First Solar, Inc. (NASDAQ:FSLR) Q4 2022 Earnings Call Transcript

First Solar, Inc. (NASDAQ:FSLR) Q4 2022 Earnings Call Transcript February 28, 2023

Operator: Good afternoon, everyone, and welcome to First Solar’s Fourth Quarter and Full Year 2022 Earnings Call. This call is being webcast live on the investors section of First Solar’s website at investor.firstsolar.com. 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: Thank you. Good afternoon, everyone, and thank you for joining us. Today, the company issued a press release announcing its fourth quarter and full year 2022 financial results as well as its guidance for 2023. 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 update, Alex will then discuss our financial results for the fourth quarter and full year 2022. Following these remarks, Mark will provide a business and strategy outlook. Alex will then discuss our financial guidance for 2023. Following their remarks, we will open the call for questions.

Please note, this call will include forward-looking statements that involve risks and uncertainties, including risks and uncertainties related to the Inflation Reduction Act of 2022 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: Thank you, Richard. Good afternoon, and thank you for joining us today. We began 2022 with the expectation that it would be challenging from an earnings perspective as we face unprecedented logistics and commodity costs. But we also expected it to be a year of transition, setting the stage for growth and profitability into 2023 and beyond. We entered this year in a significantly stronger commercial, operational and financial position with increased R&D investment, new domestic and international capacity coming online and a new Series 7 product. We also began the year with a record contracted backlog, a significant pipeline of bookings opportunity and a robust demand in our core markets. This momentum is driven by our points of differentiation, including a unique CadTel technology, vertically integrated manufacturing process, domestic production, strong balance sheet and commitment to responsible solar, placing us in a position to respond to emerging opportunities, particularly those enabled by the rapidly evolving policy environment.

This momentum is also due to the hard work, commitment and passion of our associates. Beginning on Slide 3, I will highlight some of our key 2022 accomplishments. From a commercial perspective, in 2022, we saw a precipitous shift towards long-term, multiyear module procurement. This record volume of multi-gigawatt deals spanning multiple years was driven by a combination of competitive pricing, competitive technology, agile contracting, shared values and trust in our ability to deliver the certainty that our customers are looking for. As a result, we had an excellent year from a bookings perspective, securing a record 48.3 gigawatts of net bookings in 2022. This was an increase of 30.8 gigawatts from our prior annual record of 17.5 gigawatts set in 2021.

Our total backlog of future deliveries as of today’s earnings call now stands at a record 67.7 gigawatts. Financially, while Alex will provide a more comprehensive overview of our 2022 financial results, our full year EPS results came in towards the high end of the guidance range we provided at the time of our third quarter earnings call. We ended the year with a gross cash of $2.6 billion, or $2.4 billion net of debt, which is an increase to gross and net cash of $800 million versus the prior year. This puts us in a position of strength to expand our capacity, invest in research and development and technology improvements and pursue our strategic opportunities. From a manufacturing perspective, we produced a record 9.1 gigawatts in 2022. Additionally, at the start of 2023, we achieved a significant milestone, producing our 50th gigawatts since commercial production began in 2002.

Average watts per module produced in 2022 increased to 462 watts, an increase of 14 watts, and we increased our top production bin from 465 watts in 2021 to 475 watts in 2022. We exited 2022 with 9.8 gigawatts of nameplate manufacturing capacity and, last month, commenced initial production at our next-generation Series 7 factory in Ohio, which will continue to ramp through 2023. We are also on track to complete the construction and commence the ramp of our Series 7 factory in India during 2023. Furthering our manufacturing expansion program, in 2022, we announced a new 3.5-gigawatt Series 7 factory in Alabama and a 0.9-gigawatt increase to nameplate capacity at our Ohio factories. By 2026, we expect U.S. nameplate capacity of approximately 10.7 gigawatts and global nameplate capacity of approximately 21.4 gigawatts.

We also announced in 2022 an additional investment and a dedicated $270 million research and development facility to be located near our existing Perrysburg manufacturing plant in Ohio. We expect that this investment will improve cycles of learning and innovation and reduce downtime on our commercial production lines, while allowing us to produce full-sized prototypes of both thin film and tandem PV modules. Strategically, we were able to largely exit our legacy systems business in 2022, which enables us to focus on our greatest technology and competitive advantages. Alex will discuss potential remaining legacy costs and opportunities related to this business when he provides guidance later in the call. Looking forward, we continue to evaluate the opportunities for further investments in incremental manufacturing capacity, including both greenfield expansion and throughput optimization at our currently planned capacity.

This evaluation will require, among other things, an understanding of the anticipated IRS and treasury IRA guidelines, including the respect to domestic content as well as confidence in the presence of robust supply chain that supports our expansion objectives. Therefore, no expansion decisions have been made at this time. Turning to Slide 4. I’ll next discuss our most recent shipments and bookings in greater detail. We shipped approximately 2.3 gigawatts and 9.3 gigawatts for the fourth quarter and full year 2022, respectively, which was within the guidance range that we provided during the third quarter earnings call. As a reminder, we generally define shipments as when the delivery process to a customer commences, whereas revenue recognition, or volumes sold, occurs at a transfer of control of the modules to the customer, which is commonly upon arrival at destination port or project site.

With regards to bookings, we have sustained our recent momentum with 12 gigawatts of net bookings since the third quarter earnings call at an average base ASP of $0.308 per watt. As previously noted, we are seeing a perceptible shift in procurement behavior as evidenced by the volume of multiyear, multi-gigawatt orders placed by our customers. Since the beginning of 2022, large developers such as Intersect Power, Lightsource BP, National Grid, Origis Energy, Savion, Silicon Ranch and Swift Current, among others, have placed orders for at least 2 gigawatts. The fact that many of these transactions are with repeat buyers is an indication of the trust and shared values that underpin our customer relations. And it is a clear differentiator from the most more transactional approach taken by many of our competitors.

Photo by Moritz Kindler on Unsplash

After accounting for shipments of approximately 2.3 gigawatts during the fourth quarter, our future expected shipments, which now extend into 2029, are 67.7 gigawatts. Excluding India, and including our year-to-date bookings, we are sold out through 2025. We have, in recent months, pivoted from negotiating solely for 2026 volume to work with customers who are looking to secure multiyear contracts over the remainder of the decade. As a result of this commercial shift, we have not, as previously expected, as of the third quarter earnings call, fully sold out of our non-India production in 2026. We have sold more volume than previously expected for deliveries in 2027 and beyond. In total, we now have 25.5 gigawatts of planned deliveries in 2026 and beyond, an increase of 12.3 gigawatts from our prior earnings call.

I’ll now turn the call over to Alex, who will discuss our Q4 and full year 2022 results.

Alex Bradley: Thanks, Mark. Starting on Slide 5, I’ll cover our financial results for the fourth quarter and full year 2022. Net sales in the fourth quarter were $1 billion, an increase of $0.4 billion compared to the prior quarter. Our module segment net sales were $846 million, an increase of $226 million from the prior period. The increase in module revenue is driven by higher volumes sold, partially offset by a slight reduction in ASPs. The remaining increase in our net sales was attributable to the completion of the sale of our Luz del Norte project in Chile. For the full year 2022, net sales were $2.6 billion compared to $2.9 billion in the prior year. This decrease was driven by $0.4 billion of lower revenue from our residual business operations due to the divestitures of our project development businesses in the United States and Japan, along with the divestitures of our North American and international O&M businesses.

The decrease in our Other segment revenue was partially offset by a $0.1 billion increase in our module segment revenue due to higher volumes of modules sold, partially offset by a reduction in ASPs. Gross margin was 6% in the fourth quarter compared to 3% in the third quarter, primarily due to lower module and freight costs, partially offset by a reduction in ASP. For the full year 2022, gross margin was 3% compared to 25% in the prior year. The full year gross margin was negatively impacted by reductions in module ASPs, the sale of certain projects in the prior year, higher sales rate and demurrage charges and the net impairment in sale of our Luz del Norte project, partially offset by lower module costs. Sales rate in logistics costs adversely impacted our financial results, reducing gross margin by 19 percentage points in 2022 compared with 11 percentage points in 2021 and 6 percentage points in 2020.

Given the recent decline in spot rates and the reversion of the shipping market towards pre-pandemic conditions, we expect sales rate and logistics charges to be less of a headwind in 2023. As a reminder, many of our module manufacturing peers report sales rate as a separate operating expense outside of gross margin. For comparison purposes, we encourage you to consider this factor when benchmarking our module gross margin percentage with our peers. SG&A, R&D and production start-up expenses totaled $107 million in the fourth quarter, an increase of approximately $11 million relative to the prior quarter. This increase was driven by a $13 million increase in production start-up expense, primarily related to the addition of our third factory in Ohio, which was partially offset by lower share-based compensation expense.

Our fourth quarter operating loss was $46 million, which included depreciation and amortization of $71 million, production start-up expense of $33 million and share-based compensation expense of $8 million. Our full year 2022 operating loss were $27 million, which included depreciation and amortization of $270 million, production start-up expense of $73 million, net losses of $48 million associated with the sale of our Luz del Norte project and share-based compensation expense of $29 million, partially offset by a $254 million net gain from the sale of certain businesses. With regard to other income and expense in connection with the sale of our Luz del Norte project in the fourth quarter, the project’s lenders agreed to forgive a portion of the outstanding loan balance, which resulted in a gain of $30 million recorded within other income.

Separately, interest income in the fourth quarter was $18 million, an increase of $8 million compared to the prior quarter. And interest income for the full year 2022 was $33 million and leases to $27 million compared to the prior quarter. Both increases were driven by higher interest rates on our cash and marketable securities balances. We recorded an income tax expense of $1 million in the fourth quarter. For the full year, we recorded tax expense of $53 million, primarily attributable to the sale of our Japan project development platform and due to certain losses in Chile for which no tax benefit could be recorded. Fourth quarter loss per diluted share was $0.07, compared to $0.46 in the prior quarter. For the full year 2022, loss per diluted share was $0.41, compared to earnings per diluted share of $4.38 in 2021.

Our 2022 EPS result came in above the mid-point of the guidance range that we provided during the third quarter earnings call. Let’s turn to Slide 6 to discuss select balance sheet items and summary cash flow information. The aggregate balance of our cash, cash equivalents, restricted cash, restricted cash equivalents and marketable securities was $2.6 billion at the end of the year, an increase of $0.7 billion from the prior quarter and $0.8 billion from the prior year. Our year-end net cash position, which includes the aforementioned balance less debt was $2.4 billion, an increase of $0.7 billion from the prior quarter and $0.8 billion from the prior year. The increases in our net cash balance were primarily driven by module segment operating cash flows, including higher advanced payments received for future module sales, partially offset by capital expenditures associated with our new plants under construction in the United States and India.

Cash flows from operations were $873 million in 2022, compared to $238 million in 2021. Capital expenditures were $327 million in the fourth quarter, compared to $223 million in the third quarter. Capital expenditures were $904 million in 2022, compared to $540 million in 2021. With that, I’ll turn the call back to Mark to provide a business and strategy update.

Mark Widmar: All right. Thank you, Alex. Looking forward to 2023, we are pleased to enter the year with solid fundamentals, including a record backlog of orders and a manufacturing capacity growth plan that is well underway. We are on track to add 6.2 gigawatts of global nameplate manufacturing capacity this year as our new Series 7 factories come online in the U.S. and India. We expect to exit 2023 with 16 gigawatts of annual nameplate capacity. We also expect 2023 to be a pivotal year as we build on the foundations established in 2022 to scale manufacturing, invest in R&D and evolve our technology and product road maps. In addition, we expect to begin benefiting from the advanced manufacturing production tax credits provided for under Section 45X of the Inflation Reduction Act.

We await IRS and Treasury guidance that we expect will reflect the statute’s language and intend to incentivize the domestic production of modules and the related components. Given our fully integrated thin film manufacturing process, we expect that this guidance will entitle us to integrated tax credits for wafers, cells and module assembly, which we estimate will equal approximately $0.17 per watt for modules produced in the United States and sold to a third-party. Finally, we expect to host an Analyst Day event at our manufacturing facility in Ohio later this year, on a date to be announced, to deliver an overview of our technology, product and manufacturing road maps as well as to highlight our newest Ohio factory. Turning to Slide 7. As previously noted, our new Series 7 factories remain on schedule.

The U.S. factory commenced initial production in January of 2023 and will continue to ramp over the remainder of 2023. Our India factory is forecast to begin production in the second half of 2023 and ramp into 2024. Once fully ramped, these factories are expected to lead the fleet in terms of module wattage and efficiency and regionally on a cost-per-watt basis. Based on our current technology road map, we see the potential for meaningful improvement in our module performance, with a mid-term goal of achieving a 570-watt monofacial Series 7 module. As we significantly increase our nameplate capacity, we believe this anticipated growth, when balanced with liquidity and profitability will drive earnings accretion as contribution margin expansion is leveraged against a largely fixed operating expense structure.

As a reflection of this expansion road map and continued optimization of the existing fleet, we have summarized our expected exit nameplate capacity in production for 2023 to 2026 on this slide. Turning to Slide 8. Our total bookings opportunities of 93.1 gigawatts remain robust with 58 gigawatts in mid to late-stage customer engagement. When combined with our current record backlog of 67.7 gigawatts, we believe we are well-positioned for growth with a solid foundation of demand visibility. As it relates to converting the pipeline into future bookings, our record bookings in 2022 were driven by the favorable balance of near to mid-term available supply, aligned with customer demand for large volume multi-year procurement. The time line into which we are now selling is longer-dated than historic U.S. sales cycles.

As a consequence, this could result in year-on-year reduction in bookings volume as we look to sell long-term forecasted supply in 2026 and beyond. Our commercial strategy remains largely focused on supporting long-term multi-year customers who prioritize price and product availability certainty as well as ethical and transparent supply chains. Furthermore, this demand environment supports the rationale of evaluating future capacity growth, subject to the aforementioned considerations related to expansion, including those related to IRA domestic content guidance and the assessment of our supply chain. Before turning the call back to Alex, I would like to take a brief moment to touch on the global policy environment. Broadly speaking, 2022 placed us on the cusp of significant growth in domestic solar manufacturing within our core markets.

As policymakers here in the United States and leading democracies abroad demonstrates, they are serious about tackling the unhealthy overconcentration of solar supply chains in China and the vulnerabilities that come with it. In fact, 2022 saw industrial policy designed to spur investment and create jobs at scale. The year saw a tangible progress in the U.S. with the passage of the Inflation Reduction Act in India with the production-linked incentive program and movement towards spurring domestic manufacturing within the European Union with the introduction of the Green Deal industrial plan. Furthermore, we’ve also seen a significant uptick in legislation focused on tackling the issue of forced labor with the passage of the Uyghur Forced Labor Prevention Act in the United States and similar laws and initiatives, either implemented or under consideration, in Europe, the United Kingdom Australia and Japan.

These significant recent and ongoing policy developments demonstrate that governments around the world are supportive of solar technologies that can be scaled in a sustainable manner for both people and the planet. I’ll now turn the call back over to Alex, who will discuss our financial outlook and provide 2023 guidance.

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Q&A Session

Alex Bradley: Thanks, Mark. Before discussing financial guidance, I’d like to reiterate our approach to growth and gross margin expansion. As discussed on our second quarter earnings call, this strategy includes our approach of contracting out our capacity several years in advance of production. The anticipated reduction of our cost per watt produced, the expected benefits from capacity expansion through scaling a largely fixed overhead structure in order to generate incremental contribution margin and our agile contracting approach would both provides the potential realization of incremental revenue and is expected to mitigate freight and certain commodity risks. As we look to 2023 guidance, we continue to see this approach benefiting our forecasted financial results relative to 2022.

For the full year, we expect to recognize an average ASP sold of $0.285 per watt, approximately $0.01 higher than in 2022. Looking across the horizon, as is showed in the 10-K filing, as of 31 December 2022, we had a total contracted backlog of 61.4 gigawatts with expected future revenue of $17.7 billion for a portfolio average base ASP of $0.288 per watt, before the application of potential adjusters. As it relates to cost award and our contracting approach and their impacts on both the potential value of the technology adjusters, which are reflected in the 10-K filing and our 2023 financial guidance, I’d like to provide a brief update on the timing of our technology and cost road maps. From a technology road map perspective, we continue to work to prove out both bifaciality and our copper replacement or cure program and are progressing well with both initiatives.

However, even if ready for high-volume manufacturing deployment, we expect to elect to push out implementation of these technologies across the majority of the fleet for two reasons. Firstly, technology implementations typically necessitate manufacturing downtime, both to make tooling and process changes and to conduct preproduction trials. And as we’re sold out through 2025 with limited ability to delay shipments, significant downtime would be suboptimal to executing on our delivery commitments. Secondly, we typically roll out technology improvements at our Perrysburg facilities and then, once fully optimized, across the remainder of the fleet. This leads to a potential for greater downtime in Perrysburg during initial rollout, which has the highest opportunity cost given the anticipated value of domestically produced modules, both from an IRA domestic content and Section 45X perspective.

Our new dedicated R&D facility, projected to be operational in mid-2024, is expected to alleviate the need for choosing between downtime and implementation by providing a means to optimize these technology improvements with significantly less disruption to our commercial manufacturing lines. With respect to the potential value of the adjusters related to potential future technology improvements, as reflected in the 10-K, the push out of these technology programs will result in a reduction in the supply of products with these technology improvements, leading to an expected reduction in technology adjusters, particularly in 2024 and early 2025. We have correspondingly reduced our estimate for these adjusters from $0.7 billion across 31.4 gigawatts in Q3 to $0.5 billion across 31.5 gigawatts in Q4.

From a cost reduction road map perspective, as it relates to cost per watt produced, we ended Q4 2022 5% lower than Q4 of the previous year, at the midpoint of our original forecasted production range of 4% to 6%. This was used to throughput, yield and efficiency improvements and reductions in variable costs, slightly offset by increases in fixed costs. We’ve been able to achieve a sustained cost per watt reduction road map over the last several years, having reduced our cost per watt produced by 18% from Q4 2019 to Q4 2022. On a full year 2022 to 2023 basis, we expect a 1% to 2% reduction in cost per watt produced, driven by improvements in throughput, yield, efficiency and inbound freight, partially offset by higher fixed costs and a headwind from the conversion of all production to high mechanical load modules in 2023 to optimize order fulfillment management and logistics.