First Solar (FSLR -0.59%)had a rough fourth quarter, disappointing investors with a surprise loss. On its Q4 conference call, the company's management affirmed confidence in its products, highlighted the negative impact of delayed asset sales, and attempted to assure investors its financial condition will improve.
Image source: Getty Images.
Hopes are high for new modules
First Solar has been putting a great deal of effort into upgrading from its Series 4 module to a Series 6, a thin-film solar panel that is capable of producing up to 420 watts or more, compared to the 120 watts of the Series 4.
The company has opened new factories in Malaysia and Ohio and is ramping up manufacturing to keep up with the big demand it is expecting for Series 6. "On the supply side, we continue to expand our manufacturing capacity and expect to increase our nameplate Series 6 manufacturing capacity to 6 gigawatts by year-end 2020 and 8 gigawatts by year-end 2021," said Chief Financial Officer Alex Bradley. "In 2020, we expect to produce 5.7 gigawatts of Series 6 volume, the year-over-year increase of over 50%."
First Solar already has a backlog of customers waiting for the new modules. "With regards to bookings, we are effectively sold out through 2020, and are approximately two-thirds sold out to the midpoint of expected supply in 2021," said Chief Executive Officer Mark Widmar. "In addition, we have approximately 2 gigawatts sold into 2022 and beyond."
Asset sales are hard to predict
First Solar has been trying to sell Ishikawa, Miyagi, and Hanamizu projects in Japan and did not close the deal in the timeline expected. The company said on its earnings call that it planned to sell the assets to a "private fund vehicle" in 2019, but the project was impacted by Typhoon Hagibis, which hit the region in October. The storm passed alongside the Miyagi plant and damaged the road that was to hold the project's power line but did little damage to the plant itself. Still, it was enough to keep the sale from closing and negatively impacted Q4 earnings. The company also anticipated a sale of 40 megawatts of assets in India, but that sale also experienced a delay. These sales should be final in 2020 and will contribute to earnings this year, Bradley said.
Production costs should decline
Management on the call said the company expects its "fleetwide cost-per-watt" to decline approximately 10% from 2019 levels over the course of this year. The company also anticipates a corresponding increase in gross margin, according to Bradley. Gross margin is expected to increase to a range of 26% to 27% from 24% in 2019, he said, but the boost continues to be tempered by the costs of switching from Series 4 to Series 6 production and starting up new factories. First Solar has also worked to improve module efficiency through copper replacement in a program it refers to as CuRe.
Said CEO Widmar:
Beginning with watts per module, increased module wattage through our previously discussed R&D efforts and the CuRe program leads to a significant cost per watt reduction. Secondly, over the mid term, we see the potential to increase throughput by approximately 30% to 35%, which provides a fixed cost dilution benefit. Thirdly, we are targeting an increase in manufacturing yield from approximately 95% today to a mid-term run rate of approximately 98%, which provides a direct benefit to fixed and variable cost. Fourthly, we see mid-term opportunities to reduce variable build material cost of between 20% and 30%, primarily across glass and aluminum.
Should investors be consoled?
First Solar's loss blindsided some investors, and its share price has reflected their displeasure, down more than 20 percentage points this year. The company's significant backlog of orders for its new Series 6 modules is a bright spot and cements the company's role as a key player in the renewable energy supply chain for the next few years. Management is staying focused on asset sales, so the delayed deals that hurt earnings this time should eventually close and positively impact earnings in a future quarter.
More concerning for a long-term investor, however, are the company's underperformance and inability to consistently turn a profit or pay a dividend after operating for 20 years. And with such a significant earnings miss, it stands to reason that the company had to have seen it coming for some time. When plans go off track, the company would do well to provide more frequent guidance and avoid major surprises for shareholders. Investors would be wise to hold out for more transparency from First Solar while also keeping an eye on whether the company can turn new module sales into improved profits.
