Thursday, February 14, 2008

First Solar, Inc. Q4 2007 Earnings Call Transcript Highlights (FSLR)

Seeking Alpha has the transcript.

FSLR gave a lot of information on their company and the industry; some good insight on the rent-seeking aspects of the business (feed-in tariffs, mandates [RPS], the Investment Tax Credit [ITC]), which regular readers know scare the heck out of me; being at the mercy of politicians). FSLR management seems more aware of this risk than most renewable energy co.'s and is hammering on costs to get to grid-competitive pricing.
Toward the end of this post is a question (and answer) on capacity I found interesting.
Some of the things that jumped out at me:

...We expanded our key customer base from six customers in 2006 to 12 customers by the end of 2007. And the addition of these customers had extended our geographic market coverage to all European markets with meaningful feed-in tariffs.

...the acquisition added balance of plant engineering and project management skills to the company that enable us to begin deploying cost effective solar electricity solutions for utilities seeking to meet renewable portfolio standard requirements in the U.S.

...our mid-term path to reducing solar electricity prices to levels competitive with retail conventional electricity. We believe we remain on track to reaching the 2010 to 2012 pricing capability goals that we have previously laid out.

...Conversion efficiency averaged 10.6% for the quarter, up slightly from 10.5% in the third quarter. Cost per watt declined to a $1.12 including $0.03 of stock based compensation...

...we continue to experience market demand in excess of supply. We sold 75.8 megawatts in modules and at an average sales price of $2.60 per watt. As mentioned on prior calls First Solar is pursuing revenue growth on two fronts, first we believe additional growth remains in markets supported by feed-in tariff incentive structures including countries in Europe as well as South Korea and Ontario, Canada [see our post Canadian Green Investments ]

...Second, First Solar is seeking opportunities to open new markets with limited or no dependence on traditional PV subsidies. A core focus in this regard is the U.S. utility market where we believe low cost PV represents an attractive solution for regulated utilities seeking to meet RPS quotas.

...This brings me to our guidance for 2008. For 2008, we expect to sell 400 to 430 megawatts driven by our demonstrated fourth quarter run rate and the steeper ramp of our Malaysian factories providing upside in the second half of 2008. We expect revenues of $900 million to $950 million subject to customer mix and foreign exchange fluctuations.

Revenues in the first quarter of 2008 are expected to decline sequentially over the fourth quarter of 2007, due to our contractual price decline which took effect January 1st of 2008 [this was known]. We expect plant start up cost of $28 million to $31 million up from $17 million in 2007. achieve the targets we set for 2010 to 2012 in terms of pricing capability. Our average conversion efficiencies need to be in the range of 12%.

...Also be mindful that there was a pretty sizeable contribution from a very strong euro build into that gross margin performance.


We will take our next question from the line of Michael Molner with Goldman Sachs. Your line is now open.

Michael Molner - Goldman Sachs

Hey, good morning, guys.

Michael J. Ahearn - Chairman and Chief Executive Officer

Good morning.

Michael Molner - Goldman Sachs

Question for you on your manufacturing inputs, specifically tellurium, how do you manage your input and specifically how much do you have under contract already and what is the risk that some of your inputs become scarce if other Cad-Tel players come to market.

Jens Meyerhoff - Chief Financial Officer

So, Michael, we have multiple suppliers, who are qualified for both the raw materials off as well as for the subsequent compounding into Cad-Tel. So, we are managing those closely. When we make investment decisions like right now as Mike mentioned in his script, that we are building out roughly a gigawatt of capacity, right, we asses the capability of our supply chain again, for capacity expansions. And, so we will make a decision on those capacity expansions without checking the box, and so we feel comfortable with our supply chain situation on Cad-Tel and tellurium, in particular and something we continue to manage obviously and we got a team working like all other supply chain matters.

Michael Molner - Goldman Sachs

Okay. And, just one other question. It seems like every other day there is a new thin-film entrant being funded. And, two related questions, do you feel a potential massive over supply for thin-film and number 2, is it possible or even something you are looking at to use your technology on a flexible substrate?

Michael J. Ahearn - Chairman and Chief Executive Officer

Yeah, I mean okay, let me take the first question. I think, that well first of all, how do we think about a competitive threat? Primarily, it's around whether some company or a set of companies could come in to the market, while we are all dependent on PV subsidy pools and take a share of the market that we are counting on to be able to scale and achieve the cost reductions that lead to our targets over 2010 to 2012. We think if we get to the pricing capability targets that we have set for 2010 to 2012, very large markets open for everybody in the PV industry. Our competition really becomes cost of deal based solutions.

So the question we look at is whether the threat that somebody takes share in the next several years that we are counting on to be able to scale and in that regard, we don't currently see a strong probability of that occurring. We feel pretty good about our position. To the extend that other thin-film technology to scale well and reach price points that can achieve the same kind of about group parity type pricing. We would think that's good for the industry and is eventually will occur. So that's sort of a thought on competition, in terms of over supply we also think there is a distinct possibility that that could occur sometime in the next year or two but the timing is difficult to handicap but that would be driven in our view more by more by crystal and silicon supplies rather than thin film that reached in the short term.
Oh, on flex substrate, yes, Cad-Tel... its capable of being deposit on flex substrates, its not something but its been our product road map currently but it is not a technical barrier to doing that, so we have looked at it from time to time.

...Robert W. Stone - Cowen & Company

And finally with respect to the feed-in rate, the new numbers haven't been finalized yet for Spain and Germany, are you hearing anything different than the last proposed that the rates have been discussed?

Michael J. Ahearn - Chairman and Chief Executive Officer

No, it's pretty much the same discussions as several months ago.

...Michael J. Ahearn - Chairman and Chief Executive Officer

We do have through our... on module sales efforts in U.S. we had exposure to utilities in Europe there. We are not seeing any greater interest from that now, I think the discussions are sort of proceeding along the same lines they have in the last six to 12 months. In terms of First Solar Electric, you know we are at such an early stage of flushing out the division strategy and plans that we don't really talk about those kind of details and if we did I mean it wouldn't be very good information because its still in flux, its still dynamic at this point. But there are a number of states that have RPS. Our focus right now is on load serving entities that have a legal or regulatory requirement to procure renewable energy. That's driving off these RPS programs and there are obviously a number of potential utilities in that space.

...Michael J. Ahearn - Chairman and Chief Executive Officer

Well it's possible. I mean the way we are thinking about that is, you know we do have some pricing capability here and we would like to use that to find ways to broaden the market broadly entire time, to the solar industry by finding markets that aren't relying on traditional PV subsidies and using the pricing capability to build in those markets. And I think the U.S. utility RPS market is an example but there could be as you say smaller systems driven markets as well. It doesn't mean we wouldn't continue to participate in the PV subsidized markets at the same time and in fact there is long term contracts in that revenue streams pretty important to our ability scale and hit these cost targets but I think its helpful for us and the industry to work to expand the overall market and in ways to demonstrate decreased reliance on the traditional subsidies rather than piling on and taking share from the highly subsidized market. So, that's the direction we'll likely get to move in.

...Kelly Dougherty - Calyon Securities

Good morning and congratulations again. It's obvious that cost need to come down all along the value chain to get to grid parity and we saw the Turner acquisitions last year and its evidence that you have begun to move downstream, just wondering if this was a one off effort to break into the U.S. market or if we could possibly see something similar as you tried to get into other markets as well?

Michael J. Ahearn - Chairman and Chief Executive Officer

It's sort of hard to predict what the future will bring in that regard. I think we are in a stage right now where these markets are evolving and the learning is pretty iterative. I think the U.S. is the first real opportunity to try to expand outside these traditional PV subsidized markets. I think we are going learn a lot through the U.S. utility effort about what we need to occur elsewhere and I also think as channels mature, your need to do many things obviously than that issues, I would imagine that our roles will be dynamic in the channels overtime, as the markets mature.

...Sanjay Shrestha - Lazard Capital Markets

Got it, terrific. And, one quick follow-up and, given that you guys are focusing a lot in the utility market here in the U.S. and somewhat of an uncertainty here on the ITC [investment tax credit-ed.] front but, since majority of your focus is here on the pilot and the sort of the demonstration project right now, what's been the overall interaction up to this point? Can you guys talk a little bit about that as to some of the positives, some of the negatives, and how big of a roll this somewhat of an uncertainty here in the near term related to ITC is playing in terms of the negotiating process?

Michael J. Ahearn - Chairman and Chief Executive Officer

Well, I think most utilities, low serving entities in the U.S. under this RPS obligations, are negotiating. They are out in the market negotiating to procure renewable energy without in the event that the DTCs or ITCs aren't extended. So, I think the discussions are proceeding generally across the board. It is not like there is a freeze on discussions, because of the uncertainty concerning those tax benefits. As far as the tax percentage themselves, its hard to... its obviously hard to predict what will happen there but we don't have any knowledge that they don't have, we are monitoring it pretty closely, and we will just have to wait and see how it plays out.

...Unidentified Analyst

Okay. Then, just a quick follow-up on that, you said that on the, cost per watt goes, since you lowered your cost per watt by about 12% in 2007 should we think that to be a reasonable goal for 2008?

Michael J. Ahearn - Chairman and Chief Executive Officer

No, I think if you look at our road map, in order to achieve $1.25 to $1 pricing capability, right, in the outer years which is in line with our good parity goal of $0.08 to $0.10 per kilowatt hour, that requires us to achieve cost per watt of about $0.65 to $0.70 and that's our long term goal. So we believe we are on track for the road map.

...Colin Rusch - Broadpoint Capital

Good morning, gentlemen and congratulations on the continued phenomenal execution. My questions about price elasticity in the U.S. utility market, maybe a little bit too early for you guys to have real hard data on this but how are you thinking about elasticity in the market, are you looking at RPS requirements post the market, price reference and if you could give me a little bit more... little bit of guidance on how to frame that?

Michael J. Ahearn - Chairman and Chief Executive Officer

Well, in general in risk market segment, our offering is competing against all other renewable energy alternatives. So we are not running the gamut, so you are going to have to be at a price that's competitive with non-PV technologies.
...Colin Rusch - Broadpoint Capital

And then and going over to French market, if the EU decides to define Nuclear Energy as not clean energy for its 2020 targets, have you guys done a preliminary assessment on what the market opportunities would be in France for PV if they weren't able to consider all those nuclear assets as clean energy?

Michael J. Ahearn - Chairman and Chief Executive Officer

No, we really haven't done that Colin. We are... our market analysis right now in Europe is more around the feed-in tariffs and what market opportunity and market structures would drive off of those and what's a reasonable base line to plan on in terms of availability of the structures. I think that next chapter that you're referring to is that's probably the more interesting question but we just haven't reached that yet.

...Paul Leming - Soleil Securities

Good morning and congratulations on a great quarter. I have got a question for Mike, you've raised this specter of over-capacity couple of times on the call and I am wondering if you could just walk me through how you see that playing out over the next 12 to 18 months given the un-kept nature of the German market? Are you worried about a shortage of capital to buy and install systems as long as installed cost hit the levels needed to generate desired project returns? What, really is going to be the limiting factor on installation of modules of projects in Germany to absorb all the capacity that's coming?

Michael J. Ahearn - Chairman and Chief Executive Officer

That's a good question. I guess one question is where we see additional supplies coming into the market as a result of, for example Silicon feedstock constraints being alleviated and possibly removed. That's a scenario we looked at definitely as probability. But the timing of that is kind of hard to... at least for us to pin down because it is fairly empirical and you are getting announcements it seems like every week that bear on that question. So, whether that's 12 months to 18 months or close to 18 months, I think at least for sale it's a lot a little softer and little fuzzy on that but we think it's a distinct possibility that there would be a lot more volumes, crystalline silicon-based coming into the market. In terms of -- yeah, we're with the constraint the down strain from the modules to observe it. We have them looking at the adequacy of projects finance to continue to support the projects in Europe, given the issues in the credit markets in general. So far we haven't seen any issues there, and we haven't learnt anything that would suggest that it is right for you to be a constraint, but obviously that's a dynamic situation in itself. So, we got to keep an eye on that.

That's the first nine pages of ten. The whole thing is here.