First Solar Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 31, 2023

There are 11 speakers on the call.

Operator

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 Investors section of First Solar's website at investor. Firstsolar.com. At this time, all participants are in a listen only mode. Investor.

Operator

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. Investor. Richard, you may begin.

Speaker 1

Good afternoon and thank you for joining us. Today, the company issued a press release announcing its Q3 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.

Speaker 1

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 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 Boudmore, Chief Executive Officer.

Speaker 2

All right. Thank you, Richard. Good afternoon and thank you for joining us today. At our recent Analyst Day in September, we outlined our goal to exit this decade in a stronger position than we entered it. We believe the future belongs to Thinfilm, and we describe our long term intent to be positioned to serve all addressable markets Investor Relations and Socially Responsible Way.

Speaker 2

This long term aspiration aligns with our nearer term growth, manufacturing excellence, a uniquely advantaged technology platform and crucially a balanced business model focused on delivering value to our customers Investors and our shareholders.

Speaker 3

Since our last earnings call,

Speaker 2

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. Glenn, beginning on Slide 3, we will continue to build on our backlog with 6.8 gigawatts of net bookings since our last earnings call at an ASP of $0.30 per watt, excluding India. This base ASP Excludes adjusters applicable to approximately 70% of these bookings, which when applied with our aligned with our technology roadmap, Investor Day. These bookings bring our year to date net bookings to 27.8 Gigawatts on our total backlog to 81.8 Gigawatts.

Speaker 2

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 produced 2.5 gigawatts of Series 6 modules in the Q3 with an average watts per module of 469, top in class of 4.75 and manufacturing yield of 98%. Our 3rd Ohio factory, Which establishes the template for high Boeing Series 7 manufacturing continues to ramp, demonstrating the manufacturing production capability

Speaker 3

of up

Speaker 2

to 15,000 notches per day, which is approximately 97% 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 1 gigawatt. As noted on our Analyst Day, The factory recently demonstrated a top module wattage produced of 5 50 watts as part of a limited production run.

Speaker 2

While still undergoing commercial qualification testing, this implies a record CATL production module efficiency of 19.7%. Our India plant started production in Q3 and is continuing to ramp, recently demonstrating a manufacturing production capability Factory produced a total of 154 Megawatts in Q3 and recently demonstrated the top module wattage produced of 5 35 watts. In terms of technology, our Series 6 plus bifacial modules completed rigorous build and laboratory testing. The technology features an innovative transparent back contact, pioneered by First Solar's research and development team, Upon successful demonstration of operational metrics in high volume manufacturing, such as yield and throughput, We plan to convert more plants in the future, which will enable us to capture incremental ASP through our existing contractual adjusters. Turning to Slide 4.

Speaker 2

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 Investor Relations of India Standard Certification from the Indian government, which is expected by year end. In September, we mobilized our new Louisiana manufacturing facility, our 5th 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 operations at the end of 2025.

Speaker 2

When completed, we expect $1,100,000,000 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 modules. Meanwhile, we continue to make steady progress on the construction of our new Alabama facility, which is projected to commence operation in the first half of twenty twenty four. Additionally, our new R and D Innovation Center Investor Relations and our first Perovskite development line announced at Analyst Day are also on track, representing an expected combined investment of 450,000,000 The Perovskite development line and R and D Center are expected to commence operation in the first half of twenty twenty four 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.

Speaker 2

S, We recently expanded our agreement with Vitro Architectural Glass, which is investing in upgrading existing facilities in the United States Investor Relations. The expanded capacity commitment from vitro to First Solar is expected Investor Relations segment to commence production in the Q1 of 2026. Today, First Solar is one of the largest consumers of float glass in the United States. As PV manufacturing continues to scale in the U. S.

Speaker 2

And the 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 derisk our supply chain with strategic localization. ALCO only uses American made steel, Our Hyatt facility also served by 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.

Speaker 2

In the United States, with regards to the Inflation Reduction Act, We continue to waive 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 Investor Relations reports 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 We are appreciative of the work done by the Biden administration to provide solid legislative foundation for domestic solar manufacturing.

Speaker 2

The RA 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 Investor Relations section of the agenda. Beyond the IRA, we are also aware of new antidumping and countervailing duty petitions filed against importers of aluminum extrusions from 15 countries. Consistent with our views on fair trade Investor Relations and the importance of confirming with rules governing trade issues. We will comply with any request for information Investor Relations and the International Trade Commission, while we work to understand the potential implications. Moving abroad, we remain engaged with policymakers across Europe as the block attempts to tackle serious challenges investment in the U.

Speaker 2

S.

Speaker 3

And China. For example,

Speaker 2

Chinese module 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 pumping behavior driven by overcapacity in the Chinese crystalline silicon industry that has decimated international competition investment for the past decade, represents a serious threat to non Chinese manufacturer and to ambitions of diversifying solar supply chains investment in China. It also represents a policy threat potentially undermining the political investor's willingness to deliver the comprehensive trade and industrial legislative solutions necessary to both level the playing field Incentivized Domestic Manufacturers. We continue to advocate for comprehensive legislation to safeguard any domestic manufacturing ambitions. Our view is that industrial policy related to 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.

Speaker 2

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 quarter results. Thanks,

Speaker 3

Mark. Beginning on Slide 5, as of December 31, 2022, our contracted backlog totaled 61.4 gigawatts With an aggregate value of $17,700,000,000 For September 30, 2023, we entered into an additional 23.6 gigawatts of contracts Recognize 7.4 gigawatts of volume sold, resulting in a total contracted backlog of 77.6 gigawatts aggregate value of $23,000,000,000 which equates to approximately $0.296 per watt. Since the end of the Q3 to date, we've entered into an additional 4.3 gigawatts of contracts attributed to our record total backlog of 81.8 gigawatts. Including our backlog since the previous earnings call, our contracts approximately 1 gigawatt or more with returning customer long road energy 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 moves these volumes from the contracted subject Conditions precedent grouping within our future opportunities pipeline to our bookings backlog.

Speaker 3

As noted at Analyst Day, While the ASPs associated with these India bookings are lower than those associated with the 6.6 gigawatts of U. S. Bookings in the prior earnings call, Gross margin profile excluding the 45.5x benefit is comparable to the fleet average given the lower production costs at our Chennai facility. Since the announcement of the IRA, we have amended certain existing contracts to provide U. S.

Speaker 3

Manufactured products as As well as the supply domestically produced Series 7 module in place of Series 6. Consequently, over the past 5 quarters to the end of Q3 2023 Approximately 11 gigawatts, we've increased our contracted revenue by approximately $354,000,000 an increase of $42,000,000 from the prior earnings call. As we previously addressed, substantial portion of our overall backlog includes the opportunity to increase base ASP through the application of Adjusters If we're not able to realize achievements within our technology roadmap, as of the required timing of delivery of the product. As of the end of the Q3, we had approximately 40.3 gigawatts of contracted volume with these adjusters, which if fully realized could result in additional revenue up to approximately $400,000,000 or approximately $0.01 majority of which we recognize between 20252027. 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 sale increases in sales rate more applicable aluminum or steel commodity price changes.

Speaker 3

Our contracted backlog extends into 2,030 Excluding India, we are sold out through 2026. Now, total approximately 1.5 gigawatts of production from our India facility As requested on Slide 6, our pipeline of potential bookings remains robust. Total bookings off choose of 65.9 gigawatts, decreased approximately 12.4 gigawatts as the previous quarter. Our mid to late stage opportunities decreased by approximately 16 gigawatts to 32.5 gigawatts It 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, Q3 results both are converting certain opportunities to bookings As we previously stated, given this diminished available supply, long dated time frame into which we are now selling and aligning customer project visibility with our balanced approach to ASPs, deal security and other key contractual terms.

Speaker 3

We would expect to see a reduction on new booking volume in upcoming quarters. We will continue to forward contract with customers who prioritize long term relationships and value our differentiation. 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 precedent, which includes 1.7 gigawatts in India. Given the shorter time frame between contracting and product delivery in India relative to other markets, we would not expect to say multiyear contract commitments that we're currently seeing in the U.

Speaker 3

S. As a reminder, signed contracts in India will not be recognized as bookings until we have received full security against the uptick. On Slide 7, I'll cover our financial results for the Q3. Net sales in the Q3 were $801,000,000 decrease of $10,000,000 compared to the Q2. Decrease in net sales were 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.

Speaker 3

Gross margin was 47% in the 3rd quarter compared to 38% in the 2nd quarter. This increase was primarily driven by higher module ASPs, lower sales rate costs, the higher volumes of modules produced sold in the U. S. Resulting in additional credits from the inflation reduction end. Previously mentioned based on our differentiated vertically integrated manufacturing model, the current full facts of our modules, Expect to qualify for an IRR credit of approximately $0.17 per watt for each module produced in the U.

Speaker 3

S. And sold to a third party, Which is recognized as a reduction to cost of sales in the period of sale. During the Q3, we recognized $205,000,000 of such credits to $155,000,000 in the 2nd quarter. We encourage you to review the Safe Harbor statements contained in today's press release and presentation, The risks related to our receiving full amount of the benefits we believe we are entitled to under the IRA. Reduction in our sales rate costs during the quarter affected improved ocean land rates along with a beneficial domestic versus international mix of volume sold.

Speaker 3

Lower sales rate costs reduced gross margin by 7 percentage points during the Q3 and led 8 percentage points in 2nd quarter. Rampant of utilization costs, which include costs associated with operating a new factory below its target utilization and performance levels, $25,000,000 during the Q3 compared to $29,000,000 in the Q2. RAP costs reduced gross margin by 3 percentage points Investor Relations during the Q3 compared to 4 percentage points during the Q2. Our year to date ramp costs are primarily attributable to our Series 7 factory in Ohio, SG and A and R and D expenses totaled CAD 91,000,000 in the 3rd quarter, an increase of CAD 8,000,000 compared to the 2nd quarter. This increase is primarily driven by expected Credit losses associated with our higher accounts receivable balance, additional investments in our R and D capabilities, costs relating to the implementation and support of our new Investor Relations.

Speaker 3

Production staff expense, which is included in operating expenses, was $12,000,000 in the 3rd quarter, decrease of approximately CAD11 1,000,000 compared to the 2nd quarter. This decrease is attributable to the start of production in our factory in India, Partially offset by certain startup activities for our new Series 7 factory in Alabama. Our 3rd quarter operating results did not include any significant non module However, the year to date operating loss impact from the legacy systems business related activities remains at approximately 22,000,000 Our 3rd quarter operating income was $273,000,000 which includes depreciation, amortization and accretion of 78,000,000 ramp cost of $25,000,000 production start expense of $12,000,000 and share based compensation expense of 8,000,000 We recorded tax expense of $22,000,000 in the 3rd quarter, better tax expense of $18,000,000 in the 2nd quarter, primarily driven by higher pretax income. Combination of the aforementioned items set to a 3rd quarter diluted earnings per share of $2.50 compared to $1.59 in the 2nd quarter. Next, turn to Slide 8 to discuss the ex balance sheet items and so many cash flow information.

Speaker 3

Our cash, cash equivalents, restricted cash, investor's equity and cash equivalents and marketable securities ended the quarter at $1,800,000,000 compared to $1,900,000,000 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 a higher accounts receivable balance, Partially offset by advanced payments received from future module sales. Total debt at the end of the Q3 was CAD499 1,000,000, an increase of CAD62 2,000,000 in the 2nd quarter, the result of the final loan drawdown of the credit facility for our factory in India. Our net cash position decreased by approximately $200,000,000 to $1,300,000,000 as a result of the aforementioned factors. Cash flows from operations were $165,000,000 in the 3rd quarter.

Speaker 3

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 is offshore, while the majority of our forecasted future CapEx spend We continue to evaluate options to ultimately balance this expected temporary jurisdictional cash imbalance, which includes cash repatriation, use of our existing undrawn revolver credit facility or other sources of capital. Whilst we expect our $1,000,000,000 of revolver capacity to provide sufficient liquidity, We continue to evaluate other options to optimize cost of capital for any branch financing. On Slide 9, turning to our guidance update. Our volumes sold and net sales guidance remains unchanged.

Speaker 3

Within gross margin, we are reducing the high end of our forecasted ramp under the utilization expenses by $10,000,000 between $110,000,000 $120,000,000 And narrowing the range of our Section 45X tax credit guidance by $10,000,000,000 both the low and high end between $670,000,000 $700,000,000 Given the size, these combined changes do not impact our guided gross margin range of 1,200,000,000 to 1,300,000,000 We've reduced our production start up expenses guidance to $75,000,000 to $85,000,000 which implies operating expenses guidance of $440,000,000 to 4.70 Combined these changes provide some resiliency to the low end of both the operating income guidance range, which is updated to $770,000,000 to $870,000,000 And the earnings per share guidance range, which is updated to $7.20 to $8 Net cash and capital expenses guidance remains unchanged. So Slide 10, I'll summarize the key messages from today's call. Demand continues to be robust 27.8 gigawatts of net bookings year to date, including 6.8 gigawatts of net bookings with our last earnings call At an average ASP, dollars 0.30 per watt, including India. And before the application, adjusted were applicable, leading to a record contracted backlog 81.8 Gigawatts. Our continued focus on manufacturing and technology excellence resulted in a record quarterly production of 3.2 Gigawatts.

Speaker 3

India manufacturing facility commenced production and our Alabama, Louisiana and Ohio manufacturing expansions remain on schedule. Actually, we're on $2.50 diluted share and we ended the quarter with a growth balance of $1,800,000,000 or $1,300,000,000 net debt. We maintained full year 2023 revenue guidance and raised the midpoint of our EPS guidance from $7.15 to 7.60

Operator

Investor Relations. Your first question comes from the line of Philip Shen from ROTH MKM. Please go ahead.

Speaker 4

Congrats on the strong bookings at 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 was 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 staying close to $0.30 this quarter, so 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.

Speaker 4

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

Speaker 2

Yes. So from a branding standpoint, Bill, and if you look at the bookings for this quarter all the way up into 2020 9, so it's heavily weighted in actually in 2029. Until you book it much further out in the horizon, Which also kind of creates this dynamic of what is our base price and then what are the impact of the adders, which as we indicated, the $0.30 Including India does not include the Adders and 70% of the volume includes Adders and there are a horizon that especially for benefits of temperature coefficient and long term degradation rate that will be in a much better position to capture those upsides. And as we indicated in the call, We're starting our initial buyback production already in Ohio. And so when you look at the impact to the average ASP If you were to include the benefit of the adders to and marry that up and align it to our technology roadmap as I indicated in my prepared remarks, You'd add about $0.02 or so to the ASP.

Speaker 2

So when you look when you make that adjustment, you compare to last quarter, You look at the period in which we're booking out into, what I would say is the pricing was pretty stable quarter to quarter. And you're right, last quarter, we had a relatively large Deal that did not include sales rates. 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 very dynamic environment over the last 60, 90 days.

Speaker 2

As it relates to the comment about being disciplined,

Speaker 3

We are going to

Speaker 2

continue to be disciplined. We are still supply constrained. We have a roadmap 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 touched 30 So the prior deals that we've done. If we come to terms with customers on what makes sense for us, not just on ASP, but Security, overall terms and condition, provisions except that are applicable to domestic content.

Speaker 2

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 We'll see how the market reacts and especially the further you walk into the horizon. There'll probably be some Pause as some of our customers not wanting to commit yet to that horizon, but we'll see how it plays out. But there's potential we would see bookings to stabilize where they are now and maybe potentially decline slightly as we'll cross the next several quarters.

Operator

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

Speaker 5

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 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.

Speaker 5

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, etcetera. And looking out in 2028, it's sort of hard to say which projects will be 1st versus 2nd versus 3rd or is this more that the market is kind of getting back to some level of normalcy as far as supply and demand of modules and buyers are just I

Operator

guess sort of

Speaker 5

parse that for us relative to it just being really long dated as opposed to a sort of

Speaker 2

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's our challenges, as you indicated, permitting, interconnection and what have you. But I think they all still are very bullish about ability to realize their contract pipeline and secure off agreements. The issue I think is around when do you actually first off, if we're contracting for module Deliveries in 20 8, 29, 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.

Speaker 2

So you're talking about corporate Liquidity capacity that's going to have to be used in order to provide the security, whether it's parent guarantee, NLC or Actual cash. As you know, the project has to be much further along as it relates to financing investment. Debt and structuring 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 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 at first certain entities Can work, but we want to make sure the creditworthy guarantees of the entities that those guarantees are issued against and that's Sometimes for some of our customers becomes a little bit more challenging.

Speaker 2

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 They have them and when do they want to enter into the 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 horizon right now that people are maybe not as Ready yet to commit capital and commit the liquidity that we need to get comfortable with around security for the

Speaker 3

module agreement. Two things I might note. One is at the Analyst Day, we talked around the fact that we actually over allocate 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 investor.

Speaker 3

Customers whereby they don't necessarily have a specific project allocating those 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 and timing there. It also shows that customers in very long dated bookings are willing to buy without necessarily knowing 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 that behavior, which runs a little counter to your question, I think.

Speaker 3

But We're seeing people booking out at times where they don't necessarily know exactly where it's going, but they're still willing to make that commitment because of the value for them doing so. But as Mark said, the further we get out, the fact that we're now booking out into 2028, 'twenty 9, it becomes harder people put meaningful deposits down and there's just less

Operator

Your next question comes from the line of Brian Lee from Goldman Sachs. Please go ahead.

Speaker 6

Hi, thanks for taking the questions. This is Grace on for Brian. I guess, my question on competition. So one of your Crystal Line Cell Compute has recently announced a 5 gigawatt cell expansion. I think it's the first sign of vertical integration from China in the U.

Speaker 6

S, I think the CapEx was like about $1,000,000,000 for that 5 gigawatt or so. So the CapEx is lower, but can you speak to your understanding of the cost structure for overseas peer in building manufacturing in the U. S. And how your Series 7s compare? Thanks.

Speaker 2

Sure. So there's a lot out there. Yes, there's an announcement that was made recently this week. Our competitors that will be putting sales in the U. S.

Speaker 2

And look, there are others that are doing sales in the U. S. Myburger has made equipment to do Sales in the U. S, hand on Q Cells is doing sales in the U. S.

Speaker 2

But not alone from that standpoint. But one thing I want to make sure is clear, and you said vertically integrated. It's not vertically integrated All the way through to the polysilicon. So yes, it's a module assembly with cell manufacturing. The wafers still are not manufactured in the U.

Speaker 2

S, the ingots obviously not in the U. S. Nor is the Certainty where exactly where the polysilicon is coming from. It could be from the U. S.

Speaker 2

Manufacturer or potentially Europe or Korean, I guess. So it's not an apples to apples comparison. What I'll say is that if you look at the announcement that they made, About $800,000,000 for the cell and a few $100,000,000 $200,000,000 $300,000,000 for the module, which is Pretty comparable to our fully vertically integrated. So they're about $1,100,000,000 But the What I think is maybe the most telling number to look at from a competitive standpoint is the headcount. I think it's 4 gigawatts or 5 gigawatts, it's 2,700 PET for just cell and module.

Speaker 2

We are on a roadmap that will be 14 gigawatts Fully vertically integrated. So think about that from the production of the polysilicon all the way forward. And our entire headcount for 14 gigawatts in the U. S. Will be comparable to that 2,700.

Speaker 2

So on a headcount basis, we're about they're about 2.5x higher investment on a headcount basis than we are. That adds about $0.02 to $0.025 on a cost per watt basis using kind of U. S. Labor rates. So I think that's one thing for sure that will create a much higher cost profile for that manufacturer in the U.

Speaker 2

S. The other is they don't have a local supply chain. As we indicated in our call, we have localized our supply chain. We have In front of that game, so our glass is here in the U. S.

Speaker 2

As we indicated, our back rails on Series 7 are here in the U. S. The 10 components or so that are identified through the domestic content from the underneath the IRA, all of our components for our Series 7 product will be That factory will most likely have 1, at least 1 major component. Glass is not going to be available in the U. S.

Speaker 2

There are no hand glass manufacturers today in the U. S. It could happen, but it would be much more expensive It would be to source from Southeast Asia or China. But then they have to pay the freight and it's expensive to ship which is heavy for Southeast Asia or China into the U. S.

Speaker 2

They're also going to have some attention to deal with duties. But different than the comments that we made On our prepared remarks, there are duties now that are being considered for extruded aluminum and there is potential that it could be applicable to the frame. Our Series 7 product as an example does not use long loaded steel and it's domestically sourced, so it doesn't have that type of exposure. So I am very confident and this is one of the things that we've said before is that all we want is a level playing field that we all compete on the same basis And under the same policy environment. As long as we have that, I have no doubt that we are materially cost advantaged We feel like we're in a position of strength.

Speaker 2

We believe that we have a key point of appreciation around our manufacturing excellence, And we're more than happy to compete with anyone who would choose to manufacture in the U. S. And we welcome it. We believe the IRA in order to be successful is to create A diversified supply chain with many different types of technology, crystalline silicon, dense films, whether it's Cattell or eventually perovskites or others. We need that.

Speaker 2

If we want to ensure long term energy independence and security and for the U. S. To become a technology leader,

Operator

Your next question comes from the line of Joseph Osha from Guggenheim Partners. Please go ahead.

Speaker 7

Thank you and hello everyone. Happy Halloween. Following on the previous question, assuming that most of what we see in the U. S. Is going to be Module sourced with domestic cell, but almost certainly overseas wafer and poly.

Speaker 7

Based on what you see right now, Can you see those suppliers managing to meet domestic content requirements under the IRA? And if so, just why we're

Speaker 2

So, as we currently Understand the supply chain and the availability of the domestically sourced components that were identified The IRA domestic content guidance that was provided. The only A really identifiable component that we believe, I mean, there could be some small stuff like adhesives and stuff like that, but that's not going to move the needle. But most likely, the only really, component that will move the needle and that will drive some meaningful amount of domestic content will be the sell. If you look at this most recent announcement, I think they said they'll be up and running by the end of 'twenty five, Which means largely that those cells would be available for production and shipments and then eventually installation into Yes, install or assemble the models and then eventually installation into a project in 'twenty six. And I believe the requirements under IRA in 'twenty six I think it's 50%.

Speaker 2

So they have to so you're starting off at 40% domestic content and it steps its way up all the way to 55%. So they've got a window now that by the time they can actually realize the benefit of domestic content, that requirements will be at a higher threshold than it is right now. At least the math that we run, just looking at the cell and understanding the direct material, direct labor costs Series 7, as I indicated, which is the vast majority of our 14 gigawatts of domestic production is 100% domestically sourced. Therefore, it qualifies as domestic It will be materially advantaged and enabling of domestic content bonus at the project level versus just

Speaker 8

I wanted to ask about capital allocation. At the Analyst Day, we understood that there is some downside to tech CapEx by implementing some processes Repatriating cash, it sounds like is not the most efficient path to fund CapEx in the U. S. It's only what the cost of repatriation is. And staying on the same topic, I understand that funding buybacks with IRA cash is not on the table yet.

Speaker 8

I was wondering if And then finally, I was wondering if

Speaker 2

I'll take the first one and Alex take all the rest of them. So yes, we are still working through with our supplier to enable various coatings and capabilities that would Result in us not having to make substantial capital investments related to our upgrades for our CURE technology. Testing is ongoing. What I'll say is the early indications, a long way still to go. I want to make sure it's very clear.

Speaker 2

It's a long way still to go, Early indications and what we've seen so far is very promising that we will be able to find a way to CapEx dollars is also the opportunity to further optimize the buffer layer, which is what they've been putting on to investor capture better performance at the semiconductor level. So we'll have to continue to assess the respective trade offs, but I would say at least as of right now, early innings, I want to continue to stress that. There's a pretty positive indication of their capabilities in that regard.

Speaker 3

If you think about CapEx, we at the Analyst Day, we showed you CapEx plan for 24, 5 and 6 that was Somewhere in the range of $3,500,000,000 to $4,000,000,000 to spend. As Mark just said, there's early indications that there's an opportunity potentially for some of the Technology related CapEx come down a little bit. However, if you think about the near term, the majority of the spend for 2024 was not related to that. It's capacity expansion, R and D facility maintenance and sustaining CapEx. So those guys that we've talked about in the Analyst Day of 1.6, 1.9 for next year.

Speaker 3

It doesn't have a lot related to that technology, a little bit. As you get into the outer year, there's more technology related. So if there is an opportunity to bring that down, it's going to be more in back end of 2025 and then 2026. So as we look through next year's capital spend program, Still a significant CapEx program that we're looking at. As I think through how to fund that, If you go back to the tax reform of 2017, what that effectively did was you paid a one time transition tax, Which is the equivalent of paying federal taxes though you are repatriating the money.

Speaker 3

So the federal expenses is basically done. However, There would be state and local tax implications of bringing money back. So today, we assert that we permanently reinvest our capital offshore. If we were to change that assertion and bring capital back, there wouldn't necessarily be a tax impact until we kept the capital score back, but you would see And in fact, tax expense on the

Speaker 2

P and L at the time

Speaker 3

we changed that assertion. So I haven't given a number of what that would be, but there would be some Potentially significant state and local tax implications are doing that at the time. In terms of thinking about the ways of funding, Look, what we said right now is what we need is transition capital, temporary capital. I don't see any inferences there. So what we're looking at is things that will help us bridge through the gap between the significant investments we're making now upfront and the timing of receipt of the cash associated with the section for you of ex credit.

Speaker 3

As I said at the Analyst Day, if we had that cash in hand at the same time, we recognize the tax benefit on the P and L, then we wouldn't have this potential challenge of investment. Jurisdictional mix and temporary transition timing, but the need for equity I don't see today. Then to your question around buybacks, look, we haven't looked at that. I think we're a long way We're going into pretty significant CapEx spend over the next few years, but say at the IRA Capital not coming in yet. So we'll think about that when the time comes, but that's not where we're at right now.

Speaker 2

We're going to invest in cycle.

Operator

Your next question comes from the line of Colin Rusch from Oppenheimer and Company. Please go ahead.

Speaker 2

Thanks so much guys. Can you talk about how much finished goods inventory you exited the quarter with and where you're at right now in terms of

Speaker 3

Let me start, Collyn, so you want to

Speaker 2

know the enterprise wise finished goods inventory amount, is that a question not just India, right? Yes, that's the for the whole company and then understanding where you're at in terms of the production run rate in India right now.

Speaker 3

Yes. So for the total for

Speaker 2

the company, we ended up with north of 3 gigawatts in inventory. Right now, as we indicated, we produced about 150 megawatts or so in India. All that It is actually an inventory we have. We don't have the certifications yet to allow us to start shipping. So there was a little bit of a spike in inventory partly because of that.

Speaker 2

But it lines up to our if you look at our sold volume in the Q4, I think, if I had a segment, we're north of 4 gigawatts or something like that. So that inventory is lining up to our anticipated shipments here in the Q4. India, as I indicated, from a demonstrated capability, they've demonstrated almost 80% of nameplate. We're actually running that right now about 70% a little less than 70% of the nameplate. And look, that's a Tremendous result when I look at it because we just started the integrated run of that factory in July and we're 3 months or so out and we're making 10,000 modules a day.

Speaker 2

That was obviously step function improvement. So but it's great to see where you Demonstrate that ability to make a finished 10,000 finished models on a given day, not just demonstrated capability that we can do that. And we did that from a standpoint of, as I referred to, that startup was largely a cold start. We didn't we weren't able to because there is permitting restrictions and We couldn't really start running and season any of the tools until we got to the point of actually starting the integrated fund that very quickly moved into Our plant fall process. So really good results.

Speaker 2

Hopefully, that's a forward looking indicator of success that we'll see As we move forward into our Alabama factory and our Louisiana factory, and again, our goal is always to start these factories up Sooner and faster than we had the previous one. And I would say at least indications from Ohio going to India It was pretty successful so far. Long ways still to go and a lot of work still in front of us, but pretty happy with how that factory is performing right now.

Operator

Your next question comes from the line of Ben Kallo from Baird. Please go ahead.

Speaker 9

Hey, Mark. Just on that note, I guess the question is twofold. What do we think about Your customers like breaking contracts, is that going to happen because someone's going to open up a factory in Indiana Or something like that. And how do we know that's our risk? And number 2, what you said there is The speed to time of your factories, I think is getting better as they get more automated.

Speaker 9

And how does that factor into your whatever ROIC or how we look at it?

Speaker 2

Ben, I think we'll

Speaker 3

One of

Speaker 2

the deals that we just did this quarter, I think there may be a press release this week, we added another 500 megawatts onto a deal with a partner we've had for a while. I think it brings a total of north of 3 gigawatts that we've done with this particular partner and there's just this relationship and understanding of value propositions The First Solar is able to bring and our ability to deliver certainty against commitments that people look to and want De risk their projects. I mean, that's their primary focus. These projects are Meaningful multi year investments with meaningful amount of capital and that are starting to evolve now with Higher CapEx dollars for integration of storage and eventually integration of for hydrogen that At the front end of what you need in order to make that project successful is something has to take photons and to make electrons, otherwise nothing happens. And what our partners want from us is certainty.

Speaker 2

They want us to give them a competitive technology Their commitment to their Board and to their shareholders and others. First Solar is able to do that and we're uniquely positioned. We're also uniquely positioned to provide, we believe with Series 7 in particular, the highest domestic content qualifying Find ways to look at alternative paths that have degrees of certain uncertainty associated with them. It's not even clear that factory that you're referencing will actually be up and running in the timeline of which it's been committed. The other thing is a portion of that offtake is going to be for self consumption for their development arm, no different than the factory In Ohio, which is an equity investor that is looking to take a meaningful amount of that volume For their own development pipeline.

Speaker 2

That creates a different perception to some of our partners around why do I want to buy technology or modules from a Right. Somebody that's going to be competing with me, which my primary business model is to be a developer. Primary business model is to be the IPP, utility to own and generate an asset to get the return on investment against the project, to feed My competitor to better position them to take market share from me is not in a position of strength that a lot of our partners choose to be in. And there's still uncertainty. I mean, there's a lot of things that are changing as it relates to I mentioned already the potential duties that are posed on investment coming in from China and Southeast Asia.

Speaker 2

That's another risk profile that somebody has to be willing to accept. It could be GlassFlex. I mean, who knows what the next step in the journey is going to be. And all our partners know is that with First Solar, They completely de risked those dimensions and they've got a great partner who's going to deliver a great product, great technology at a great price on top. So that's the sense of where our customers, I think, view us.

Speaker 2

And our contracts, yes, we have penalties and there's ways to potentially You don't pay those penalties and customers potentially could break a contract and we'll take those penalties and we'll look to sell that technology on Into the marketplace to somebody else, but when they step back and reflect the significant amount of risk that they would be taking Small nominal impact that is uncertain whether it's even a meaningful impact. It could even be a worse opposition especially if they're jeopardizing the domestic content under ITC. Why would you want to do all that brain damage for Potentially, it will have any benefit or make yourself put yourself in a worse position. As it relates to the factories and the startups, I The ROIC, every one of these factories that we start up sooner just accelerates the ROIC, especially for a U. S.

Speaker 2

Manufacturer. That means we get more IRA dollars faster. And so anything we can do to get product into the market faster just investor. And as we see that ability then as we think about alternatives for another factory, Yes, we'll factor that in and say that our ability from announcement to high volume manufacturing is that if it's a shorter timeline, then It potentially creates a lens that says that the payback in the ROIC would be more attractive for refractory. Just about a couple

Speaker 3

of numbers around the termination piece. We I said on our Analyst Day that about 14% of the megawatts in our backlog at that point was subject to a termination for convenience clause. If you look at that, that means that 86% of our backlog at that point had no ability to terminate a contract short of default. Now we can never stop people trying to default out of contract, but in a default scenario, a developer then puts themselves in a very difficult position Because they have an ongoing dispute and contractual breach, which would make it very hard for them to seek financing and tax equity for a project going forward. So for the vast majority of our backlog, there is no ability to terminate for convenience.

Speaker 3

For those contracts that we do have that clause, which typically is When we have larger long dated contracts, we have a small portion of that contract where we are subject some of the megawatts donation for convenience. We then have an agreed fee, typically up to 20%, which we look to collect and the idea there being that we could then resell those modules and be at least made whole in that transaction. So Just to give you some color on the numbers.

Operator

Our final question comes from Andrew Percoco from Morgan Stanley. Please go ahead.

Speaker 10

Thanks so much for taking my question. Mark, Mark, you sort of answered my question already, but I kind of just want to dive into the cost of capital environment. Obviously, having an impact on the market or the perceived economics of renewables. So I'm just wondering if you're seeing any developers or customers that maybe haven't been Big First Solar customers historically that are maybe turning to your technology because maybe they see your technology and your supply chain as more bankable than someone else. UF LPA, ADCVD combined with a more expensive cost of capital environment.

Speaker 10

I'm just wondering if that's becoming a bigger competitive advantage than

Speaker 2

Yes. I think Alex actually referenced it in his section, but if you look at our bookings this last quarter, We had we highlighted 3 large contracts that were over at GIGO Live and then 12 bookings. One of them is a returning customer that we made an announcement on with Long Road Energy. I think we made that right around RA plus September around September time frame. But then we announced there was 2 other new customers.

Speaker 2

1 is an IPP and another is effectively an asset management entity with a portfolio company and multiple developers, both new customers, Right. And we're very happy with those in the first half of our journey of developing a deeper partnership with those counterparties. And look, they've come to First Solar for understanding of the unique value proposition and what we can provide. One of them in particular I know is who's would have liked to have gotten on First Solar's books earlier. We just didn't have capacity.

Speaker 2

And so now when they look forward and they see there is some supplies get out in 'twenty seven, 'twenty eight, 'twenty They want to secure some of that supply. They would have loved it on the books in 'twenty four, 'twenty five N26 in particular, we didn't have supply. So yes, I do think that the environment that we're in right now First Solar's capabilities value proposition, I think are more compelling and is driving new customers into our portfolio Overall contracted backlog, which is now north of 80 gigawatts. I mean, just so that I can reflect on that number. I mean, that's a huge Multi year contracted backlog and commitments with dozens of different partners

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Earnings Conference Call
First Solar Q3 2023
00:00 / 00:00