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First Solar Inc (FSLR -1.66%)
Q2Â 2019 Earnings Call
Aug 1, 2019, 4:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good afternoon everyone and welcome to First Solar's Second Quarter 2019 Earnings Call. This call is being webcast live on the Investors section of First Solar's website an investor.firstsolar.com.
[Operator Instructions]. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions].
I would now like to turn the call over to Adrianna Defranco, from First Solar Investor Relations. Ms. Defranco, you may begin.
Adrianna Defranco -- Investor Relations
Thank you. Good afternoon everyone and thank you for joining us. Today, the company issued a press release announcing its second quarter 2019 financial results, a copy of the press release and associated presentation are available on First Solar's website at investor.firstsolar.com.
With me today are Mark Widmar; Chief Executive Officer and Alex Bradley; Chief Financial Officer. Mark will begin by providing a business and technology update. Alex will then discuss our financial results for the quarter and provide updated guidance for 2019 .
Following their remarks we will open the call for questions. Please note this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statements contained in today's press release and presentation for a more complete description.
It is now my pleasure to introduce Mark Widmar; Chief Executive Officer, Mark?
Mark Widmar -- Chief Executive Officer
Thank you. Adrianna. Good afternoon and thank you for joining us today. I'll begin by noting our second-quarter loss of $0.18 per share. Despite this result due largely to increased variable compensation expense associated with the company's short-term and long-term incentive plans and increased tax expense which Alex will address. We put a number of wins on the board during the quarter and are maintaining our full year earnings per share guidance.
The Series 6 program remains on track, with improvement across all key manufacturing metrics. Q2 saw the greatest quarterly production run in the company's history. From a bookings perspective, we recorded our largest ever individual order for Series 6 modules and from a shipment perspective we recorded record quarterly shipments. These highlights are reflection of the team's continued excellence in a very dynamic and changing business environment.
Turning to the market, catalysts driving increased PV penetration continued to point to growing global momentum and strong demand. On our last earnings call, we discussed our optimism for utility scale solar growth driven not just by pure economics, but by the ground sale of communities making strong actionable commitments to renewable energy.
The recent uptick in government commitments coupled with growth in corporate activity provides the underpinnings for secure and stable growth. In many regions, the solar industry has reached a cost inflection point relative to coal. In the U.S. the Energy Information Administration has identified a trend of younger and larger coal plants shutting down and a study by Energy Innovations released in March showed that it would be cheaper to replace 74% of U.S. coal with new wind and solar.
The study further found that replacing 94 gigawatts of existing coal plants with wind and or solar would result in a 25% reduction in energy cost. In Europe, the first half of 2019 saw renewable energy outproduced fossil fuels for the first time. These are just some of the encouraging signs of sustainable growth we see. Shifting to the domestic market, we pointed out during our last earnings call that three states have adopted active mandates to reach 100% clean electricity standards. We have over a dozen or more committed to non-binding goals.
As of today. eight states enacted 100% clean renewable energy goals and an additional 29 states plus Washington DC are targeting nine binding energy targets. Another trend gaining traction in the U.S. relates to battery storage. Deployment of grid connected energy storage in the U.S. are expected to hit over 700 megawatt of this year and are projected to reach 2.5 gigawatts by 2023.
Moreover, the economics of these projects signal that in certain regions today clean and dispatchable energy can be made available for less than the cost of new natural gas. We also continue to see growing momentum among corporate seeking to de-carbonize their electricity 2018 saw over 13 gigawatts a corporate PPA agreements double in 2017 levels with new buyers and emerging markets to being the scale.
Since our comments last quarter companies in France, and Poland signed corporate power purchase agreement for large-scale solar, making a first for these nations. We continue to solidify our position as a leading global provider of corporate solar solutions by providing clean, more eco-efficient solar technology. On Tuesday of this week we just announced jointly with Microsoft that our Sun streams 2 solar facility will power Microsoft's new energy-efficient data center being built in Arizona.
We are thrilled Microsoft values our Series 6 technology, especially given its lower carbon footprint and superior environmental profile compared to crystalline silicon. We look forward to providing Microsoft cleaner solar electricity. Earlier in the quarter, we announced that our Cove Mountain 2 solar power plant would support Facebook's Eagle Mountain data center in Utah through a PPA with Rocky Mountain Power.
The project will be constructed near the 58 megawatt Cove Mountain power plant, which we announced last year will also support Facebook's operations. Continuing this trend we announced last week that Kellogg's Australia and New Zealand signed the PPA with the Beryl Solar Farm developed and operated by First Solar and New South Wales.
Finally, the utility-scale market in the United States continues to drive. Notably, we're seeing an increase in multi-year module sales agreements, driven by our customers' need for pricing and technology certainty and our commitment to stand behind our contracts. Starting on Slide 4, I'll provide an update on our Series 6 production metrics. As a reminder, we began production at our first Series 6 factory in April 2018. And over the subsequent five quarters, we have continued to ramp production in the U.S., Malaysia and Vietnam. Leveraging our control replication process we are operating four factories which are matched in terms of key processes, in which are produced 1.9 gigawatts year-to-date. Reflecting on the significant progress we've made over relatively short period of time, we are pleased with the Series 6 in terms of schedule performance and cost.
On a fleet wide basis since April, we have seen significant operational improvements when comparing performance for the month of April to July meaningful improvement can be seen. Megawatts produced per day is up 16%. Capacity utilization has increased 12 percentage points to 94%. Adjusted for planned downtime the fleet capacity utilization was 96%. Note in support of our module efficiency roadmap in July, we increased the volume in engineering test articles, which adversely impact of capacity utilization by one percentage point.
The production yield is up two percentage points to 91% the average watt per module has increased three watts. And finally, the percentage of modules produced with anti-reflective coating has increased by five percentage points to 91%. The combination of our efficiency improvement program and increased ARC utilization has led to a significant improvement in the module bin distribution. In July the ARC bin distribution between 420 watt to 430 watt modules represented 87% of production.
Our best factory head ARC utilization of 95%, with 94% of the production volume at a 420 watt bin or high. With 893 megawatts produced Q2 continues our planned production ramp, and we have carried momentum into July, where we are experiencing our best ever production month with 322 megawatts produced On an individual client level all the factories are performing well at our second factory in Vietnam, the production metrics are ahead of plan and within six months of commencing operation, consistent with the fleet average. This is a direct result of learnings from prior factory ramps and the synergies realized by having a multi-factory site, which effectively leverages the whip inventory buffers across two factories and creates additional equipment redundancy. We would expect to see similar benefits when we start up our second factory in Ohio, where construction is continuing according to schedule. The first tools installed in June. Note as a highlight, during our Q1 earnings call our new Ohio factory will include additional capital which among other improvements will target a 5% increase in the nameplate capacity.
Depending on our ability to realize the targeted capacity increase we will look to roll-out this program across the fleet. We anticipate starting the production in early 2020 with the possibility of pre-qualified production in Q4 of 2019. The progress we have made ramping our factories has been a key contributor in enabling the achievement of our Series 6 cost per watt objectives for the first half of 2019. While this is a significant accomplishment there is tremendous amount of work still in front of us in order to achieve our cost per watt roadmap for the full year. As we noted in our April earnings call, our Series 6 cost per Watt is expected to drop approximately 30% from Q1 to Q4.
Turning to Slide 5. I'll next discuss our bookings activity. In total we have 4.3 gigawatts of net bookings in 2019. Including net bookings of over 2 gigawatts since the last earnings call. After accounting for shipments of 2.2 gigawatts in the first half of the year, including record quarterly shipments of 1.4 gigawatts in the second quarter, our future expected shipments are 12.9 gigawatts. As it relates to the systems business, we converted two opportunities in Japan from our mid to late-stage pipeline into 77 megawatts of bookings with expected deliveries through 2022. With these projects are footprint. Japan has grown to approximately 400 megawatts, we continue to believe in the strength of our portfolio of systems opportunities in Japan and we could double our existing systems bookings there by the end of 2023.
The remainder of our net bookings for the quarter were module only bookings essentially all for Series 6 product. International markets represented slightly more than 100 megawatts of the bookings. As I noted previously, we are seeing an increased in multi-year module sales agreements, driven by our customers' need for certainty in terms of the technology they are investing in and the certainty that we will stand behind our contracts. Representative this we have secured our largest Series 6 agreement with a new customer to supply 1.7 gigawatts of deployment of projects across the U.S. We've also secured a 0.3 gigawatt booking with another new customer in the United States. Note, this is the first phase of the project with a similar size second phase included in our contracted pipeline and awaiting confirmation of conditions precedent to become a booking.
We are particularly pleased with the strength of the bookings in the quarter despite the decision in June of the Office of the U.S. trade representative to exempt bifacial panels from Section 201 tariffs. But we were able to contract through this headwind is important to note that the disappointing decision, which in our view has the effect of undermining the Administration's efforts to secure a level playing field for U.S. solar manufacturing introduces a new source of uncertainty going forward . Since the last earnings call related to certain customer and specific event, we did book 0.3 gigawatts scheduled to be shipped in 2019 and 2020. These events included the combination of a customer's request to support the revised project development schedule and project size, as well as settlement of an ongoing dispute with a customer, which originated over the potential sale of one of our systems projects.
Although these events had an adverse impact to our previously contracted module backlog given our robust pipeline, we were able to contract volume with other customers. More importantly, we view the resolution as an investment in long-term customer relationship.
Turning to Slide 6, we show the forecasted supply plan for the second half of 2019 through full-year 2021. As noted in the Q1 earnings call, we are effectively sold out through the remainder of 2019 and full year 2020. With the most recent bookings, 2021 is starting to book up relative to anticipated supply plan of 6.5 gigawatts. For full year 2021, we booked and contracted volume subject to conditions precedent representing approximately 60% of the supply plan. This leaves approximately 2.5 gigawatts to be booked in 2021. Note, approximately half of the remaining volume is anticipated to be needed for our self development systems business. Assuming [Phonetic] our systems business demand is level loaded by quarter in 2021. We are largely sold out for third-party module sales in the first half of 2021. We remain pleased with the bookings momentum and have increased confidence in achieving or exceeding our targeted one-to-one book to ship ratio in 2019, even as we continue to contract for deliveries over two years in advance.
Slide 7 provides an updated view of our mid-to late-stage bookings opportunities which now totals 6 gigawatts DC, a decrease of 0.6 gigawatts from the prior quarter, when factoring in the bookings for the quarter, 0.6 gigawatts, which were included in the opportunities in the prior quarter. Our mid to late-stage pipeline remains unchanged. Additionally, the pipeline includes 0.6 gigawatts of confirmed opportunities awaiting satisfaction of outstanding conditions precedents before being booked in the quarter. As a reminder, our mid to late-stage pipeline is reflective of those opportunities we could fill would book within the next 12 months and is a subset of a much larger pipeline of opportunities, which totals 13.3 gigawatts DC, which increased 1.6 gigawatts from last quarter. This includes 2.8 gigawatts of opportunities in 2019 and 2020 which provide demand resiliency to our near-term bookings production. While the remaining 12.5 gigawatts demand would be for modules delivered in 2021 and beyond.
In terms of geographic breakdown of our mid to late-stage pipeline, North America remains the region with the largest number of opportunities at 4 gigawatts DC. Europe represents 1.5 gigawatts, with the remainder in Asia-Pacific. In terms of segment mix, our mid to late-stage pipeline includes 1.9 gigawatts of systems opportunities across the U.S. and Japan with the remainder being module only sales. The significant increase in systems opportunities largely attributed to U.S. opportunities associated with the ITC safe harbor. We have also had significant success across our Energy Services business with year-to-date bookings of over 1.6 gigawatts DC. Approximately 0.5 gigawatts was associated with the sale of development assets with the remainder 1 gigawatts was contracted with project developed by third parties. This brings our total energy services portfolio of assets on a contract to nearly 13 gigawatts globally.
Before turning the call over to Alex, I'd like to discuss recent developments related to the ongoing class action lawsuit, which was filed in 2012. As previously disclosed in August of 2018, we filed the cert petition with the US Supreme Court concerning the appropriate standard to determine loss causation. We identified various standards across several circuits and did not believe the standard used in the 9th Circuit, which is a standard that will apply to this case was appropriate. We were supported by the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association, the Business Roundtable and other groups, who filed in make us brief with the court in support of our position. At the end of last month, the Supreme Court denied the cert petition. While we are disappointed with the denial we continue to believe we have notorious defenses and are vigorously defending this case. Also as previously disclosed, from following the result of the Supreme Court, The Arizona district court order that the trial began in January 2020.
I'll now turn the call over to Alex, who will discuss our second quarter financial results and provide updated guidance for 2019.
Alexander Bradley -- Chief Financial Officer
Thanks, Mark. Before discussing the financial results for the quarter, I'd like to note that as we said in our previous earnings call, we anticipated that Q2 would be a breakeven the last quarter and our second quarter financial performance was in line with those expectations. With the sale of the Beryl asset in Australia and the Cove Mountain andMuscle Shoals assets in the U.S. continued progress toward additional system sales and an increase in third-party module sales during the quarter, We remain on track to hit our financial objectives for the year. With regards to the sale of the Cove Mountain and Muscle Shoals assets. These projects are not anticipated to begin construction until late 2019 and early 2020 respectively. However, as noted on the previous earnings call, given the opportunity to optimize valuations and reduce risk, we sold these assets prior to notice to proceed. In addition, in lieu [Phonetic] of our traditional sales structure whereby we would perform the EPC and recognize revenue on a percentage of completion basis over the life of the contract. We have in these cases sold the project companies with a module sale agreement and our customers will engage a third-party EPC provider. This structure has several advantages including earlier cash collection and reduction of EPC risk exposure as we continue to evaluate the extent of our offering of this service.
Note that in our public filings this also has the effect of removing the sold assets from our systems pipeline table adding approximately half a gigawatt of volume into the module backlog, With respect to the module backlog that will be updated in our forthcoming 10-Q although this metric is always impacted by rounding given it is reported in gigawatts and billions of dollars.
This quarter is also atypical circumstances, which will imply a lower ASP for new bookings in the case. This is a result of two key drivers. Firstly, with regards to the aforementioned Muscle Shoals and Cove Mountain projects. The change in the sales structure results in a great upfront margin and the approximately half a gigawatt of additional module backlog with deliveries in 2020 and 2021 comes in ASP is lower than the previous average.
This does not change the overall project economics for these assets, but has the impact of lowering the overall average ASP and a module backlog. Secondly, as Mark noted, we had 0.3 gigawatts of debookings with the certain customers since the last earnings call, which resulted in an ASP reduction associated with those volumes.
Combined, these changes, lower the overall average ASP in the backlog, The implied average ASP for the calendar quarter is not reflective of the pricing associated with the new bookings, including the 2 gigawatts of net bookings since the prior earnings call. To be clear, we're very pleased with our overall ASPs and new bookings in 2019.
Turning to Slide 9. I'll start by covering the income statement highlights for the second quarter. Net sales in Q2 were $585 million, an increase of $53 million compared to the prior quarter. The increase in net sales was primarily a result of increased module sales as well as the closing of the sale of fully constructed Beryl project in Australia and the sale of our Cove Mountain, and Muscle Shoals projects in the U.S.
Although Q2 was a record shipment quarter for us given the contractual terms associated with certain third-party module bookings as well as shipments to our systems projects, which have not been sold, we only recognize revenue on approximately one third of those shipments. On the segment basis as a percentage of total quarterly net sales, our systems revenue in Q2 was 61% compared to 63% in Q1.
Gross margin was 13% in Q2 compared to breakeven in Q1. The system segment gross margin was 18% in the second quarter and the module segment, gross margin was 5%. As a reminder module segment cost of sales is comprised of all third-party module cost of sale as well as Series 6 ramp-related costs. We experienced ramp-related costs of $18 million in the second quarter, which combined with Q1 is put on to the majority of the forecasted ramp charges for the year.
In regards to the module segment gross margin increased 18 percentage points from negative 13 in Q1 to positive five in Q2. This was due to a combination of increased shipments driven by increased Series 6 volume , lower ramp costs and lower cost per watt. Operating expenses were $86 million in the second quarter, an increase of %9 million compared to Q1.
This was driven by increased variable compensation associated with the company's short-term and long-term incentive plans. We have an operating loss of $9 million in the second quarter compared to an operating loss of $77 million in the prior quarter. This was a result of the increased module and systems revenue and margin referenced earlier, partially offset by the increase in operating expenses.
We took a mark-to-market charge of $4 million related to the fair value of certain interest rate swap contracts for some of our project assets in Japan and Australia. This is a timing impact based on movement of interest rates within the quarter. Approximately half of which was recovered during the quarter through the increased sale value of the Beryl project.
We expect the remainder to be recovered in subsequent quarters through increased project values recorded at the time of sale. Recorded tax expense of $12 million in the quarter compared to a tax benefit of $1 million in Q1. The increase in tax expense for the quarter is attributable to the jurisdictional mix of income as well as a discrete return to provision expense of $7 million.
Combination of the aforementioned items led to a second quarter loss per share of $0.18 compared to a loss per share of $0.64 in the first quarter. I'll next turn to Slide 10 to discuss select balance sheet items and summary cash flow information. Our cash and multiple securities balance ended the quarter at $2.1 billion, a decrease of approximately $170 million from the prior quarter.
Total debt at the end of the second quarter was $481 million compared to $571 million at the end of Q1. The reduction in debt is primarily due to the sale of the Beryl asset in Australia in the assumption by the buyer of the project level debt. As a reminder, all of our outstanding debt continues to be project related and will come off our balance sheet when projects are sold.
Our net cash position decreased by approximately $80 million to $1.7 billion. The decrease in our net cash balance is primarily related to capital investments in Series 6 manufacturing capacity. Net working capital in Q2, which includes non-current project assets and excludes cash and marketable securities decreased by $133 million versus the prior quarter.
Change was primarily due to collections on receivables, the systems, projects partially offset by an increase in our Series 6 module inventories. Cash flow from operations were $13 million in the second quarter. And finally, capital expenditures were $179 million in the second quarter compared to $149 million in the first quarter, as we continued Series 6 capacity expansion,
Continuing on to Slide 11 I'll next discuss the updated assumptions associated with our 2019 guidance. Firstly, our guidance continues to assume both a a back-ended Series 6 module sale profile, as well as a significant Series 6 cost reduction profile over the next two quarters. As Mark noted earlier, our Series 6 cost per watt is expected to drop approximately 30% from Q1 to Q4.
We also continue to expect approximately 60% of our ramp related and start-up charges to have been occurred in the first half of the year. Secondly, while we continue to forecast the closing of multiple project sales both in the U.S. and internationally in the second half of the year timing between Q3 and Q4 remains uncertain and could have a material impact on the timing of revenue and earnings between the third and fourth quarters.
With regards to our U.S. project sales we continue to be pleased with the progress made in sales processes. So those assets with offtake agreements with FCE recent legislative developments in California have been positive and uncertainty around timing and value remains. As indicated on the previous call, should the market not reflect what we believe to be the appropriate risk profiles and values for the assets we would look to refinance the assets and hold them on balance sheet through the period of uncertainty, rather than selling prices below what we believe to be fair value.
As a reminder, while unlikely should this occur, it could result in full year EPS, approximately $0.50 below the low end of the guidance range. Thirdly, we continue to highlight that our guidance does not reflect the potential for higher legal costs associated with defending the class action lawsuit. but these defense costs may exceed our insurance coverage limits.
In addition, our guidance does not take into account the financial impact of any resolution of that lawsuit given the uncertainties of trial. With these factors in mind, we're updating our 2019 guidance as follows: net sales guidance remains unchanged. Gross margin guidance has increased 50 basis points to a revised range of 18.5% to 19.5% due to higher upfront recognition of margin on the Muscle Shoals and Cove Mountain projects particularly with the sales structure discussed earlier, offset by an increase in Series 6 ramp-related costs.
Operating expense forecast has been lowered by $10 million to a revised range of $360 million to $380 million as a result of decreased plant start-up expense, which is now forecast to be $55 million to $65 million, partially offset by higher variable compensation expense. The operating income guidance has been increased to a revised range of $290 million to $340 million as a result of the above changes.
Full year tax expense is now forecast to be approximately $70 million, up from previous estimate of $50 million. The increase is primarily due to a shift in jurisdictional mix of income and the previously mentioned return to provision expense. And earnings per share, net cash capital expenditures and shipment guidance is unchanged.
Finally, I'll summarize the key messages from our call on Slide 12. Firstly, we continue to be pleased with the progress on our Series 6 platform, including the significant progress across key manufacturing metrics. Secondly, our year-to-date bookings of 4.3 gigawatts continue to strengthen our future contracted position and we're now approximately 60% contracted in relation to our 2021 supply plan.
And lastly, we have increased our gross margin operating income guidance and maintained our full year EPS guidance range.
And with that, we conclude our prepared remarks and open the call for questions. Operator?
Questions and Answers:
Operator
[Operator Instructions] Your first question comes from Philip Shen with ROTH Capital Partners. Your line is open.
Philip Shen -- ROTH Capital Partners
Hi, everyone. Thanks for the questions. I have got three. The first one is recall the slide that you guys put out back in Q4 of '18. I think in Slide 12 where you had your average
average cost per watt in Q1 was 30% above that, Q2 5% above that and in Q4, '19 was expected to be 10% below average for the year. Can you guys, can you guys just give us an update as to where things stand relative to that, I know pardon me that you talked about meeting your objectives and so forth. How does things stand relative to that first? And then secondarily, as it relates to the bookings, how are bookings looking into 2022 with this bifacial exemption, our customers starting to look more closely at the book bifacial offerings by your peers? And then finally, can you give us an update on your view of -- your latest view on capacity expansion and in general, maybe shareholder capital allocation in general? So, thanks for taking all these questions. I appreciate it.
Alexander Bradley -- Chief Financial Officer
All right, Phil. On the cost per watt and what I did say in my prepared remarks is that we are happy with where we are right now. We met our first half commitment on the reduction and as you remember, that was a pretty steep reduction from first quarter into the second quarter. So we're happy with the first-half results, still work to be done yet to get to the second half. A number of things. If you look at the first first half. I mean a lot of it was driven by utilization has come up significantly. We've driven up throughput improvements dramatically, yields have an improved significantly there all on the metrics that we reflected in the in the deck and I referenced in my comments, and you can clearly see the benefit of that drive down the cost per watt, is I look across what still needs to happen for the balance of the year to get to our cost per watt. It's a -- there's no one silver bullet is one of many things. We've got labor that needs to come out , when we, through the ramp process starting to production, we threw a lot of labor into the manufacturing process that we're now in the process of of taking out. So there is a pretty significant reduction of labor that should get down to the entitlement where we expect it to be, but in the early ramp phases we do labor into the process in order to continue to run operations at the highest throughput levels that we can.
We've got some bill of material opportunity still that we've got to capture. We've got negotiations ongoing right now to realize that benefit and they don't talk about. There is still we got to get the yields up, yields are at 91%. We got to get those numbers past 95% closer to 97%. So there is some work to be done there. We still have a little bit of room to go on utilization. So we've got to see that and continue to drive throughput as to the highest possible optimization that we can. So there's --there's a lot of levers, not one individual lever, but we feel confident with what we still need to do and our ability to get there, but a lot of heavy lifting still to go yet to get to the cost per watt for the second half of the year.
Bookings we're very happy with bookings and where we are and we can see from the slide that the bifacial exemption happen. I think it was either June 12 there's something along that line in the bookings that we were able to secure with a couple of two key new customers and both happened after that date, not to say that there was an inflection point of discussions with the customer around the ramifications around bifacial modules. I don't have any concern around our ability to compete with a bifacial module. It's just a discussion around what are the economics land. So, to me the bigger challenge we have, if the exemption stays where it is that it ultimately compromises economics and realization of what we can capture relative to our competition. The spirit of what was put in place under the 201 was to allow companies to scale into ramp manufacturing and to enhance overall cost competitiveness to deal with imported competitors. We made an investment, a significant investment in our factory in Ohio for that very reason, coupled with the tax reform that was provided and what we had hoped for with we allow our ability to ramp our new facility in an environment that wouldn't be under siege by the flood of imports. And I do think there is a risk that could happen with the exemption as it's currently written, unless there is some form of a modification to it or either rescission or some form of quota. I think it will create some challenges that will have to be able to deal with. So we're very disappointed in that decision as I said in my comments.
Capacity expansion, if you look at 2021 as we highlighted in the slide, there's the committed supply plans basically about 6.5 gigawatts. If you look at it coupled with our systems business that we have, we anticipate to have in 2021. We have about 1.25 kind of available capacity still in 2021 and we are focused on what we can do to potentially address that. We're very encouraged to hopefully see positive results of what we're doing in Perrysburg, as I indicated in my prepared remarks that is with that plant will go into the ground with additional capacity about 5% to 7% incremental capacity, which would say that at our nameplate basis, we can drive somewhere in the range of 60 megawatts to 80 megawatts somewhere in that range of incremental throughput. If we're successful and what we'd like to be able to do is to then replicate that across the balance of the fleet and continue to look for other opportunities for throughput.
If you look at my prepared remarks, one of the things we highlighted it was that the benefit we've seen in Vietnam is to have two factories co-located at one site, whether it's the leveraging of the whip buffers, whether it's redundancy that you have around the toolset across both factories. So we know, we want to leverage that across Malaysia-Vietnam and the U.S. We've got the U.S. covered now, Vietnam is already addressed, and then we in the process by the end of this year we'll start to conversion of Malaysia. But then beyond that we just want to continue to drive throughput. As two things efficiency and throughput are going to drive to our lowest cost per watt. And so we're very focused on doing that. We're continuing to evaluate options around how we can get additional capacity out of those factories, plus we still have the optionality if we choose to convert KLM 1-2. And so that's another 1.2 gigawatts that could be put into the mix.
My first choice would be to optimize the efficiency in the throughput levers first and then look to an expansion or should say a conversion to KLM 1-2, a lot of different options and things and scenarios that we'll have to evaluate, but very happy with the demand and supply backlog that we currently have contracted now really almost through the next 10 quarters.
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 everyone, Thank you for the time. Maybe to just pick up where you just left off, in fact, why don't we talk a little bit, if you can on this cost per watt trajectory not just heading into 4Q and I appreciate what a lift that may be already. How do you think about that over time here, especially as you think about scaling the megawatts here too. I mean, just I want to focus on the cost per watt metric and where we can go from here, and I don't want to pre-up too much guidance into '20 specifically, but trajectory wise how much more is there to go sort of overall, especially as you see these other products continue to have trajectory on cost themselves, be it bifacial or otherwise?
Mark Widmar -- Chief Executive Officer
Yeah, I mean it's hard to go forward with too much details of the specifics. But what we said before, even with the -- when we first launched Series 6 and obviously a significant cost reduction from Series 4 but that initial indication, which was about a 40% reduction relative to our Series 4 price -- our cost. Excuse me that there wasn't necessarily an endpoint of a destination that we still had room to run in the two most significant levers around that. Our continued drive of our efficiency. And then if we can drive incremental throughput across each of our factories. Those will have some significant impacts on the cost per watt enable us to continue to drive the cost down to create an advantage position on a cost position to our competition, which is the ultimate goal that we had. Clearly it is, it is challenging in terms of what we're seeing in the marketplace with some of our competitors in their cost. But, and we think the final destination still will allow us to have an advantaged position.
There is other things we've got -- we got to work through though that helps us get through that destination. One is the frame. We've talked before about the frame and even the design of the frame is actually adding cost to the module. So we've got it, we've got optimize against the frame and it really, it's an optimization across the frame and the glass. So it's a combination of glass thickness and the associated frame the packaging that those three components of the two sheets of glass in the frame make up a very significant percentage of overall build material. So how do we optimize against that and drive that down from where it is right now and we've got a number of options around how to do that. And then we just need to continue to drive and improve our yields. I would say the other one that's a little bit of a headwind right now is our yields as I highlighted we're at 91 and we need to drive that up. So it's not only driving the yields up. It's also where to scrap occur within the manufacturing process and in the more that we see the scrap, a loss in the back end of the factory of the factory, it just drives a higher cost because the majority of the bomb is already incurred at that point in time. So there's a lot a lot of things we need to do along those lines. But I don't think there should be a view that there is a -- there is not additional room still to go and continue to drive to the lowest optimal cost point, a lot of work though to make happen. But we got a first figure out the second half of this year and then carry forward from there.
Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst
If I can just quickly ask on the incremental bookings for ASP, how firm is the market at this point? We saw some uptick in pricing for the first time in a while in the U.S. obviously bifacial impacting things now, but just where are we on the incremental bookings and just if you can talk a little bit on market pricing today, as you've already alluded to from bifacial?
Mark Widmar -- Chief Executive Officer
Yeah, so, look I'm -- we're happy with the 2 gigawatts or so north of 2 gigawatts on a growth gross basis of bookings. I mean the ASPs that we're realizing on the incremental volumes is consistent with what we saw in the first half. So if I look across the north of 4 gigawatts of bookings that we have year-to-date that ASP is very firm and consistent really across that entire volume and you really only variation you have is what year are you shipping it, right. So some of the bookings that we had in the first quarter, still we're 2020. Now we're all into '21. We've got some bookings out in '22 and even some of the touch into '23.
So the real variation that you see right now around ASPs depends on the year of which you're booking against. But we've been pretty pleased with how firm the market has been.
Alexander Bradley -- Chief Financial Officer
Yeah. Julien the one thing we talked about in prepared remarks, I want to make it clear the difference between what you're going to see in the queue when it comes through tomorrow in terms of the backlog reported there which again is rounded it showed in gigawatts and billion. So there's a lot of error that can happen in that rounding versus where we've actually been booking, new bookings a couple of atypical events that happen as we mentioned on the call that impacted the number you'll see in the queue.
And that was, this customer dispute accommodation we had and the discrete events around Cove Mountain and Muscle Shoals but relative to where we are seeing the market now for new bookings. Sales of [Indecipherable] booking that with a 300 and very happy with what we're seeing those.
Mark Widmar -- Chief Executive Officer
Yeah. And just, and you got to remember too, just a natural cadence is going to be that as we ship, we're shipping 19 volumes and we're replacing them with 21 or later volumes. You're going to see some natural erosion of that metric, but at the same time you will see margin expansion , because of the cost profile that we'll have in that horizon is going to be much more advantage relative to what we're -- what our current cost of our Series 6 production is. So you got to look at it from both perspectives. But the metric in itself naturally is going to trend down over time.
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. I'm going to try to squeeze in three here as well. I guess, first off, in the past you've been telegraphing some bookings moderation moving through the year. We're obviously not seeing it yet. So maybe just a quick update on your thinking around bookings trajectory as you move through 2019. Has that changed versus what you said before? Second on the gross margins, you mentioned Cove Mountain and shows a bunch, Alex and I know they're moving around in terms of buckets, but was that in the modules gross margin of 5% or was it embedded in the systems gross margin. And then can you quantify what that impact was? And then just last one I'll squeeze in here on the 5% to maybe 7% nameplate capacity increase at Ohio. Mark, can you elaborate a little bit more. Is that the debottlenecking process, what amount of capex is involved? And then is it a quarter or two, if you see success where you could then decide to roll it out to Malaysia and Vietnam? Thanks.
Mark Widmar -- Chief Executive Officer
Yeah. I'll do the bookings and the capacity and let Alex talk to the gross margin, but yeah, I've been real happy with the ability of our sales team to engage with customers and to get to an opportunity to book volumes that are sitting that far out in the horizon. But one of the things, as I said in the prepared remarks is that there is a significant under-town of wanting to lock into multi-year agreements having certainty around the technology and ability to deliver the committed bin of which they're going to rely on and then design around and the fact that will stand behind the contracts and there is not going to be repricing or anything else along those lines.
And I think that's playing to our strength. The two large orders that we have for the first half of this year one in Q1 and the other one here and even even the one that we said that there is a Phase 1 and Phase 2 really is reflective of that. And it's really the confidence in developing those types of relationships with our partners and obviously a shared commitment and trust and having gotten in certain situations has been put in difficult situations by some of our competitors at various points in times and given safe harbor and other things that are in front of us, nobody wants to be in that type of position where they have a partner that is unable to supply them or deliver against their commitments. So I think that's playing to our strength.
So as we have sort of given an indication of second half weighted bookings we clearly are ahead of where we thought we would be. There is still a lot of opportunity even yet for the balance of this year. As we said, we still are confident in our ability to get to at least a 1 to 1 booking ratio, which I would say we've got another 1.2 gigawatts or so, something in that range. We've got a couple of pretty significant deals that hopefully we can be able to bring across the finish line over the next few quarters.
So I think we can get there, but yeah we've been very pleased with what we're seeing it from that standpoint. On the capacity side, it's really, it's a debottlenecking, it's also, and it's basically there is some capex that you think about where your constraint is in your production process and then adding a little bit of capacity there or resiliency, redundancy and that creates incremental throughput across the remaining operations. And so there's a little bit of that. It's not a significant capex, and if we are successful we can roll it out within a matter of a few quarters across the balance of the fleet. The only real lead-time issue is just to the extent there's capital requirement is just lead time from the vendor to provide the capital, but it's a relatively short time from the point of decision to actually see in the benefit of throughput.
Alexander Bradley -- Chief Financial Officer
Brian, to the question on gross margin. If you look at how we've typically structured deals historically when we had an EPC agreement as a profit pool associated with the development, profit pool associated with the module and then a piece with the EPC. Those were all up together into one large profit pool, which would then be recognized on a percentage of completion basis throughout the project life.
What we've done here is we've sold the development project assets and then the fully recouped on development costs and taken the development fee upfront. And remember, if you look at the risk profile that we talked about at our Analyst Day year and a half ago, that's a higher margin piece of the business and that's flowing through the system segment. And then now we then have a module agreement with that project company to deliver modules in that module revenue and margin will throw -- flow through the module segment over time. So that's the split you're seeing.
Mark Widmar -- Chief Executive Officer
We haven't broken out the exact delta but that's how it's going to be recognized over time.
Operator
Your next question comes from Michael Weinstein with Credit Suisse. Your line is open.
Michael Weinstein -- Credit Suisse -- Analyst
Hi guys. Can you, -- given your visibility in the safe harbor demand and pricing do you expect to extend the Series 4 lines for the first quarter of '20?
Mark Widmar -- Chief Executive Officer
We're looking at Series 4 and opportunities for that. We have gotten requests from customers around availability of Series 4, you got to remember, for sure, right now, we're running two factories in Malaysia, excuse me, of Series 4. We referred to them as KLM 1-2, and KLM 3-4. You know 3-4 for sure is closed -- is shutting down. I'm going to ramp that up. We're going to get Series 6 production out of that product most likely by the end of 2020.
It's a matter what do we do with KLM 1, 2 and there is a couple of different things. There is some here domestically in the U.S. and we got some pull from customers right now to do few things. Safe Harbor as well as we have some examples which customers are actually having issues with damage modules, hail damage in particular and asking if there's a way not for solar technology with crystalline silicon technology and asking if there is a way that we could probably help support their needs where they may actually replace some of the crystalline silicon and use it. First of all, the product we only have a Series 4 that could actually accommodate that type of request. There's other opportunities with pull-through of opportunities internationally for Series 4 in some key markets. So we're looking at that.
And there are some synergies that we capture. I think that as even purchasing power across the glass, while the actual form factor of the glass is not the same between Series 4 and Series 6. There are some synergies along that aggregate purchasing power, volume breaks and the like that we could maybe get some additional leverage not only for better pricing on our cost on Series 4 but potentially better cost on Series 6. So there's a lot of options that are being looked at. We will have more information around that, probably in the upcoming guidance call and we'll do by the end of the year.
Operator
Your next question comes from Colin Rusch with Oppenheimer. Your line is open.
Colin Rusch -- Oppenheimer
Thanks so much. So last quarter, you've talked a little bit about the project business and some inefficiencies there that you were working on section. Can you just give us an update on what's happening there and what you're able to accomplish in the last quarter?
Mark Widmar -- Chief Executive Officer
Yes, so there is I think what we highlighted in the -- I think it was in the last earnings call maybe the one before that. We have put a new leadership team in place and we are evaluating the kind of long-term relative competitive position of our own EPC offering and trying to determine what is the right strategy and the view is very simple. If we can be best-in-class as it relates to our EPC execution and similar to what we feel like we're best in class in O&M, we're best-in-class on our module technology.
If we can do the same with EPC, then that will be the path that we will pursue if we can't, then we'll have to look at options. As Alex indicated in his his remarks that we have structured two deals here recently that we are only in the sale of development asset with follow-on module sale agreement. We chose not to engage with EPC execution at this point in time, just given the uncertainty and the changes that we're going through until we can get our feet back underneath us, it's hard to sort of make additional commitments.
As it relates to the existing projects and the execution against the existing projects. I think the team has made some some very good progress getting where we need to be on cost and schedule. We still need to go, we still need further to go in terms of our ability to meet and satisfy our customers' expectations, whether it's third-party EPC for example when we, I would say that we haven't necessarily lived up to a standard that we want to live up to in terms of customer experience and we got to do better job from that standpoint.
But there's a lot of moving pieces that we're looking at in evaluating a number of different options and we will look to give you more color when we have more details.
Colin Rusch -- Oppenheimer
All right. And then just one quick follow-up. And just as you look at the mid to late-stage pipeline, how, how many new customers are in that and how much of that is really existing customers that may try to leverage some of that potential new business into price reductions on existing contracts?
Mark Widmar -- Chief Executive Officer
I don't have the -- look the two orders that we got for this quarter were new customers . I don't have that the exact mix between of what sits in there, then turns of the existing customers versus new customers. I would argue, though, that there is a pretty high percentage of that pipeline that customers that we've done business with that's largely representative of what you see in the marketplace as the next areas of the world. The EDS of the of the world in others. I mean, they're going to be key customers and there'll be not only in our contract volume, but there'll be in our pipeline volume as well.
Operator
Our final question will come from the line of Travis Miller with Morningstar. Your line is open.
Travis Miller -- Morningstar
Good afternoon. Thank you. You answered most of my questions, but I had a higher level question. You mentioned batteries in your remarks there and just wondering how does that impact you guys. Is battery development is something that improves the number of megawatts you can sell, does it change pricing at all, is it something that you might even eventually be involved in terms of offering a full package?
Mark Widmar -- Chief Executive Officer
Yes, so I mean, let's be clear, I mean as it relates to the battery, it clearly enhances the overall solar value proposition, and we've talked about this before as we've moved from energy-only contracts to we refer to as flexible solar generation, which allows you to effectively provide value beyond the energy, which could include ancillary services. And we, we've not been able to leverage that in some key markets in some opportunities.
And we've done a number of studies whether it. We've done a study with CAISO and NREL, we've done a study with E3 and TECO around that demonstrates kind of that flexible solar value proposition and then it gets into dispatchable energy. And so that's the evolution that we see and we do believe that you can get to a relatively high solar penetration in a number of key markets before you ultimately has to get to battery integration.
But the market starting to trend that way. We do think it's sort of creates this disruptive opportunity where you can displace with the deal that we won with APS, and so we'll refer to as our Sun Streams 3 project that was an all resource. We competed Solar against gas peaker in other forms of generation and we were able to win a portion of that, of that RFP.
So I think it just further enhances the overall value proposition. Now as it relates to technology and the technology as it evolves right now is dominated by lithium-ion and it's really leveraged off of the scale is being created through EVs and I see that is kind of the near-term, the most competitive solution that will be in the marketplace. So I wouldn't expect us to get into the battery side of it.
Now on the power plant control side and the optimization and dispatching of the energy generation and optimizing that against the for example, what we've done with APS, there's a pricing tier structure that determines the energy value that's being generated. And how do you optimize charging of the battery versus dispatching of the battery to capitalize -- to optimize to capture the highest value. Those are the things, we'd like to stay close to, we think that fits in well. We'll do O&M on that plant. We already have the power plant controls, so it's more or less modification of the capability, we already have that further enhances the value proposition that we can provide to the customers. So that's how we see, it's an important piece. It will evolve. Near-term, I think you can see it quite, quite high solar penetration before you have to get into dispatchable generation.
But in some markets like California the value proposition is a little bit different and more immediate need potentially in point of time throughout the year that we see more battery installations there. You'll see some in Nevada, you see some here in Arizona, but a number of other markets are probably way too early in their evolution to really required at this point in time.
Operator
[Operator Closing Remarks]
Duration: 55 minutes
Call participants:
Adrianna Defranco -- Investor Relations
Mark Widmar -- Chief Executive Officer
Alexander Bradley -- Chief Financial Officer
Philip Shen -- ROTH Capital Partners
Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst
Brian Lee -- Goldman Sachs -- Analyst
Michael Weinstein -- Credit Suisse -- Analyst
Colin Rusch -- Oppenheimer
Travis Miller -- Morningstar
