First Solar, Inc. (NASDAQ:FSLR) Q3 2023 Earnings Call Transcript

First Solar, Inc. (NASDAQ:FSLR) Q3 2023 Earnings Call Transcript October 31, 2023

First Solar, Inc. beats earnings expectations. Reported EPS is $2.5, expectations were $2.09.

Operator: Hello. Good afternoon, everyone, and welcome to First Solar’s Third Quarter 2023 Earnings Call. This call is being webcast live on the Investors section of First Solar’s website at investor.firstsolar.com. At this time, all participants are in a listen-only mode. As a reminder, today’s call is being recorded. I would now like to turn the call over to Richard Romero from First Solar Investor Relations. Richard, you may begin.

Richard Romero: Good afternoon, and thank you for joining us. Today, the Company issued a press release announcing its second quarter 2023 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 provide a business update. Alex will discuss our financial results and provide updated guidance. 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 statement 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 Widmar: Thank you, Richard. Good afternoon, and thank you for joining us today. On our recent analyst day in September, we outlined our goal to exit this decade in a stronger position than we ever did. We believe the future belongs to thin film, and we described our long-term intent to be positioned to serve all addressable markets and commercialize the next generation of PV technology, balancing and optimizing across efficiency, energy and cost in an environmentally and socially responsible way. This long-term aspiration aligns with our nearer-term growth, which is underpinned by our points of differentiation and solid market fundamentals, including continued strong demand for our products, proven manufacturing excellence, a uniquely advantaged technology platform, and crucially, a balanced business model focused on delivering value to our customers and our shareholders.

This is our last earnest call. We have continued to make steady progress on this journey, and I will share some key highlights related to continued strong demand and ASPs, manufacturing operational excellence, and expansion. Beginning on slide three, we will continue to build on our backlog with 6.8 gigawatts of net bookings since our last earnest call at an ASP of 30 cents per watt, excluding India. This base ASP excludes adjusters applicable to approximately 70 percent of these bookings, which when applied with our — aligned with our technology roadmap, may provide potential upside to the base ASP. These bookings bring our year-to-date net bookings to 27.8 gigawatts and our total backlog to 81.8 gigawatts. Our total pipeline of future bookings opportunity stands at 65.9 gigawatts, including 32.5 gigawatts of mid- to late-stage opportunities.

As it relates to manufacturing, we produce 2.5 gigawatts of Series 6 modules in the third quarter with an average watt per module of 469, a top end class of 475, and a manufacturing yield of 98 percent. Our third Ohio factory, which establishes the template for high-going Series 7 manufacturing, continues to ramp, demonstrating the manufacturing production capability of up to 15,000 modules per day, which is approximately 97 percent of nameplate throughput. The factory produced a total of 565 megawatts in Q3. Total year-to-date production of Series 7 modules in the U.S. has surpassed one gigawatt. As noted on our analyst day, the factory recently demonstrated a top module wattage produced of 550 watts as part of a limited production run. While still undergoing commercial qualification testing, this implies a record cattail production module efficiency of 19.7 percent.

Our India plant started production in Q3 and is continuing to ramp, recently demonstrating a manufacturing production capability of approximately 12,000 modules per day, which is approximately 77 percent of nameplate throughput. The factory produced a total of 154 megawatts in Q3 and recently demonstrated a-top module wattage produced of 535 watts. In terms of technology, our Series 6 plus bifacial modules completed rigorous field and laboratory testing. We recently converted our first Series 6 plus plants in Perrysburg, Ohio, to commercially produce the world’s first bifacial solar panel, utilizing an advanced thin film semiconductor. The technology features an innovative, transparent back contact pioneered by First Solar’s research and development team, which in addition to enabling bifacial energy gain, allows infrared wavelengths of light to pass through rather than be absorbed as heat, and is expected to lower the operational temperature of the bifacial module and result in higher specific energy yield.

Upon successful demonstration of operational metrics in high-value manufacturing, such as yield and throughput, we plan to convert more plants in the future, which will enable us to capture incremental ASV through our existing contractual adjusters. Turning to slide four, our focus on delivering value extends to our manufacturing expansion strategy, and we are making tangible progress towards achieving our forecasted 25 gigawatts of global nameplate capacity by 2026. Construction of our India facility is completed, and production has commenced. Commercial shipments are expected to begin once the factory receives the Bureau of India Standards certification, from the Indian government, which is expected by year-end. In September, we mobilized on our new Louisiana manufacturing facility, our fifth fully vertically integrated factory in the United States.

At a ceremony attended by the governor of Louisiana, we set in motion the work expected to deliver 3.5 gigawatts of annual nameplate capacity, which is anticipated to commence operation at the end of 2025. When completed, we expect 1.1 billion facility is projected to take us to approximately 14 gigawatts of annual nameplate capacity in the United States, further enhancing our ability to serve the market with domestically made models. Meanwhile, we continue to make steady progress on the construction of our new Alabama facility, which is expected to commence operation in the second half of 2024, and our Ohio manufacturing expansion, which is projected to commence operation in the first half of 2024. Additionally, our new R&D Innovation Center and our first perovskite development line, announced at Analyst Day, are also on track, representing an expected combined investment of $450 million.

The perovskite development line and R&D Center are expected to commence operation in the first half of 2024 and reflect our determination to lead the industry in developing the next generation of PV technologies, optimizing across efficiency, energy, and cost. Crucially, as our manufacturing footprint continues to grow, so does our supply chain. In the U.S., we recently expanded our agreement with Vitro Architectural Glass, which is investing in upgrading existing facilities in the United States to produce glass for our solar panels. The expanded capacity commitment from Vitro to FirstSolar is expected to commence production in the first quarter of 2026. Today, FirstSolar is one of the largest consumers of float glass in the United States. As PV manufacturing continues to scale in the U.S. and a premium is placed on domestically produced components, including glass, our early work to build a resilient domestic supply chain, which began in 2019, gives us a significant head start over the competition.

Similarly, we expect Omco Solar to manufacture and supply Series 7 module back rails through a new facility in Alabama. This reflects our efforts to de-risk our supply chain with strategic localization. Omco only uses American-made steel, which aligns with our intent to maximize the domestic economic value created by our U.S. manufacturing footprint. Similarly, our high facility also served by a steel value chain that is located within a 100-mile radius of our factories. Before handing the call over to Alex, I would like to discuss our policy environment. In the United States, with regards to the Inflation Reduction Act, we continue to await guidance from the Department of Treasury on the Section 45X manufacturing tax credits. We also remain engaged with the administration and continue to work with our customers to ensure that the IRA’s domestic content bonus guideline supports the Act’s intent to sustainably grow U.S. solar manufacturing and its supply chains.

As we have previously noted, we share our commitment to the current guidance with the administration and are working with our customers to enable their ability to benefit from the bonus credit for using U.S.-made content. We are appreciative of the work done by the Biden administration to provide a solid legislative foundation for domestic solar manufacturing. The IRA has supplied a catalyst for growth, and our goal is to leverage it to help create a position of strength for the country both now and after the term of the incentives. Beyond the IRA, we are also aware of new anti-dumping and counter-dating duty petitions filed against importers of aluminum extrusions from 15 countries. Consistent with our views on fair trade and the importance of conforming with rules governing trade issues, we will comply with any request for information from the United States Department of Commerce and the International Trade Commission while we work to understand the potential implications.

Moving abroad, we remain engaged with policymakers across Europe as the bloc attempts to tackle serious challenges to its solar manufacturing ambitions. For example, Chinese modular inventory in Europe, stored in warehouses across the region and estimated by analysts to reach 100 gigawatts by the end of the year, is reportedly being sold at prices below its cost to manufacture. This alleged dumping behavior, driven by overcapacity in a Chinese silicon industry that has decimated international competition for the past decade, represents a serious threat to non-Chinese manufacturing and to ambitions of diversifying solar supply chains away from the dependency on China. It also represents a policy threat, potentially undermining the political willingness to deliver the comprehensive trade and industrial legislative solutions necessary to both level the playing field and incentivize domestic manufacturing.

We continue to advocate for comprehensive legislation to safeguard any domestic manufacturing ambitions. Our view is that industrialistic manufacturing ambitions, our view is that industrial policy-related CapEx benefits alone are insufficient, and that absent sufficient trade policy support to ensure a level playing field, Europe will find it challenging to achieve what the U.S. and India have been able to do in a relatively short period of time. I’ll now turn the call over to Alex, who will discuss our bookings, pipeline, and third-party results.

Alexander Bradley: Thanks, Mark. Beginning on slide five, as of December 31, 2022, our contracted backfill totaled 61.4 gigawatts, with an aggregate value of $17.7 billion. To September 30, 2023, we entered into an additional 23.6 gigawatts of contracts, and recognized 7.4 gigawatts of volume sold, resulting in a total contracted backlog of 77.6 gigawatts, with an aggregate value of $23 billion, which equates to approximately 29.6 cents per watt. Since the end of the third quarter to date, we’ve entered into an additional 4.3 gigawatts of contracts, contributing to our record total backlog of 81.8 gigawatts. Including our backlog since the previous earnings call, our contracts are approximately one gigawatt or more, with returning customer Long Road Energy, and new customers, including a new IPP, and an asset manager with multiple companies in its portfolio.

Additionally, we have received full security against 141 megawatts of previously signed contracts in India, which now move to these volumes from the contracted subject conditions precedent grouping within our future opportunities pipeline to our bookings backlog. As noted on this day, while the ASPs associated with these India bookings are lower than those associated with the 6.6 gigawatts of US bookings since the prior earnings call, gross margin profile, excluding the 45x benefit, is comparable to the fleet average, given the lower production costs in our Chennai facility. Since the announcement of the IRA, we’ve amended certain existing contracts to provide US manufactured products, as well as to supply domestically produced Series 7 modules in place of Series 6.

Consequently, over the past five quarters, to the end of Q3 2023, across approximately 11 gigawatts, we’ve increased our contracted revenue by approximately $354 million, an increase of $42 million from the prior earnings call. As we previously addressed, a substantial portion of our overall backlog includes the opportunity to increase base ASP through the application of adjusters, if we’re able to realize achievements within our technology roadmap, as of the required time of delivery of the product. As of the end of the third quarter, we had approximately 40.3 gigawatts of contracted volume with these adjusters, which if fully realized, could result in additional revenue up to approximately $0.4 billion, or approximately $0.01 per watt, the majority of which we recognize between 2025 and 2027.

As previously discussed, this amount does not include potential adjustments, which are generally applicable to the total contracted backlog. Both the ultimate-bin produced and delivered to the customer, which may adjust the ASP under the sales contract upwards or downwards, and for increased sales rate or applicable aluminum or steel commodity price changes. Our contracted backlog extends into 2030, and excluding India, we are sold out through 2026. Note, a total of approximately 1.5 gigawatts of production from our India facility is expected to be used to support US deliveries in 2024 and 2025. As reflected on slide six, our pipeline potential bookings remains robust. Total bookings opportunities are 65.9 gigawatts, a decrease of approximately 12.4 gigawatts as of the previous quarter.

Our mid- to late-stage opportunities decreased by approximately 16 gigawatts to 32.5 gigawatts, and includes 27.1 gigawatts in North America, 3.8 gigawatts in India, 1.3 gigawatts in the EU, and 0.3 gigawatts across all other geographies. Decreases in our total mid- to late-stage pipeline in Q2 to Q3 result both are converting certain opportunities to bookings, as well as a remover of certain other opportunities given our sold-out position and diminished available supply. As we previously stated, given this diminished available supply, the long-dated timeframe into which we are now selling, and aligning customer project visibility with our balanced approach to ASPs, field security, and other key contraction terms, we would expect to see a reduction in volume in upcoming quarters.

We will continue to forward contract with customers who prioritize long-term relationships and value our differentiation, and given the strength and duration of our contracted backlog, we will be strategic and selective in our approach to future contracts. Included within our mid- to late-stage pipeline are 5.1 gigawatts of opportunities that are contracted subject to conditions present, which includes 1.7 gigawatts in India. Given the shorter timeframe between contracting and product delivery in India relative to other markets, we would not expect to see a multi-year contract commitment to occur in the US. As a reminder, signed contracts in India will not be recognized as bookings until we have received full security against the Arctic. Next slide, 7, I’ll cover our financial results for the third quarter.

Net sales in the third quarter were $801 million, a decrease of $10 million compared to the second quarter. Decrease in net sales was primarily driven by lower non-module revenue associated with project earn-outs from our former systems business, as well as within the module segment, a slight reduction in volume sold, partially offset by an increase in ASPs as we continue to see favorable pricing trends. Gross margin was 47% in the third quarter, compared to 38% in the second quarter. This increase was primarily driven by higher module ASPs, lower sales rate costs, and higher volumes of modules produced and sold in the US, resulting in additional credits from the inflation reduction end. Previously mentioned, based on our differentiated vertically integrated manufacturing model, the current form factor of our modules, we expect to qualify for an IRA credit of approximately $0.17 per watt for each module produced in the US and sold to a third party, which is recognized as a reduction to cost of sales in the period of sale.

During the third quarter, we recognized $205 million of such credits, compared to $155 million in the second quarter. We encourage you to review the safe harvest statements contained in today’s press release and presentation, the risks related to our receiving the full amount of the benefits we believe we are entitled to under the IRA. The reduction in our sales rate costs during the quarter reflected improved ocean and land rates, along with a beneficial domestic versus international mix of volume sold. Lower sales rate costs reduced gross margin by 7 percentage points during the third quarter, and by 8 percentage points in the second quarter. Ramp costs reduced gross margin by 3 percentage points during the third quarter, and by 4 percentage points during the second quarter.

Our year-to-date ramp costs are primarily attributed to our Series 7 factory in Ohio, which is expected to reach its initial target operating capacity later this year, and our new Series 7 factory in India, which commenced production during the quarter. S&A and R&D expenses total $91 million in the third quarter, an increase of $8 million compared to the second quarter. This increase is primarily driven by expected credit losses associated with our higher accounts receivable balance, additional investments in our R&D capabilities, costs related to the implementation and support of our new global electrified resource plan. Production start-up expense, which is included in the operating expenses, was $12 million in the third quarter, a decrease of approximately $11 million compared to the second quarter.

This decrease was attributable to the start-up production in our factory in India, partially offset by certain start-up activities for our new Series 7 factory in Alabama. Our third quarter operating results did not include any significant non-module activities. However, the year-to-date operating loss impact for the legacy systems business related activities remains at approximately $22 million. Our third quarter operating income was $273 million, which included depreciation, amortization, and accretion of $78 million, ramp costs of $25 million, production start-up expense of $12 million, and share-based compensation expense of $8 million. We recorded tax expense of $22 million in the third quarter, and tax expense of $18 million in the second quarter, primarily driven by higher pre-tax income.

A combination of the aforementioned items led to a third quarter diluted earnings per share of $2.50 compared to $1.59 in the second quarter. Next on the slide, eight, discuss the expensive items and summary cash flow commission. Our cash, cash equivalents, restricted cash, restricted cash equivalents, and marketable securities ended the quarter at $1.8 billion, compared to $1.9 billion at the end of the prior quarter. This decrease was primarily driven by capital expenditures associated with our new facilities in Ohio, Alabama, and India, along with our higher accounts receivable balance, partially offset by advanced payments received from future module sales. Total debt at the end of the third quarter was $499 million, an increase of $62 million in the second quarter, and the result of the final loan, drawdown, and credit facility for our factory in India.

Our net cash position decreased by approximately $0.2 billion to $1.3 billion as a result of the aforementioned factors. Cash flows for operations were $165 million in the third quarter. Global liquidity and the strength of our balance sheet remains one of our key differentiating factors. However, as discussed on our analyst day, the majority of our cash sits offshore, while the majority of our forecasted future CapEx spend between 2034 and 2026 is in the United States. As we invest significantly in the U.S. manufacturing ahead of any IRA cash proceeds, we continue to evaluate options to optimally balance this expected temporary jurisdictional cash imbalance, which includes cash repatriation, use of our existing undrawn revolving credit facility, or other sources of capital.

Whilst we expect our $1 billion of revolving capacity to provide sufficient liquidity, we continue to evaluate other options to optimize cost of capital for any French financing. On slide nine, our guidance updates, our volume sold and net sales guidance remains unchanged. Within gross margin, we are reducing the high end of our forecasted ramp under the utilization expenses by $10 million, between $110 and $120 million and narrowing the range of our section 45X tax credit guidance by $10 million, both the low and high end, between $670 and $700 million. Given their size, these combined changes do not impact our guided gross margin range of $1.2 to $1.3 billion. We’ve reduced our production start-up expenses guidance to $75 to $85 million, which implies operating expenses guidance of $440 to $470 million.

Combining these changes provides some resiliency to the low end of both the operating income guidance range, which is updated to $770 to $870 million, and the earnings per share guidance range, which is updated to $7.20 to $8. Net cash and capital expenses guidance remains unchanged. Turn to slide 10, I’ll summarize the key messages from today’s call. Demand continues to be robust, with 27.8 gigawatts of net bookings year-to-date, including 6.8 gigawatts of net bookings since our last earnings call, and an average ASP 30 cents for one, including India. And before the application adjusters were applicable, leading to a record contracted backlog of 81.8 gigawatts. Our continued focus on manufacturing technology excellence resulted in a record quarterly production of 3.2 gigawatts.

Our India manufacturing facility commenced production, and our Alabama, Louisiana, and Ohio manufacturing expansions remain on schedule. Financially, we’re on $2.50 per diluted share, and we ended the quarter with a gross balance of $1.8 billion, or $1.3 billion net of debt. We maintain fully-expensed 2023 revenue guidance, and raise the midpoint of our EPS guidance from $7.50 to $7.60. With that, we conclude our prepared remarks and open the call for questions. Operator?

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Philip Shen from Roth MKM. Please go ahead. Philip, your line is open.

Philip Shen: Hey, guys. Thanks for taking the questions, and congrats on the strong bookings at what appears to be strong pricing. Congrats on the strong bookings, that what appears to be strong pricing. Mark, can you talk through the pricing at $0.30 a watt that’s without India? And I think the prior quarter, there were some nuance around a contract with without freight. And so if you adjusted that where you typically include freight, was your prior pricing kind of closer to $0.31. So you guys are sitting close to $0.30 this quarter to maybe a bit of a drop, but really compared to the crystalline silicon price collapse. It looks like you’re holding price pretty well. And then looking ahead, I think you guys said you may be selective and strategic with bookings.

So should we expect things to slow down from here and maybe fewer bookings in general coming up in this full quarter here in Q4 and maybe in Q1 as well, especially since U.S. LPA module you have compliance module pricing has come down so much there? So just curious what you expect ahead there as well.

Mark Widmar: Yes. So from a branding standpoint, Bill, if you look at the bookings for this quarter, all the way out into 2029, so it’s totally weighted in actually 2029. And so we’re looking much further out in the horizon, which also kind of creates the dynamic of what is our base price and then what is the impact of the adders, which — as we indicated, the $0.30, excluding India does not include the adders and 70% of the volume includes adders, and there a horizon that especially for the benefit of temperature-coefficient long-term degradation rate that we’ll be in a much better position to capture those upsides. And as we indicated in the call, we’re starting our initial buy-in production already in Ohio. And so when you look at the impact to the average ASP, and if you were to include the benefit of the adders to and marry that up and align it to our technology road map, as I indicated in my prepared remarks, you’d add about $0.02 or so to ASPs. So when you look — when you make that adjustment, you compared to last quarter, you look at the period at which we’re booking out into, but I would say the pricing is pretty stable quarter-to-quarter.

And you’re right. Last quarter, we had a relatively large deal that did not include sales rate. So there was a little bit of an impact to the average ASP because of that. But I would say, largely, it’s pretty stable. We’re very pleased with our ability to go further out into the horizon and still get very attractive pricing in the backdrop of a lot of changes in the very dynamic environment over the last 60, 90 days. As it relates to the comment about being discipline, we are going to continue to be disciplined. We are still supply constrained and we have a road map that will get us to 25 gigawatts. We’re starting to see 27 fill up very nicely and starting to put more points on the board that go out 28, 29 and we touch 30 in some of the prior deals that we’ve done.

If we come to the terms with customers on what makes sense for us, not just on ASP, but security, overall in terms of conditions, provisions to the extent they’re applicable to domestic content, all that has to balance itself out into a deal that makes sense for us. And so look, that’s how we’re going to continue to engage them on market, and there’s — we’ll see how the market reacts and especially the further events of the horizon, there will probably be some pause to some of our customers not willing to commit yet to that horizon, but we’ll see how it plays out. But there’s — where they are now and maybe potentially decline slightly as we go across the next several quarters.

Operator: Your next question comes from the line of Julien Dumoulin-Smith from Bank of America. Please go ahead.

Alexander Vrabel: Hey, guys. It’s Alex on for Julian. Just a follow-up if I can to that, Mark. When you think about where you guys are booking, and I’ll say this like you guys used to be in the development game as well. So I think you obviously understand the lead times on these projects. I mean, how much is that mid- to late-stage compression, a function of just listen, there’s a lot of uncertainty as far as timing of interconnects, permitting, et cetera? And looking out in 2028, it’s sort of hard to say which projects will be first versus second versus third. Or is this more that the market is kind of getting back to some level of normalcy as far as supply and demand in modules and buyers are just electing to it? I guess sort of parse that for us relative to it just being really long dated as opposed to a sort of a shift in buyer sentiment or market conditions, if you will?

Mark Widmar: I don’t see it as a huge shift in our customers’ sentiment as they think about their realization against their development pipeline. Look, there are challenges as you indicated, permitting interconnection and what have you. But I think they all still are very bullish about ability to realize their contracted pipeline and secure off-take agreements. The issue, I think, is around when do you actually if we’re contracting for module deliveries in 2029, and we’re asking for security. Clearly, project is not in a condition at that point in time where they would be able to get financing put in place. So when you’re talking about corporate liquidity capacity that’s going to have to be used in order to provide the security, whether it’s a parent guarantee and LC or actual cash.

As you know, the project has to be much further along as it relates to financing debt and structure of tax equity before that liquidity is brought into the mix at the project level. So I think part of it is wanting to have the certainty of the delivery, but balancing that with capacity to — from a security standpoint that we’re requiring on our contracts, and it’s just a matter of finding a good balance that can work. Parent guarantees for certain entities can work, but we want to make sure they’re creditworthy parent guarantees and guarantees that those guarantees are issued against and that’s sometimes for some of our customers becomes a little bit more challenging. So you kind of got this balance of wanting certainty, wanting to engage, clearly want to partner with First Solar, and they also know that and we’re a loyal supplier to, especially our partners that have been with us for an extended period of time.

But then also balancing their near-term liquidity constraints to the extent that they have then when do they want to undertone contract. So I don’t see it so much of the sentiment to realization against the development pipeline. I just think it’s you’re going out to the horizon right now that people are maybe not as ready yet to commit capital and commit to the liquidity that we need to get comfortable with around security for module agreement.

Alexander Bradley: Two things I might note. One is, at the Analyst Day, we talked around the fact that we actually over-allocate in the near term. And we do that deliberately because we tend to see projects move out to the right that gives us some comfort. The other reason we do that is a lot of our recent bookings have been framework agreements with customers, whereby they don’t necessarily have a specific project allocating the modules they’re buying from us. They just know they’re going to need that total volume over a period of time. And those frameworks can be more challenging to plan for because there is often some flexibility in timing there. but also shows that customers and very long-dated bookings are willing to buy without necessarily loan exactly where the products go in because they value that certainty, and they know that over time, they’ll find a home for it.

So we’ve been seeing a lot more of behavior, which runs a little counter to your question, but we’re seeing people looking out at times and they don’t necessarily know exactly where it’s going, but they’re still willing to make that commitment because of the value I’m doing so. But as Mark said, the further we get out, the fact that we’re now looking out into 2028, ’29, it becomes part of people put meaningful deposits down and there’s just less visibility on the framework side. That’s why we talked about potentially seeing bookings slower.