First Solar update: Output, efficiency, and end-market maneuvers

First Solar offers more insight into its 3Q11 numbers, the need for a CEO transition, and outlook for where it sees growth in 2012, and not in the usual places.

November 4, 2011 – More updates from FSLR, following last week’s sneak-peek at 3Q11 numbers:

– Module cost/W dipped a penny Q/Q to $0.74/W. Roadmap is $0.52- $0.63 cost/W by end of 2014, with 13.5%-14.5% conversion efficiencies. Production rose 14% Q/Q to 551MW. “Best-performing lines” reached 12.4% average efficiency modules (up 0.4%) using technologies/processes from 17.3% efficient CdTe cells in R&D. Average conversion efficiency for all lines inched up a point to 11.8%.

– Average throughput rising to 70MW/year/line by YE2012, up from 63.5MW/line in 3Q11.

– Expansion in Vietnam will be postponed until supply/demand dynamics rebalance. Development will continue at the new Mesa, AZ site to support 2.7GW of North American projects (Agua Caliente, Desert Sunlight, Antelope Valley, Topaz). FSLR separately announced it has been chosen as EPC partner for NRG’s 66MW Alpine solar project in Lancaster, CA, targeting 3Q12 completion. It’s three times as big as the two firm’s previous collaboration, 21MW at Blythe two years ago.

Some pithy comments from the conference call and Q&A:

– Projected market demand in 2011: Germany 4GW-5GW, France 1GW-1.4GW, Spain 500Mw, North America 2GW (1GW of RFOs issued in California alone).

– Long-term solar looks good, especially vs. traditional energy sources. Short-term outlook is hazy at best, given subsidy changes in Europe and lack of new ones in the US (and mainly focused in California). “Supply chain entry barriers for silicon have evaporated, leading to massive capacity buildup” — and resulting lower prices and margins.

– So absent any good visibility in Western (EU/US) markets, FSLR “must […] go where we can solve pressing problems; that means places like India, the Middle East, North Africa and China.”

– 2012 plan and strategy will be revealed in early December.

Newly reappointed CEO Mike Ahern, on the sudden exec swap: “The board felt a leadership change was necessary in order for the company to navigate through the current market conditions and achieve its full potential.” Forget speculation of fraud/legal action/government investigation/major operational problems: “This was simply a question of fit.” Later, he added specifics on the need for a CEO transition:

I believe there are three things principally that have been holding us back. The first is inertia. The normal operating rhythm and comfort level of the organization has caused us to continue to allocate most of our resources to the legacy markets fed by a declining subsidy pool. So now we need to make hard shifts to the future and develop new markets.

The second is short-term fixation with earnings per share. Operating to maximize GAAP EPS in the short term despite declining subsidy pools and massive oversupply is not a good strategy when it leads to suboptimizing investment in the future. Our decision-making needs to be guided by creation of long-term fundamental economic value rather than short-term financial metrics that depend on shrinking subsidy programs.

The third is confusing factory expansion with growth. And we grow by identifying customers with pressing needs and serving them in ways that are compelling and unique. Building more factories absent this type of demand creation does not lead to growth. It prevents us from focusing on the right things to do. Our emphasis needs right now to be on creating new markets.

Analysts’ Take

Clarity over the sudden CEO transition was welcomed, as was the promise of 14% efficient modules by 2014. Also helpful, says Citi’s Tim Arcuri, was clarity into the captive EPC pipeline’s impact on earnings; he calculates FSLR sold modules at ~$2.20/W (about $1 above merchant pricing), and adding $1.70 in 3Q11 alone.

Not so good: Inventory buildup, and expectation of reigning in factory utilization. Shipping ~300MW into the EPC pipeline will help alleviate some of this, but beyond that pricing might have fallen to the level of costs and thus 1Q12 profitability is a risk (Arcuri thinks FSLR might even slip into the red), and the module business is likely to keep losing money all the way through 2013.

Deutsche Bank’s Vishal Shah thinks the move away from EU/US markets and towards emerging ones seems to be a smart move, though it’s “too early to get excited about the timing, growth and profitability profile.” Note that FSLR still remains confident on selling its Topaz project soon, for which it dropped DoE loan guarantees this fall and separate financing recently fell through.

Shah and others, however, had been hoping for a better cost/W stepdown this quarter (maybe even to $0.70/W), and he wasn’t pleased by the pushout of some projects to 2012. Moreover the elephant in the room continues to be Si pricing, and FSLR’s need to sell at a discount to keep up — at some point one has to wonder if and when this becomes an unsustainable battle.

Maxim Group’s Aaron Chew horns in on the cashflow side of things, noting that 2011 OCF guidance was better than he’d feared ($203M in 3Q11, not his worst-case $87M), but still it’s sunk for a third time and could end up far below breakeven (and maybe -$200M). From a cost/W perspective, he’s hoping for $0.65/W by the end of 2012 (vs. FSLR’s $0.52-$0.63 cost/W by YE2014), though that might be optimistic given a lack of significant improvement over the past year. Given the current money-losing module side of the business, “we believe FSLR?s future growth prospects hinge on its ability to shift its dependence to the project business,” he writes.

Production capacity growth (year-end capacity). 2005-2006 based on 4Q’06 run rate; 2007-2010 based on 4Q run rates; 2011 based on 3Q11 run rate; 2012 based on 4Q12 est. run rate. Line run rate based on actual production days in each quarter. (Source: First Solar)

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