Mark Widmar -- Chief Executive Officer

Yes, so I think the premise of the question is -- well, one thing want to make clear is that falling short of contractual obligations -- we're not falling short of any of our contractual obligations relative to commitments to the customers and the product which we need to ship to them. We have -- as we said before, we have bin adders and bin deducters. So, we have a contracted commitment that we anchor around, and to the extent the bin is actually higher or lower, then there's an adjustment to the price accordingly for that delta. It could be up; it could be down. So, I just want to make sure that that's clear. There's nothing that we're doing that would say that we're falling short of our contractual obligation. But to the extent we do have to deliver a bin that's -- a bin down would be five watts, then there would be a bin adjustment to the price. And that is happening in some cases. And part of it was -- I think we indicated on prior calls is that the early production in particular, we've been struggling to see the increased penetration of ARC.

And so -- and without ARC, you're gonna lose almost two bins of volume. And one of the things we've said on the call is our ARC presentation has increased now 33 percentage points. So, we're seeing a much better utilization for ARC, and as a result of that, as we go forward and we continue to ramp across the balance of the fleet, some of the early launch issues that we had will be subsided, and we'll be able to make sure that we hit the committed bin that we initially structured around. But I want to make sure it's clear and you understand that, to the extent the bin is slightly above or below, the contract allows for that, and there's appropriate adjustments to the SP.

Operator

Your next question comes Colin Rusch with Oppenheimer. Your line is open.

Kristen Owen -- Oppenheimer -- Analyst

Great, thanks for taking our questions. This is Kristen Owen for Colin. You talked a little bit about this in your prepared remarks, but can you provide some additional color on the geographic diversity of the backlog on an annual basis, just sort of the mix of domestic versus international? And then what opportunities are you seeing to pick up broken projects for the systems business in the U.S.? So, a corollary to that, what's the expertise in integrating -- your expertise in integrating solar with storage to your pricing strategy for modules?

Mark Widmar -- Chief Executive Officer

Okay, a lot there. When you look at the geographic diversity of our shipments forward, and shipments that will come out in the queue -- they actually will come out tomorrow -- you'll see that there's a high concentration of module shipments that occurred within the U.S., in the range of 70% or so of the shipments last year were in the U.S., and the balance were in international markets. And again, it's largely reflective of where the strength of the demand is. And if you look at our high point as you carry forward of the a little over seven gigawatts of mid-to-late stage opportunities, about five-and-a-half of that sits within the U.S. The volumes at which we booked this quarter were largely U.S. We had some volume with a European customer, but most of the cull, 1.6 since the last earnings call, was focused around the U.S. And it largely has to do with where our customers are willing to commit.

And I think it's important to understand that of the large order that came through this year, a gigawatt of the 1.3, that volume is to shift in 2021, 2022, and 2023. You'll see customers in the U.S., because of certainty around the ITC and wanting to Safe Harbor, you'll see customers having a greater appetite to commit forward and to procure materials that would go out that far in the horizon. And when you look in some of the international markets, we don't see as many customers willing to start procuring in 2021, 2022, and 2023, partly because they have lack of certainty of the underlying projects for those modules and where they would go.

And so, what we said in the call is that partly, when you look at the bookings for the year, we started off great, but we still look to have a one-to-one book-to-ship ratio, which we say that we're targeting to book somewhere between five-and-a-half or six gigawatts this year. We may see some of that being more backend-loaded, because I do see more diversity of the bookings as we progress throughout the year being more opportunities in our international markets because we're getting to a horizon that, toward the end of 2019, we're looking to ship to customers starting in 2021 that we can see that international customer participating in that opportunity. So, I would expect our bookings as we progress throughout the year to improve, having more a diversity to U.S. versus international.

But at the same time, as long as we are still relatively capacity-constrained, while it's important that we continue to grow and develop our international market, if we have opportunities to capture better value in the U.S. markets, we'll prioritize the U.S. market, or we may prioritize some of the international markets to give us better opportunities to capture higher ASPs, and we'll focus there first before maybe we chase some of the other markets that we know have traditionally been very low ASP markets.

On the storage question -- well, let me go to the systems question first. I think, and particularly in the U.S., there's a lot that's in the market right now. As you can see, there's a lot of -- I'll call them smaller developers than others that are trying to actively market and to sell their development pipeline, some with contracted assets, some not. And I do think that some of that could be related to the capacity of some of the smaller developers to make the investments to capture the IT Safe Harbor. And we indicated in our last call that we'll be investing somewhere, call it $300 to $400 million to secure, call it five gigawatts of opportunities between now and 2023. That's a big investment, and I think some of the smaller developers may be constrained with making those investments. And I think they understand that if they don't make those investments, they'll be less competitive as they're competing for projects that -- FCODs that go through the end of 2023.

So, I can see a lot coming to market, and we're trying to at least get engaged and evaluate, and see if some of those opportunities make sense for us. And clearly, we've got a great development team, and we've proven ourself with our ability to make acquisitions and integrate development assets, and contract them, and realize meaningful value associated with that. So, that's a good opportunity for us.

And then storage, we are actively involved -- our largest storage deal, we announced a few quarters ago, with ABS. We've got a couple of other projects. We've been recently awarded a project with a utility in Florida to do a pilot for them, a small addition of storage onto their array. We've done some work with utility in Nevada along the same type of opportunity, where customers are exploring and learning, and wanting to know more about storage and how it can be effectively integrated. And it's an area of emphasis and focus for us. I look at it -- it's somewhat of an extension to our normal systems business, and it's just part of our offer. And we can add enhanced value through our power plant controls and optimization of how we charge the battery and dispatch the battery, and we've proven some capabilities there that has been very interesting to some of our customers in that regard. So, it's still early innings. We've picked up some wins, and I see more momentum as we move forward as it relates to storage.

Operator

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

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Hey, good afternoon. Thank you. Perhaps just to pick up where you left off, if you can clarify a little bit your comments just now about securing up the backlog here from an ITC perspective, A, how do you think about that accelerating into the yearend 2019, given that is the timeline that you need to meet to get to qualify that ITC? And then secondly, I think you alluded to a gigawatt utility customer in the quarter who they were trying themselves to try to lock up some supply. So, maybe as you think about the potential orders from what you haven't locked in from an ITC perspective, is that another source of bookings acceleration into the back half?

Alex Bradley -- Chief Financial Officer

Yeah, I'll just start with what we're looking at from a Safe Harbor perspective ourselves. And it's similar today to what we talked about on our guidance call in December. So, we're still looking at somewhere between $325 and $375 million of spend this year. We haven't explicitly talked about what we're gonna spend that on. It's less likely to be on the module side, just given the constraints we have in module supply. As Mark said, we're largely sold out for the rest of the year. So, we'll look at the rest of the balance of the plant. There'll be some projects that were far enough along that we can use the physical work test. And so, a small piece of that midpoint $350 number that I talked about will be associated with physical work incurred. But that'll probably be in the range of $25 to $50 million. The rest, we'll look to spend on, as mentioned, the balance of the plant, with projects that go out into 2021 from a contracted perspective, and then the uncontracted side will take us out beyond that 2021 timeframe.

The other thing we've said from our perspective is that if there is opportunity to spend more, to the point of if we are able to pick up projects where other developers are constrained from a capital perspective in procuring Safe Harbor material, it's somewhere we'll be very happy to invest additional capital. We believe the returns are good. And so, it's somewhere where, if we see the right opportunity, we're willing to spend more than that $375 topline that we talked about.

Mark Widmar -- Chief Executive Officer

And from a customer standpoint, Julien, I mean, the order that we secure here with our own customer is just the common conversation that our team is having with a lot of our customers in thinking about the Safe Harbor, and how to -- what their particular strategy is, and engaging in conversations with us around that, and how we could try to evolve that. In some cases -- and this customer, it was interesting, they already had a commitment to some volume for this year. So, we didn't have to -- it wasn't an issue of not having the supply. But what we were able to do is since we already contractually had volume on the books with this customer, we then engaged with them -- well, let's leverage that as your Safe Harbor anchor, and then commit to volume that's out in the horizon, and when you will the construct the projects in 2021, 2022, and 2023.

So, Alex is right. We are constrained as it relates to available supply. Now, starting up Vietnam a little bit faster, then getting up to it a little faster, you get a little bit of supply. If we continue to ramp quarterly, we may see a little bit of opportunity there. Those are small in the rounding. But the bigger opportunity I see is how do we talk to customers today that have contracted volume that's on the books, and then how do we position that as the anchor for the ITC, and then contractually commit to the volume it would sit out and deliver in the 2021, 2022, and 2023 timeframe? So, we're having a number of conversations with customers in that regard.

Operator

Your next question comes from Ben Callow with Baird. Your line is open.

Ben Kallo -- Baird -- Analyst

All right. Thanks, guys. So, I have three questions. First of all, slide 12 is kind of confusing. Could you help me through that? And then just talk about the cost reduction versus the 40% that you said back at Analyst Day, and you're plus or minus a penny or two from there. Number two, I understand that costs fall forward, but then I don't see megawatts going up. And then, number three, could you just talk about how you're pricing some of these out-year contracts, just because we have a hard time going with ASPs with regard to 2022. So, how do you think about pricing those? Thanks.

Alex Bradley -- Chief Financial Officer

Yes, to explain the graph in a bit more detail -- so, the graph on the left-hand side of slide 12 is showing you the Series 6 third party volume. So, if you think about the guidance we gave, that 5.2 to 5.5 gigwatts for the year, you take out a couple of gigawatts to Series 4, and then you go take out the systems piece. So, you're left with what it Series 6 through third party module deliveries. And when you take that total number, we're saying this is the breakdown per quarter of the delivery of those modules. So, about 10% of that third party Series 6 volume is delivered in Q1; 15% in Q2; 30% in Q3; 45% in Q4. This is really trying to show that on a third party module delivery basis, we're backending the profile pretty significantly in the year.

On the right-hand side, looking at the cost, so the question you had around cost, we talked in the guidance call around long-term -- our end-of-year Series 6 cost being approximately 40% lower than our 2016 benchmark for Series 4, with a roughly penny add or associated with increased costs throughout the frame. So, if you take that point over the end of the year and say that's the year ending point, you can look at what you think the full year average is. We're trying to make a point that one the average basis for 2019, you're gonna see whatever that average is be significantly higher in Q1 in terms of modules delivered. It comes down to Q2, and then by the time you get to Q3, you're fractionally under the year average. And by Q4, you're 10% under the year average. So, again, it's trying to say when you combine these two, the left-hand side level of volume at the beginning of the year, the right-hand side, higher costs relative to the average, you're gonna see pretty negative impacts to results for Q1 and Q2, and you start to see that reverse out when you have much higher volume and much lower cost in Q3 and Q4.

Mark Widmar -- Chief Executive Officer

Yeah, I think what Alex said there is a real question about our view around the 40% of our Series 4 reference point, but for the penny or so, a penny or two for the trending piece and a couple other smaller components, that's effectively where we anticipate to be, and nothing's changed there. And we're working on opportunities where we can even revise the frame and even take more cost out there, because the frame and two sheets of glass, that's really where the vast majority of the bill material is. And the team's working pretty aggressively on finding a roadmap to figure out how we get everything back to the full entitlement of what we had. And this is encouraging work being done from that standpoint.

The other thing I'll say about that slide is that one of the biggest levers that moves you from whatever the number is, 20% to 30% higher in the first quarter versus the average, and then trends down to being 10% lower than the average -- a big piece of that is the throughput, right? Because there's still a significant amount of underutilization that sits in the first half of the year. And then as we drive that utilization down, we're at full entitlement across the entire fleet. Because we're starting up another factory now, and so, we're gonna be -- utilization, while it's significantly higher upon launch after the first month or so of production relative to our other factories, it's still gonna be driving us down, and there'll be some under-utilization cost that's gonna be waned out on the overall average across the fleet. So, that's what he said.

And then the other is the efficiency improvement. So, we'll continue to see improvement as we progress from where we are now to the end of the year, and we'll pick up close to another two bins from the launching point where we are right now to the exit rate. There's close to that from Q1 to Q4. So, those are the two biggest drivers that'll drive that cost per watt down.

The contracts for the outer year and the pricing around that, Ben, we look at -- we capture that as a fair value, right? And pricing as we go out into 2021, 2022, and 2023, we have a roadmap of where we -- where now we'll go with the costs. We know what our efficiency's gonna be. We know what the energy advantage is gonna be at that point in time. We price it accordingly. And I'm very happy with -- we have now quite a bit of volume. Obviously, a lot of supply that's ticked up in 2021, 2022, and 2023, but I'm pretty happy with the pricing that our team has been able to capture in that window. It's above where my expectations would have been relative to the business case we put together for Series 6. So, we're pretty pleased from that standpoint.

Operator

Your next question comes from Brian Lee with Goldman Sachs. Your line is open.

Brian Lee -- Goldman Sachs -- Analyst

Hey, guys. Thanks for taking the questions. Two for me. I guess first on that sort of capacity point, you mentioned in mid-December when you gave the guidance for 2019 that you're putting Malaysia One conversion to Series 6 on hold, and you've mentioned capacity constraints, and now you're talking about 2023 deliveries throughout this call. So, given that backdrop, what's sort of the decision process around bringing that back into the capacity expansion roadmap here?

And then second question just on slide 12, super helpful with the cadence. Alex, can you help us think about how that average line moves into 2020 with some of the utilization effects starting to fall off, and then getting fuller entitlement around the efficiency targets and so forth and so on? Thanks, guys.

Mark Widmar -- Chief Executive Officer

I'll take the expansion, and then Alex can take the other one. So, Brian, as we said when we -- at the end of this year, we'll ramp down two of our factories in Malaysia, we'll immediately start the transition of one of them. The other one is continuing to be evaluated, and it's really being evaluated based on market demand and our ability to capture the bookings that we need in 2021 to get to a high level of confidence in our ability to sell through that volume. And so, it's really -- it's demand-related, demand-driven. And as we continue to book, then it'll somewhat crystallize our decision around that, and we'll get more and more comfortable.

What I will say, though, is that every one of those factories that comes up in essence creates pricing power, because it creates scale. And that scale enables us to enhance our competitive position, and it allows us to capture volume in other markets that we may not be participating in today. So, I'm very motivated to get that factory up and running, but it's highly dependent on our ability to clear the market at acceptable margins. And as we continue to do that, then I think the likelihood of starting that conversion on that second plant, and -- it'll really be our third Series 6 factory in Malaysia, will start to crystallize.

Alex Bradley -- Chief Financial Officer

Yeah. Brian, I mean, we can't give you guidance out that far. So, what I can say, I guess, is that, as Mark mentioned, that a lot of the costs -- the majority of the cost sits between the two pieces of glass and the frame. So, that's where we're gonna be spending a lot of our time. On both -- so, on the frame, we're impacted by the tariff. We are looking to optimize the frame further. So, we had some movements in the frame in terms of design from when we originally came out with Series 6 and some of the modules we produced. So, we're looking at, can we optimize design to use less aluminum in that frame?

On the glass side, we mentioned on our guidance call in December that we have some projects that we're looking at that may impact start-up. And one of those that we talked a little bit about was trying to optimize some of the glass, where we today pay for more specialized processes on that glass, and is that something we can either bring in-house or try and optimize pricing? So, we're continuing to work that group, on the glass side and the frame side both. And then beyond that, we'll continue to work the rest of billed materials. But a lot of this will just come from increased scale. So, with scale, we get pricing power, we get efficiency, and our supply chain as well.

Operator

Your next question comes from Paul Coster with JP Morgan. Your line is open.

Paul Coster -- JP Morgan -- Analyst

Yes, thanks. A couple of questions. You saw some revenue recognition slip to 2019, but you didn't raise the revenue numbers for 2019, and I'm wondering if it's something to do with PG&E and SCE, or whether it's supply constraints? Perhaps you can just talk us through the puts and takes there as to why you didn't increase the 2019 revenue guidance? 

And the other question I've got is that the ramp cost seems to be increasing, at least since the first guidance you gave for 2019. What changed, if you can just sort of talk us through the process by which we got here? Thanks.

Alex Bradley -- Chief Financial Officer

Yeah, sure. So, on the guidance piece, we've got a broad range in the guidance, and we just talked about, on slide 12, a significant amount of the revenue and margin is backended for the year. So, obviously, that's in the fact that we have a guidance range, but you can see that small changes in timing could have a large impact to results at the backend of the year. There is some risk around SCE. When we think about SCE, and I don't think it's a significant risk for us -- it's hard to evaluate. You've got to look at what's happening with PG&E itself, how California and FERC and the bankruptcy courts will deal with that, and then how that specifically applies to the facts and circumstances around SCE and their territory. So, we're monitoring that. We do have assets that we're selling this year. We have three assets that we're currently running a competitive process for, and we are seeing high demand for those.

 If you look at SCE's credit today, the bond's still rated investment grade. You haven't seen -- the yields that widen incrementally, we haven't seen them gap out like you have on PG&E. So, I think we've got good confidence, but there is still risk around those processes. So, that's a piece of it. But then the other piece is we're just -- we're only eight weeks into the air. So, it's early to make a change in terms of overall guidance. We'll continue to evaluate guidance as we go through 2019. 

On the ramp piece specifically, all you're seeing is a change in geography from start-up moving into ramp, and it's a function of the timing of us bringing out the Vietnam factory. So, effectively, we've decreased start-up, bringing that up early, but it's increased ramp. And you see that in the half percentage point change in the gross margin guidance, and that's offset by a $15 million decrease in the start-up cost in the opex. So, those two net out to a zero change to guidance. It's just geography based on the timing of the Vietnam plant coming up. 

Operator

Your next question comes from Michael Weinstein with Credit Suisse. Your line is open.

Maheep Mandloi -- Credit Suisse -- Analyst

Hi, thanks for taking the question. This is Maheep Mandloi on behalf of Michael. Given your shipment visibility, can you talk about how much of the third party sales is fixed, or is that fixed versus floating prices for the year? And the second question is on the Series 6 cost structure. Can you talk about when you expect to achieve the target cost structure? Is it still a Q4 target? Thanks. 

Mark Widmar -- Chief Executive Officer

So, as it relates to shipment visibility and the pricing, all of the -- anything that we recognize as a booking has a firm price associated with it. The only impact it has is, and we've referenced this before, if we deliver a bin that's higher than what we initially anchored toward, right -- so, the contract will say -- let's use an example -- you have to deliver a 420-watt module. We can go down two bins to 410, and we can go up two bins to 430, or we can average to the 420; whatever the math ends up working out to. And those, there'll be subtle price deltas as you move across. In some cases, that's like a quarter percent for each bin. In some cases, it's slightly higher than that. So, there could be slight movements in the realized ASP from what the center point of that contract is, but it's a firm fixed price. So, they all have a firm fixed price. There is no floating, but for wherever the final delivery is of the product. 

On the Series 6 cost structure, as we said in the last call, as we exit this year, we'll be within a couple of pennies from our targeted 40% cost reduction. And that's important. And when get there, we still have an issue with the frames not fully optimized and the glass. So, we've got issues and we've got a path of how to improve that. And the other is, we're not at the average efficiency that we had targeted for Series 6, right? So, we knew it was gonna take us a couple years, and we even showed a slide, I think, in the Analyst Day of kind of where that average efficiency would be. And then we showed a more of a mid-term objective of where we want to go with the real wattage for the product. 

So, a combination of optimizing around the glass and the frame, and driving the efficiency, we will be in a much better position as we exit 2020. Should be relatively in line with what our original targeted cost reduction was when launched Series 6. And again, we launched it in November of 2016. So, it's only a little over three years since -- or two years, I guess -- a little over two years. We're not even three years into the journey. So, just put it in that perspective. And I think there's tremendous progress that's been made over that horizon. 

Operator

Your final question comes from Joseph Osho with JMP Securities. Your line is open.

Joseph Osho -- JMP Securities -- Analyst

Wow, I made it. Thank you. I wanted to go back to the margin comments you made about the systems versus the module business; in particular, the comments about Series 4. I understand that obviously, you've got more 6 allocated to your systems business. But I'm wondering if there is any under-loading on the 4 business that's weighing on those margins, and also, how much that might play out as you ramp the business down?

Alex Bradley -- Chief Financial Officer

Yeah, so, you're not seeing any under-loading on the Series 4. What you're seeing is just the impact of the fact that the Series 6 business is really still nearly all being allocated over to the systems segment from a revenue perspective and from a core comps perspective. But you're seeing all of the ramp costs coming through in the module segment. So, you're seeing a blend of what looks like Series 4, but all Series 6 kind of non-core costs coming through as well. So, that's what's happening there. It's not a function of there being any underutilization on the S4 piece. 

Operator

This concludes today's conference call. You may now disconnect.

Duration: 56 minutes

Call participants:

Steve Haymore -- Investor Relations

Mark Widmar -- Chief Executive Officer

Alex Bradley -- Chief Financial Officer

Philip Shen -- ROTH Capital Partners -- Analyst

Kristen Owen -- Oppenheimer -- Analyst

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Ben Kallo -- Baird -- Analyst

Brian Lee -- Goldman Sachs -- Analyst

Paul Coster -- JP Morgan -- Analyst

Maheep Mandloi -- Credit Suisse -- Analyst

Joseph Osho -- JMP Securities -- Analyst

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