FIRST-SOLAR Earningcall Transcript Of Q2 of 2024
Widmar, chief executive officer; and Alex Bradley, chief financial officer. Mark will provide business, strategy, technology, and policy updates, Alex will discuss our bookings, pipeline, quarterly financial results and provide updated guidance. Following their remarks, we will open the call to questions. Please note this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the safe harbor statements contained in today's press release and presentation for a more complete description. It is now my pleasure to introduce Mark Widmar, chief executive officer. Mark R. Widmar -- Chief Executive Officer and Director Good afternoon, and thank you for joining us today. Reflecting on the first half of 2024, we are pleased with our ongoing efforts to strengthen the fundamentals of our business. With solid operating and financial performance, selective incremental bookings, robust pipeline of demand, including a near -- a recently signed 620-megawatt module supply agreement subject to additional conditions precedent with a new U.S. customer that will be supplying power to a hyperscaler. And investment in technology, R&D infrastructure, and manufacturing expansions, we continue to solidify our market position through strong execution. Our balanced approach to growth, profitability, and liquidity, combined with multiple technological and business model points of differentiation enable us to deliver value for both our customers and our shareholders. Beginning on Slide 3, I will share some key highlights for the second quarter. From a commercial perspective, we continued our disciplined approach to bookings. Since our last earnings call, we have secured a net 0.9 gigawatts of bookings with an ASP of $0.316 per watt, excluding adjusters where applicable or $0.334 per watt, assuming the realization of adjusters where applicable and in each case, excluding India domestic sales. This includes a 0.4 gigawatt debooking related to a termination for convenience exercised by one of our European power and utilities customers who are selling a portfolio of U.S. development assets as referenced on our last earnings call and who is obligated to pay the associated contract termination payment. This brings our year-to-date net bookings to 3.6 gigawatts. Our total contracted backlog now stands at 75.9 gigawatts with orders stretching through 2030. From a technology perspective, since our Q1 earnings call, we have established a new world record CadTel research cell with a conversion efficiency of 23.1%, commissioned new critical R&D infrastructure in Ohio, and remain on track to launch our CuRe program in Q4 of this year. Our CuRe program is expected to increase energy production in real-world conditions through improved module temperature coefficient, bifacial reality, and degradation rate. Additionally, we have announced the ownership of certain issued and pending patents related to the manufacturing of TOPCon crystalline silicon solar cells. And while Alex will provide a comprehensive overview of our second quarter 2024 results, I would like to highlight our ability to deliver financially with second-quarter earnings per diluted share of $3.25 and a quarter-end net cash balance of $1.2 billion. Despite this strong execution and our success, delivering on the manufacturing technology, customer, and financial commitments, we must acknowledge that our industry faces varying degrees of increasing external uncertainties, particularly related to policy, supply conditions, and evaluations of strategic direction and capital allocation by certain large multinational companies. These will be discussed later during the call. Turning to Slide 4. Our growth plans remain on track. The expansion of our Ohio manufacturing footprint has been completed and commercial shipments began as scheduled at the end of the second quarter. The completion of this phase expands our manufacturing capacity into the state by almost one gigawatt to nearly seven gigawatts. In Alabama, we expect to complete the installation of tools, complete plant certification, and commence production this quarter with the first commercial shipments from the plan expected in Q4 of 2024. We are pleased with the speed at which we're able to construct, equip, and commission the 2.4 million square foot facility, achieving this in approximately 24 months from the investment decision. Our new Louisiana facility is also on track with the start of commercial operations expected in the second half of 2025. Furthermore, we commissioned the Jim Nolan Center for Solar Innovation earlier this month. This new research and development innovation center in Ohio is the largest facility of its kind in the Western Hemisphere. The 1.3 million square foot facility includes a high-tech pilot manufacturing line, which we expect will allow us to produce full-size prototypes of thin-film and tandem PV modules in a manufacturing sandbox, freeing up our commercial production lots. In addition, we are on track to commission our new perovskite development line at our Ohio campus in the second half of 2024. Combined, these new facilities represent an investment of nearly $0.5 billion in American R&D infrastructure. We believe that thin-film research is critical for commercializing multi-junction tandem devices, which are anticipated to be the next disruptive innovation in the solar industry. While the U.S. leads the world in thin-film PV under First Solar's stewardship, China is racing to close the innovation gap, and we expect that our strategic investment in R&D infrastructure will help us maintain our nation's strategic advantage in thin-film technology and position the next generation of disruptive, transformative solar technologies to be American-made. Turning to Slide 5. We continue to progress our technology road map and during the quarter, established a new world record CadTel research cell conversion efficiency of 23.1%. This achievement certified by the United States Department of Energy's National Renewable Energy Laboratory was accomplished at our California Technology Center. We remain on track to launch CuRe at our lead line in Ohio in Q4 of this year and following the pull-in of capex discussed at our previous earnings call, intend to accelerate replication across the fleet beginning in late 2025, with our Vietnam and third Ohio facility. Additionally, we announced the ownership of issued and pending patents related to the manufacturing of TOPCon crystalline silicon photovoltaic solar cells earlier this month, which we continue to leverage as we pursue multiple pathways toward our goal of developing the next transformative disruptive tandem solar technology. This portfolio, which includes issued patents across various jurisdictions, including the U.S., and pending patents in the EU and Japan has validity extending to 2030. We are mindful that there have recently been a number of TOPCon patent ownerships announcements and several litigation claims related to particular aspects of TOPCon cell production. Based on thorough and ongoing analysis, including the engagement of third-party legal and technology experts, we firmly believe in the value and strength of our patents and are investigating several leading crystalline silicon cell manufacturers for potential infringement. If infringement is discovered, we intend to challenge the ability to manufacture, assemble, and sell infringing TOPCon technologies by pursuing enforcement, licensing, and other measures to safeguard our rights. I'll now turn the call over to Alex to discuss our bookings pipeline and finances. Alexander R. Bradley -- Chief Financial Officer Thanks, Mark. Moving on to Slide 6. As of December 31, 2023, our contracted backlog totaled 78.3 gigawatts, with an aggregate value of $23.3 billion. Through June 30, 2024, we contracted 2.7 gigawatts of incremental volume, reduced our bookings by 0.4 gigawatts due to the aforementioned contract termination by a European customer, and recognized 6.1 gigawatts of volume sold. This brings our total backlog to 74.6 gigawatts at quarter-end with an aggregate value of $22.3 billion implying an ASP of approximately $0.299 per watt, excluding adjusters where applicable. Since the end of the second quarter, we've entered into an additional 1.3 gigawatts of contracts, resulting in a total backlog of 75.9 gigawatts. Substantial portion of our backlog includes opportunities to increase the base ASP through the application of adjusters if we realize achievements within our current technology road map as of the expected timing for delivery of the product. At the end of the second quarter, we had approximately 38.4 gigawatts of contracted volume with these adjusters, which if fully realized, could result in additional revenue of up to approximately $0.7 billion or approximately $0.02 per watt, majority of which will be recognized between 2025 and 2028. This increase in adjusters relative to the prior quarter is a function of the opportunity discussed on our prior earnings call to accelerate the expected replication of CuRe across the fleet. 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 in the sales contract upwards or downwards and for increases in sales rate where applicable aluminum or steel commodity price changes. As reflected on Slide 7, our total pipeline of potential bookings remained strong, with bookings opportunities totaling 80.6 gigawatts, an increase of approximately 7.8 gigawatts since the previous quarter. Our mid- to late-stage bookings opportunities decreased by approximately 0.8 gigawatts to 28.6 gigawatts, now includes 24.6 gigawatts in North America and 3.7 gigawatts in India. Within our mid- to late-stage pipeline, our 4.1 gigawatts of opportunities that are contracted subject to conditions precedent, including 1.2 gigawatts in India. And in the U.S., a 620-megawatt module supply agreement with a new customer who will be supplying power to our hyperscaler, which Mark noted earlier. As a reminder, signed contracts in India will not be recognized as bookings until we've received full security against the offtake. Note that we anticipate reducing our opportunities on a contract subject to conditions precedent India by 0.4 gigawatts as a result of an expected termination of a defaulted module supply agreement with an Indian affiliate of a European oil major who is in the process of selling this business. As stated on previous earnings calls, given our diminished available supply through 2027, the long-dated time frame into which we are now selling, and the need to align customer project visibility with our balanced approach to ASPs, payment security, and other key contractual terms, and given the uncertainty related to the policy environment due to the upcoming U.S. election, we will continue to leverage our position of strength in our contracted backlog and be highly selective in our approach to new bookings this year. We intend to continue forward contracting with customers who prioritize long-term relationships and appropriately value our points of differentiation. Slide 8 will cover our financial results for the second quarter. Net sales in the second quarter were $1 billion, an increase of $0.2 billion compared to the first quarter. Increase in net sales was driven by a 24% increase in the volume of megawatts sold and the aforementioned contract termination payment obligation of one of our European customers. Gross margin was 49% in the second quarter compared to 44% in the first quarter. This increase was primarily due to a higher mix of modules sold from our U.S. factories, which led to $255 million in the Section 45X tax credits in the second quarter, the aforementioned contract termination payment obligation, reduction in warehousing and logistics costs, and continued reductions in production costs. SG&A, R&D, and production start-up expenses totaled $126 million in the second quarter, an increase of approximately $22 million compared to the first quarter. This increase was primarily driven by higher start-up expenses for our Alabama factory, higher R&D expenses associated with the development of next-generation solar technologies, and higher professional fees. Our second quarter operating income was $373 million, which included depreciation, amortization, and accretion of $97 million, ramp costs of $6 million, production start-up expense of $27 million, and share-based compensation expense of $8 million. Second quarter other income was $5 million. Tax expense for the second quarter was $28 million compared to $19 million in the first quarter. This increase was driven by higher pre-tax income during the period and a change in our position related to reinvesting the accumulated earnings of a foreign subsidiary, which allows us to repatriate certain offshore funds to support our strategic investments in the U.S. and show that our worldwide cash is available in the locations in which it's needed. The combination of the aforementioned items led to second-quarter earnings per diluted share of $3.25. Next turn to Slide 9 to discuss select balance sheet items and summary cash flow information. Our cash, cash equivalents, restricted cash, restricted cash equivalents, and marketable securities ended the quarter at $1.8 billion compared to $2 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, along with the repayment of working capital loans in India partially offset by operating cash flows from our modules business. Total debt at the end of the second quarter was $559 million, a decrease of $61 million from the first quarter driven by the repayment of certain working capital loans in India, which helped support the ramp of our new plant in the region. Our net cash position decreased by approximately $0.2 billion to $1.2 billion as a result of the aforementioned factors. Cash flows from operations were $193 million in the second quarter, and capital expenditures were $365 million during the period. Continuing on Slide 10. Our full year 2024 guidance remains unchanged. Note following the aforementioned termination for convenience of 0.4 gigawatts in Q2, one of the limited number of contracts that have such a right, we expect volumes sold, revenue, and net cash to be toward the bottom of our guidance range. From a second-half earnings cadence perspective, we expect our net sales and cost of sales profile, excluding the benefit of Section 45X tax credits to be approximately 40% in the third quarter and 60% in the fourth quarter. We forecast Section 45X tax credits of approximately $240 million in the third quarter and $335 million in the fourth quarter with an operating expense profile roughly evenly spread across the remainder of the year, this results in a forecasted earnings per diluted share profile of approximately 40% in the third quarter and 60% in the fourth quarter. Note, while it's a third-quarter event, we, like many companies, were impacted by the recent defective software update issued by CrowdStrike that resulted in IT outages around the world. First Solar's corporate and manufacturing operations were briefly impacted, including the temporary idling of our fleet, which was gradually restored over a period of approximately two days. This incident did not impact our full year 2024 guidance. I'll now hand the call back to Mark to continue the business update. Mark R. Widmar -- Chief Executive Officer and Director All right. Thank you, Alex. As reflected by remarks at the beginning of the call, we are pleased with our financial and operational execution for the second quarter. We have continued to deliver on our commitments and have largely advanced our planned initiatives throughout the year thus far, such as progressing our U.S. manufacturing capacity expansion on schedule, commissioning our research and development infrastructure build-out on plan, and maintaining a disciplined approach to new bookings opportunities. That said, we are also mindful of several externalities, which may impact the industry as a whole, including First Solar. Among these externalities we are most frequently encountering are the uncertainties related to politics and policies, irrational global supply conditions, and the evaluation of strategic directions and capital allocation by certain large multinational companies. Firstly, with the November election fast approaching, the solar industry is again facing an uncertain policy environment. The impact of this uncertainty became more apparent as the second quarter progressed. We have observed increasing constraints on access to capital, both for early stage solar technology companies seeking to finance the next stage of their growth as well as for the established companies looking to build domestic manufacturing capacity. Our financing parties wait to make investment decisions until they have a clear view of the policy picture. This uncertainty has also impacted developers evaluating risk and returns within project pro formas and which comes at a time when, as mentioned earlier, some oil and gas and power and utility developers are contemplating the pivot from renewables to prioritizing fossil projects. The potential for Republican control of the presidency in both Houses of Congress has given rise to concern over the prospect of a legislative reconciliation process or use of the Congressional Review Act adversely impacting the Inflation Reduction Act legislation or its related regulations. A change in the executive administration alone, regardless of the results of the Senate and House elections, has raised similar concerns of the potential use of executive orders to block or delay implementation of IRA-related guidance and the administration of both published and unfinalized regulations. While we cannot predict the outcome of the November election or what a Republican suite would mean for renewable energy industry and trade policies, we can help inform policymakers across the political spectrum of the significant economic and strategic benefits of promoting and securing a robust domestic solar energy manufacturing base and how policies, such as 45X of the IRA, significantly contribute to the economic life of our nation's communities, particularly those located in traditionally red states. According to an economic analysis commissioned by First Solar and conducted by the University of Louisiana, Lafayette, our investments are already delivering tangible value by creating jobs and raising wages for American workers. Our existing facilities, combined with our expansions in Ohio and new facilities in Alabama and Louisiana, are expected to see us support over 30,000 direct, indirect, and induced American jobs by 2026 and $2.8 billion annually in labor income. Our growth trajectory and long-standing commitment to investing in local supply chains is estimated to support 7.3 jobs nationally for every First Solar job created and is expected to add over $10 billion annually to the country's economic output by 2026. We are demonstrating that investing in American solar manufacturing, innovation, and supply chains delivers enduring job creation and economic value, solidifying solar manufacturers' role in Americas, all of the above approach to energy security. We believe our model of high-value domestic manufacturing is the towering example of what are the art of the possible is when the nation follows through on bipartisan goals of countering China's ambition to dominate critical supply chains. Our manufacturing and domestic sourcing is also an example of capturing and retaining maximum value in the U.S., leveraging it to spur cycles of innovation to advance American technological leadership and attract and retain an enduring workforce. This is, however, a relatively unique example. While intended to enable the growth of domestic renewable manufacturer and value chains, we believe Section 45X of the Inflation Reduction Act of 2022 can and must be strengthened by establishing guardrails and prevent companies controlled by, owned, or subject to the jurisdiction of adversarial governments such as China from receiving U.S. taxpayer dollars. We believe that any legislation that establishes these guardrails will help reinforce the IRA's intent of encouraging true value in job creation and retention across the solar value chain. A message we believe resonates with policymakers across the political spectrum. Despite the political uncertainties ahead, a look back on the quarter reflects several positive developments in the trade environment. Over the past quarter, we have seen the United States government continue to address systemic overcapacity in China by leveraging the tools and the trade policy toolbox. Recently, the Biden-Harris administration acted to close a loophole in trade law by removing the Section 201 bifacial module exemption, which the Trump administration had also attempted to remove and announced plans to double the Section 301 tariffs on solar cells and modules imported from China, another trade measure initiated by the Trump administration. In addition, the two-year anti-circumvention solar bridge moratorium expired in the second quarter, and the administration pledged to crack down on stockpiling through "vigorous enforcement" announcing that importers, which brought product and tariff-free during the moratorium will be required to certify as to module installation by the December 2024 deadline with detailed information about the imported modules being deployed or pay the required tariff. In June, the U.S. International Trade Commission by unanimous and notably bipartisan decision, issued a preliminary determination finding a reasonable indication of material injury caused by the dumping of solar cells and modules by Cambodia, Malaysia, Thailand, and Vietnam. Material injury caused by subsidies by Malaysia, Thailand, and Vietnam, and a threat finding caused by subsidies in Cambodia. The unanimous bipartisan vote supports the petition of the American Alliance for Solar Manufacturing Trade Committee, which First Solar is a member, and underscores the harm caused by the unfair trade practices of China solar companies and their affiliates in Southeast Asia. The alliance is currently evaluating filing critical circumstances petitions in response to the surge of injurious solar imports from the subject countries in the wake of the Department of Commerce's initiation of the trade investigation. For example, recent data suggests import increases of more than 60% from Malaysia and Vietnam and approximately 19% from Thailand. Such petitions are filed with the United States Department of Commerce determines that critical circumstances exist, cash deposit requirements can be imposed retroactively on solar cells and panels entering the country up to 90 days prior to the date of the Commerce's preliminary determinations. Critical circumstances can be alleged at any point until just before Commerce's final determination. Based on the Republican campaign platform, which has expressively contemplated employing tariffs to increase trade imbalances, we believe it is reasonably foreseeable that if administration were to change could result in incremental tariffs on the Chinese crystalline silicon supply chain operating from Mainland and through its Southeast Asia and other satellite countries. While broadly beneficial to us given our significant and expanding U.S. manufacturing base, any new universal tariffs on imports could adversely impact the gross margin related to our Malaysia, Vietnam, and India production sold into United States. Finally, it is also important to note that regardless of the outcome of the November election, utility-scale demand for renewables is expected to continue to grow. The sources of this projected substantial demand are varied, including from data center, the reshoring of manufacturing, cryptocurrency mining, the heating and cooling, to name a few. Critically, such demand is generally not dependent on policy-enabled drivers. Solar continues to demonstrate that in many U.S. locations, it is the lowest cost source of energy and there are a few other generation sources that can be expanded at scale or notably deployed as quickly as solar, a critical attribute for end users who place a priority on time to power. In addition, given the presence of long-term fixed-price PPAs, relatively predictable degradation, few moving parts, and an unlimited free fuel source in the form of sunlight, solar is by nature, is deflationary energy generation asset, further contributing to the nation's economic growth. Moving on from political consideration. The second externality, a long common theme in the solar industry is irrational oversupply, driven almost exclusively by China's well-documented ambitions to dominate solar supply chains. The unsustainable market conditions resulting from this behavior continue to be an adverse macro condition confronting module manufacturers like First Solar that are committed to competing on a level playing field and on the basis of their merits and undertaking growth that is underpinned by demand. These market-distorting practices have resulted in a 2024 year-end projected U.S. oversupply position of approximately 40 gigawatts. Oversupply conditions in the EU continued unabated as policymakers struggled to provide a coherent policy response to ensure sustainable manufacturing conditions with the -- in the European block. In India, a challenged ASP environment is a large part a consequence of Chinese cell dumping, that is artificially lower pricing, and challenges the country's aspiration to end its reliance on an adversarial by developing a domestic manufacturing base that serves a domestic market. Despite several of our crystalline silicon competitors publicly reporting significant financial losses for the first half of the year as they work to shed excess inventory and rationalize capacity, the Chinese solar industry continues its race to the bottom through overbuilding capacity. Ignoring clear indications that the market cannot sustain such levels of production, this results in continued dumping of products into key markets at depressed prices. Despite the recently published proposal by China's Ministry of Industry and Information Technology seeking to raise the minimum capital ratio for new PV capacity and impose intellectual property ownership criteria related to capacity expansion, there is skepticism that such measures will be effective in curtailing production expansions and reshoring supply and demand balance. Particularly as a consequence, we see China capacity expansions -- excuse me, particularly as we see -- continuously see China capacity expansion plans announced. In a market challenged by irrational oversupply, and in sharp contrast, the results recently announced by some of our Chinese competitors, we have continued to deliver strong performance as reflected by our year-to-date earnings, recent bookings, and total backlog. And while the crystalline silicon industry faces potential obstacles to innovation due to weakening fundamentals and pending legal challenges to its freedom to operate, including as it relates to First Solar's recently announced TOPCon technology patents. During the quarter, we established a new record CadTel research cell, remain on track related to our CuRe launch and fleet replication schedule, and commissioned our new R&D facility. The third externality we have observed relates to certain multinational companies' strategic direction and capital allocation. As referenced on our prior earnings call and during this call, we're observing some multinational oil and gas and power and utility companies, particularly those based in Europe, considering pivots from renewable project development back to fossil projects in an effort to increase returns. For example, we've been made aware that a U.S. affiliate of a European-based multinational oil and gas customer is evaluating their strategic direction with regards to renewable project development. Notwithstanding, we believe the underlying fundamentals of solar remain robust. As mentioned in our last earnings call, we are seeing the potential for a significant increase in demand as the decade advances, driven in part by data center load growth. Ten of our largest customers have ongoing and future projects that are serving the nation's largest hyperscalers, deploying our technology for the balance of the decade. According to an analysis by the Boston Consulting Group, data center-driven energy demand is expected to increase by 15% to 20% annually through 2030. Total U.S. power consumption is expected to increase by 3% per year through the end of this decade, with data centers alone expected to contribute more than 60% of the total growth. We believe that this potential hyperscale-related demand, coupled with their publicly stated commitments to address their energy needs through clean generation, along with our strong track record of partnering with developers to provide solutions for these off-takers, places First Solar in a strong position to have an important role in powering the industry of the future. As demonstrated by our recently signed, 620-megawatt module supply agreement subject to additional conditions precedent with a new U.S. customer that will be supplying power to a hyperscaler. Underlying fundamentals related to fossil fuel retirements, the movement toward electrification, utility and corporate demand for clean energy, scrutiny of environmental impact, and social consciousness of supply chain providers and load growth, especially related to AI-driven data center demand, aligned with First Solar's position as a leading provider of eco-efficient modules and its approach to responsible solar. We're also seeing increased demand driven by the modified domestic content bonus safe harbor guidance issued by the Department of Treasury and IRS in May of 2024. The updated guidance sets out a more practical points-based calculation rather than a cost-based calculation for a renewable energy project to qualify for the bonus, placing a high value on vertically integrated manufacturing that utilizes domestic procured components, a profile exemplified by First Solar's growing domestic manufacturing operations. Given the high domestic content embedded in our U.S.-produced Series 6 and Series 7 modules, which critically feature a domestically manufactured cell and incorporate domestic components for either all or almost all of the points eligible components specified in the elective safe harbor in the May 2024 updated guidance, our customers' projects can satisfy key aspects of the domestic content bonus criteria just by procuring First Solar modules. On the new elective safe harbor, there are opportunities for First Solar to blend its deliveries to customers with modules produced across its global fleet, potentially increasing the optimization of all of our factories while enabling our customers to qualify more projects for the domestic content bonus. In summary, while external factors such as the outcome and impact of the forthcoming election and the continued impact of the global Chinese-driven overcapacity on supply present challenges, First Solar continues to focus and deliver on our planned initiatives. Through continued execution, active policy engagement, utilizing our balanced approach to growth, profitability, and liquidity, and leveraging our points of differentiation, we believe we remain well-positioned to navigate these challenges. To conclude, Alex will now summarize the key messages from today's call on Slide 11. Alexander R. Bradley -- Chief Financial Officer Demand continues to be robust, 3.6 gigawatts of net bookings year to date, including 0.9 gigawatts of net bookings since our last earnings call, leading to a resilient contracted backlog of 75.9 gigawatts. Our continued focus on manufacturing technology excellence resulted in a record quarterly production of 3.7 gigawatts. Alabama and Louisiana factory expansions remain on schedule. The expansion of our Ohio manufacturing footprint has been completed and commercial shipments began as scheduled at the end of the second quarter. From a technology perspective, we've established a new world record CadTel research sale, commissioned our new R&D facility in Ohio. We expect our CuRe line launch in Q4 of this year, announced the ownership of certain issued and pending patents related to the manufacturing of TOPCon crystalline silicon cells. Financially, we earned $3.25 a diluted share, and we ended the quarter with a gross cash balance of $1.8 billion or $1.2 billion net of debt. We're maintaining our full year 2024 guidance, including forecasted full-year earnings per diluted share of $13 to $14. And with that, we conclude our prepared remarks and open the call to questions. Operator? Operator Questions & Answers: |
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