First Solar, Inc. (NASDAQ:FSLR) Q1 2024 Earnings Call Transcript

First Solar, Inc. (NASDAQ:FSLR) Q1 2024 Earnings Call Transcript May 1, 2024

First Solar, Inc. beats earnings expectations. Reported EPS is $2.2, expectations were $1.99. First Solar, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, everyone, and welcome to First Solar’s First Quarter 2024 Earnings Call. This call is being webcast live on the Investors section of First Solar’s website at investor.firstsolar.com. [Operator Instructions] 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 first quarter 2024 financial results. A copy of the press release and associated presentation are available on our website at investor.firstsolar.com. With me today are Mark Widmar, Chief Executive Officer; and Alex Bradley, Chief Financial Officer. Mark will provide business, strategy and policy updates. Alex will discuss our bookings, pipeline, quarterly 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 include 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 Widmar: Good afternoon and thank you for joining us today. We are pleased with our start to 2024 with good operating performance, selective year-to-date bookings of 2.7 gigawatts with an ASP over $0.31 per watt, excluding adjusters or $0.327 per watt assuming the realization of technology adjusters, and solid financial performance. We’re also pleased with the developing foundations to enable our long-term goal of exiting this decade in a stronger position than we entered it. From increasing production of our most advantaged Series 7 module to expanding our manufacturing footprint, to the building of an R&D innovation center and perovskite development line that is expected to enable development of the next generation of disruptive solar technology, we are focused on the future of differentiation and sustainable growth.

But while we continue to play the long game, we must acknowledge the current environment in the solar manufacturing industry, which remains in a state of heightened volatility driven by intentional structural overcapacity in China. As we previously said, our ability to play this long game is a direct result of our differentiated technology and business model. From a technological perspective, the contrast is clear between our unique proprietary cadmium telluride semiconductor technology and highly commoditized crystalline silicon modules. This difference has become increasingly apparent in light of the recently announced disputes concerning alleged infringement of TOPCon cell technology and intellectual property rights, which cast out some numerous crystalline silicon producers having the freedom to legally manufacture and sell this technology.

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Q&A Session

From a business model and growth perspective, we are once again reminded of the value of our balanced approach to growth, liquidity and profitability. According to reporting, large Chinese solar companies have warned a potential quality and reliability issues as manufacturers cut corners and the impact of the current oversupply environment and associated financial stress on R&D and innovation. By contrast, we continue to invest. We are on track to commission our R&D innovation center and a perovskite development line in Ohio in the second half of this year, representing a combined investment of nearly $0.5 billion. And we continue to optimize our products for energy efficiency and cost. In the face of overcapacity, the average large Chinese solar manufacturing facility reportedly had a record-low capacity utilization rate of 23% in February of this year.

In contrast, supported by our large contracted backlog, our facilities were operating near nameplate capacity in the first quarter of this year. The Chinese solar industry has engaged in a race to the bottom with a rationally low market-distorting pricing that has caused even Chinese companies to call for intervention by the Chinese government to manage the pricing environment and send the financial hardship this is causing them. By contrast, we remain focused on a highly selective approach to forward contracting that provides optionality and healthy ASPs. We are not immune to the broader ramifications of the Chinese solar business model. However, we continue to focus on our points of differentiation, which aim to provide some resiliency in light of current industry challenges.

We’re also focused on policy and trade drivers that can encounter anticompetitive and abusive market behaviors. There should be no doubt, we invite competition and free trade. All we continue to seek is that the competition and trade are practiced on a fair and level playing field. We believe this approach will help us to drive growth, navigate industry volatility and deliver enduring shareholder value. On Slide 3, I will share some highlights from the first quarter. From a commercial perspective, we continued our selective approach to building backlog underpinned by our cumulatively oversold position through 2026. Since our last earnings call approximately 9 weeks ago, we have booked 854 megawatts with an ASP of $0.301 per watt, excluding adjusters where applicable.

This brings our year-to-date net bookings to 2.7 gigawatts with an average ASP of $0.313 per watt excluding adjusters or $0.327 per watt assuming the realization of technology adjusters. Our total contracted backlog now stands at 78.3 gigawatts with orders stretching through 2030. From a manufacturing perspective, we are pleased with our solid Q1 performance, including producing a record 3.6 gigawatts of modules as a result of our relentless focus on manufacturing excellence. From a technology perspective, we are pleased with our CuRe module field test and have completed the UL and IEC certification process. We continue to anticipate launching CuRe at our lead line factory in Ohio in Q4 of this year. In parallel to preparing for launch, we continue to make progress on technical solutions that could enable accelerating CuRe’s replication across our factories at a lower CapEx than assumed at our recent Analyst Day.

Now Alex will provide a comprehensive overview of our first quarter 2024 financial results. I would like to highlight our ability to deliver strong performance in a market challenged by Chinese oversupply, which, in our view, validates our approach to long-term forward contracting. This led to first quarter earnings per diluted share of $2.20 and a quarter end net cash balance of $1.4 billion. Moving to Slide 4. Our growth plans remain on track. The expansion of our Perrysburg, Ohio manufacturing footprint is expected to be completed, and commercial shipments are expected to begin before the end of the second quarter. Construction activity at our new facility in Alabama is complete, and the first tools are now being installed in preparation for the expected start of commercial shipments in the second half of this year.

Our new Louisiana facility is also on track with the start in commercial operations expected in late 2025. In Ashley, our India facility is continuing to ramp. And we’re proud that the first Indian-made Series 7 modules have been deployed in the field. We therefore expect to exit 2024 with over 21 gigawatts of global nameplate capacity and 2026 with over 25 gigawatts of nameplate capacity. All of this capacity is available to serve the U.S. market with over half of our capacity physically located in the U.S. Additionally, we are on track to commission the previously mentioned R&D projects in Ohio in the second half of this year, which will comprise a perovskite development line and a new R&D innovation center at our Perrysburg campus. The innovation center features a high-tech CadTel pilot line, which we expect will accelerate our development activities and bring capabilities for full-size prototyping of thin-film and tandem PV modules.

At our Analyst Day in September 2023, we talked about the need to create a disruptive, transformative technology platform that balances energy efficiency and costs. We believe that these investments in R&D will help accelerate our cycles of innovation, optimize our technology road map and reinforce our position of strength through technology leadership. I’ll now turn the call over to Alex to discuss our bookings, pipeline and financials.

Alex Bradley: Thanks, Mark. Moving on Slide 5. As of December 31, 2023, our contracted backlog totaled 78.3 gigawatts with an aggregate value of $23.3 billion. to March 31, 2024, we entered into an additional 2.7 gigawatts of contracts and recognized 2.7 gigawatts of volume sold, resulting in a total backlog of 78.3 gigawatts with an aggregate value of $23.4 billion, which implies an ASP of approximately $0.299 per watt excluding adjusters. As we previously stated, given our diminished available supply, the long-dated time frame into which we’re now selling, the need to align customer project visibility with our balanced approach to ASPs, payment security and other key contractual terms and uncertainty related to the policy environment and the upcoming U.S. election cycle, we expect to take advantage of our position of strength in our contracted backlog and be highly selective in our approach to new bookings this year.

We will continue to forward contract with customers who prioritize long-term relationships and appropriately value a point of differentiation. The substantial portion of our overall backlog includes the opportunity to increase the base ASP through the application of adjusters if we are able to realize achievements within our current technology road map as of the expected timing of delivery for the product. At the end of the first quarter, we had approximately 40.2 gigawatts of contracted volume with these adjusters, which if fully realized, could result in additional revenue of up to approximately $0.5 billion or approximately $0.01 per watt, the majority of which will be recognized between 2025 and 2027. This amount does not include potential adjustments, which are generally applicable to the total contracted backlog, both the ultimate module being delivered to the customer, which may adjust the ASP under the sales contract upward or downwards, and for increases in sales rate or applicable aluminum or steel commodity price changes.

As reflected on Slide 6, our total pipeline of potential bookings remained strong with bookings opportunities of 72.8 gigawatts, an increase of approximately 6.3 gigawatts in the previous quarter. Our mid- to late-stage bookings opportunities decreased by approximately 2.6 gigawatts to 29.4 gigawatts and now includes 25.8 gigawatts in North America and 3.3 gigawatts in India. Included within our mid- to late-stage pipeline are 3.7 gigawatts of opportunities that are connected subject to conditions, which includes 1 gigawatt in India. As a reminder, signed contracts in India will not be recognized as bookings until we have received full security against the offtake. We’re seeing meaningful increases in demand expectations driven in part by data center load growth.

According to McKinsey, U.S. data center power consumption is expected to reach 35 gigawatts annually by 2030, and much of this growth is supplied by renewable energy given that hyperscalers like Apple, Google, Meta and Microsoft are committed to 24/7 use of carbon-free energy. We believe that First Solar is strongly positioned to supply this emerging sector given our advantaged technology and more sustainable product. Slide 7, I’ll cover our financial results for the first quarter. Net sales in the first quarter were $794 million, a decrease of $365 million compared to the fourth quarter. Decrease in net sales was driven by an expected historical seasonal reduction in the Q1 volume of modules sold. Gross margin was 44% in the first quarter compared to 43% in the fourth quarter of 2023.

This increase was primarily driven by a higher mix of modules sold from our U.S. factories, which qualify for Section 45X tax credits, partially offset by higher warehousing and logistics costs in India and the U.S. SG&A, R&D and production start-up expenses totaled $104 million in the first quarter, a decrease of approximately $7 million compared to the prior quarter. This decrease was primarily due to lower professional fees as we incurred certain costs to facilitate the sale of our 2023 Section 45X credits during the prior quarter, lower incentive compensation and the receipt of an R&D granted our factories in Ohio. These reductions were partially offset by higher production start-up expenses for our Alabama factory and Ohio manufacturing footprint expansions as well as the reversal of certain credit losses in the prior quarter due to improved collections for our accounts receivables.

Our first quarter operating income was $243 million, which included depreciation, amortization and accretion of $91 million, ramp costs of $12 million, production start-up expense of $15 million and share-based compensation expense of $7 million. The increase in other income expense was primarily driven by the prior quarter impairment of our strategic investment in CubicPV. We recorded tax expense of $19 million in the first quarter compared to $27 million in the fourth quarter. The decrease in tax expense was largely driven by excess tax benefits associated with share-based compensation awards and lower pretax income. Combination of the aforementioned items led to first quarter earnings per diluted share of $2.20. Next, turn to Slide 8 to discuss the next balance sheet items and summary cash flow information.

Our cash, cash equivalents, restricted cash, restricted cash equivalents and marketable securities ended the quarter at $2 billion compared to $2.1 billion at the end of the prior quarter. This decrease was primarily attributable to capital expenditures associated with our new U.S. factories in Alabama and Louisiana and our Ohio capacity expansion, partially offset by operating cash flows from our module segment. Total debt at the end of the first quarter was $620 million, an increase of $60 million from the fourth quarter as a result of additional working capital facilities to support the ramp of our new India plant. Our net cash position decreased by approximately $0.2 billion to $1.4 billion as a result of the aforementioned factors. Cash flows from operations were $268 million in the first quarter.

Capital expenditures were $413 million during the period. Continuing on Slide 9. Our full year 2024 volumes sold and P&L guidance is unchanged from our previous earnings and guidance call in late February. We’re increasing our capital expenditures forecast by $0.1 billion with the intention of accelerating the CuRe conversion at our Vietnam facilities as well as at our third Perrysburg facility and with a view to advancing global fleet replication by more than 1 year from our assumptions at our recent Analyst Day, which could drive incremental upside to the current estimate of additional revenue realizable through technology adjusters referenced earlier in the call. Our year-end 2024 net cash balance guidance range has been revised due to 4 factors: our selective accommodation of customer schedule shift requests, potential sale by a customer of a U.S. project development portfolio, our strategic approach to new bookings, and higher CapEx. Firstly, as noted on our previous call, we have seen some requests from customers to shift delivery volume timing out as a function of project development delays.

We continue to work with our customers to optimize delivery schedules for their contracted volumes to the extent we are able to accommodate. Secondly, consistent with the reports that some energy project developers are coming under investor pressure to pursue returns commensurate with those currently prevalent in fossil project development, who may therefore be examining their renewable procurement positions, we have indications that a customer is expecting to sell their U.S. solar development portfolio. And we understand that the potential purchase of these assets, they first sold a customer with an existing module framework agreement. We expect that the development time lines for the projects within this portfolio will be delayed, including as a result of the sales process, pushing construction schedules out of 2024.

Because the potential pursue of these assets in an existing customer with a framework agreement covering the revised construction schedules and a portion of our backlog the selling customer is among unlimited contracts with a termination for convenience rights, we expect that this right will be exercised in connection with this portfolio sale. As discussed on previous earnings calls, if this termination for convenience right is exercised, we will be owed a termination payment. We’d look to reallocate or resell these modules. Between selectively accommodating customer timing optimization requests and the expected termination for convenience by the aforementioned portfolio selling developer customer, we now expect a greater concentration of the shipments and sold volume in the second half of the year to be in Q4 versus Q3.

As a result of this back ending of deliveries, we expect the timing of some cash collection previously assumed in Q4 2024 to now occur in Q1 of 2025. Thirdly, relating to the revision of our year-end 2024 net cash balance guidance range, as a function of our highly selective approach to bookings, we’re forecasting a reduction in assumed cash deposits associated with new bookings in 2024. And fourthly, as previously mentioned, we’re forecasting higher CapEx associated with our intention to accelerate CuRe conversion at our Vietnam and our third Perrysburg facilities. So taken together, the combination of higher year-end accounts receivable balance due to accommodating customer timing optimization requests, the expanded termination for convenience by the aforementioned portfolio selling developer customer and reduced deposits from new bookings due to our highly selective approach to bookings as well as the increased CapEx due to the CuRe conversion in Vietnam and Perrysburg, results in an updated year-end 2024 net cash balance guide of $600 million to $900 million.

From an earnings cadence perspective, we expect our net sales and cost-of-sale profile, excluding the benefit of Section 45X tax credit, to be approximately 35% to 40% in the first half of the year and 60% to 65% in the second half of the year. We forecast Section 45X tax credits of approximately $400 million in the first half of the year, approximately $620 million in the second half of the year, then operating expense profile roughly evenly split across the year. This results in a forecasted earnings per diluted share profile of approximately 35% to 40% in the first half of the year and 60% to 65% in the second half of the year. Now, I hand the call back to Mark to provide an update on policy.

Mark Widmar: Turning to Slide 10. As we stated in the past, we believe the Inflation Reduction Act represents America’s first durable solar industrial strategy and if implemented with the whole of government commitment to onshoring, together with strong and consistent enforcement of trade laws, it also has the potential to dismantle China’s dominated influence over solar manufacturing value chain. Quite simply, the IRA paves a viable pathway for the U.S. to secure supply of critical clean energy technologies, enabling America’s energy independence while capturing the value of our economy and creating well-paying enduring jobs. At the same time and also as previously stated, while we are not the only American solar manufacturer to come in existence at the end of the last century, the grim reality is that as a consequence of China’s strategic objective to dominate the solar industry, we’re the only one at scale to remain today.

For the IRA to achieve one of its intended purposes, which is to spur U.S. manufacturing to the scale required to support the country’s energy independence and climate goals, we must ensure that more companies that are aligned with the U.S. ambitions and are committed to fair competition and innovation can scale, compete and prosper. The purpose of the IRA will not be achieved under current unsustainable market conditions. The relentlessness of the Chinese subsidization and dumping strategy have caused a significant collapse in cell and module pricing and threatens the viability of many manufacturers who may never be able to get off the ground or have the ability to finance and start up the growth of their operations. Given this unfortunate reality, together with our role as a market leader in the Western Hemisphere’s largest solar module manufacturer, we have joined an alliance of 7 solar manufacturing companies, comprising the American Alliance for Solar Manufacturing Committee, which last week filed a set of antidumping and countervailing petitions with the U.S. International Trade Commission and U.S. Department of Commerce to investigate unfair trade practices from factories in 4 belt and road initiative countries in Southeast Asia, Cambodia, Malaysia, Thailand and Vietnam, that are injuring the U.S. solar industry.

This action takes place against the backdrop of growing momentum on the part of current U.S. administration to broadly address structural overcapacity across a range of industries in China. The administration’s leadership in tackling this wide-ranging issue is remarkable. And in the past few weeks, we have heard senior members of the administration, including Treasury Secretary, Janet Yellen; and White House Climate Adviser, John Podesta, state in no uncertain terms that the President intends to act to level the playing field for American manufacturing. We welcome the actions focused on solar supply chains, including the reported potential withdrawal of the Section 201 bifacial exemption and the pending expiration on the moratorium on tariffs related to and in circumvention findings.

These are clear actions that deliver on the President’s intent. The context of our decision to support the petition starts with China’s role in the global solar market. That country’s long history of egregious subsidies, dumping of modules at prices believed to be below their cost, creation of structural overcapacity, engagement and circumvention of measures designed to address these factors and other unfair trade practices have intentionally distorted markets around the globe, causing a significant decline in solar prices and denying international competitors access to a level playing field. As Secretary Yellen herself has recently said, “China’s overcapacity distorts global prices and production patterns hurts American firms and workers.” China ended 2023 with more than twice the solar manufacturing capacity that was deployed worldwide last year, had record-low factory capacity utilization rates in the first quarter of 2024 and despite these market-distorting factors, is still expected to add 500 to 600 gigawatts of new capacity this year with China expected to exit 2024 with sufficient capacity to meet global demand through 2032.

It appears that the overcapacity is not a miscalculation but an intentional feature of the Chinese government strategy to dominate clean energy supply chains. Notably, the 4 Southeast Asian countries in question account for 75% of U.S. solar imports in 2023 and were responsible for an approximately 140% increase in exports to the U.S. in the 18 months following the passage of the IRA compared to the 18 months preceding August of 2022. While the current environment, if allowed to persist, will provide a short-term pricing benefit to developers, allowing these practices to continue denies non-Chinese solar manufacturers the opportunities to scale and compete on a level playing field while multiplying installers and developers exposure to the risk of over-concentrated supply chains.