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First Solar (NASDAQ: FSLR)
Q3 2024 Earnings Call
Oct 29, 2024, 4:30 p.m. ET
Overview of the Earnings Call
- Prepared Remarks
- Questions and Answers
- Call Participants
Insights from First Solar’s Leadership
Operator
Good afternoon, everyone, and welcome to First Solar’s third-quarter 2024 earnings call. This call is being webcast live on the investors section of First Solar’s website at investor.firstsolar.com. [Operator instructions] As a reminder, today’s call is being recorded. I would now like to turn the call over to First Solar investor relations.
You may begin.
Unknown speaker — —
Good afternoon, and thank you for joining us. Today, the company issued a press release announcing its third-quarter 2024 financial results. A copy of the press release and associated presentation are available on First Solar’s website at investor.firstsolar.com. With us today are: Mark Widmar, chief executive officer; and Alex Bradley, chief financial officer.
Mark will provide a business and technology update, while Alex will discuss our bookings, pipeline, quarterly financial results, and give updated guidance. After that, we will open the call to questions. Please remember, today’s discussion will include forward-looking statements that involve risks and uncertainties, which could result in actual outcomes differing from management’s expectations. We encourage you to review the safe harbor statements found in today’s press release and presentation for more details.
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Now, I am pleased to introduce Mark Widmar, chief executive officer.
Mark R. Widmar — Chief Executive Officer and Director
Good afternoon, and thank you for joining us today. As we approach the end of 2024, we are pleased with our progress amid industry volatility and political uncertainties. Our focus continues to be on balancing growth, profitability, and liquidity. As mentioned at our analyst day in late 2023, we are committed to long-term strategic decision-making, supported by our unique technology and business model. This approach is designed to create value for our shareholders and partners, and we believe it positions us well to navigate the upcoming U.S. elections and ongoing challenges within the solar manufacturing industry.
Turning to Slide 3, I’ll share key highlights from Q3. From a commercial standpoint, we adopted a selective contracting strategy, resulting in a net 0.4 gigawatts of new bookings since our last earnings call. This brings our year-to-date net bookings to 4 gigawatts and total contracted backlog to 73.3 gigawatts, with orders stretching through 2030.
On the manufacturing front, we achieved record production of 3.8 gigawatts this quarter. However, our financial performance was affected by a $50 million warranty charge due to manufacturing issues identified in the initial production of our Series 7 products. These issues were primarily caused by variability in our glass cleaning process and errors in predicting engineering performance margins. Recently, we inaugurated our $1.1 billion facility in Alabama, which will contribute 3.5 gigawatts of vertically integrated solar manufacturing capacity when fully operational. The start of operations at this facility, alongside our Louisiana site slated to begin in the second half of 2025, keeps us on track to meet our goal of over 14 gigawatts of annual U.S. nameplate capacity and more than 25 gigawatts of global nameplate capacity by 2026.
This expansion is expected to generate around 30,000 direct, indirect, and induced jobs in the U.S., equating to an estimated $2.8 billion in annual labor income, highlighting the significant economic impact of advanced solar manufacturing.
In terms of technology, we are set to start production of our CuRe product at our Ohio facility in Q4 2024. This phased approach will initially produce and sell approximately 0.4 gigawatts through Q1 2025. Upon successful validation of its performance, we plan to permanently convert our Ohio plant to CuRe production by Q4 2025 and expand this across our facilities, starting with our sites in Vietnam and Ohio to leverage contractual revenue adjustments.
Additionally, our new perovskite development line in Perrysburg will run technology prototypes through automated processes for the first time as part of our drive to innovate within thin film photovoltaic technology. We have also sent notification letters to key solar manufacturers suspected of infringing on our TOPCon patent portfolio, a topic I will discuss further later in the call.
While Alex will provide a detailed financial overview, it is worth mentioning that our earnings per share for Q3 stands at $2.91, which includes the aforementioned warranty charge. Our advancement in thin film technology and our focus on innovation earned First Solar recognition on MIT Technology Review’s annual list of climate tech companies to watch, making us the only solar manufacturing company featured this year. We are also proud to be included in Time Magazine’s list of the World’s Best Companies for 2024. Moving to Slide 4.
We recently published our annual sustainability…
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First Solar Celebrates 25 Years of Commitment and Innovation
Leading the Way in Sustainable Practices and Intellectual Property
First Solar is marking its 25th year by strengthening its commitment to responsible solar energy practices. This dedication guides the company’s environmental, social, and governance strategies, setting it apart in the industry. The company emphasizes the positive impact of ultra-low carbon solar technology, which reduces emissions, and its focus on recycling photovoltaic (PV) materials while upholding human rights. Over the last year, First Solar has successfully made progress in its ESG initiatives, which are now a vital part of its operations.
In 2023, First Solar has managed to lower its water and waste intensity per watt produced. Additionally, there is a notable increase in the percentage of women in its workforce compared to the previous year. The company’s leadership in PV recycling continues, with a global average material recovery rate of 95% achieved across its recycling facilities located in the U.S., Germany, Malaysia, Vietnam, and India. As the PV manufacturing industry grows, transitioning to verifiable ultra-low carbon solar is essential to avoid undermining efforts against climate change.
Though the solar industry currently represents a small fraction of global emissions, this is projected to change. A report by the Clean Energy Buyers Institute warns that maintaining a business-as-usual approach dominated by energy-intensive crystalline silicon technologies could see PV manufacturing emissions surpass those of aluminum manufacturing by 2024–2040, making it the fourth most emission-intensive industrial product. First Solar takes pride in being the first to offer solar modules that have achieved the EPEAT Climate+ designation, meeting the industry’s first ultra-low carbon solar standards.
Turning to intellectual property (IP) issues, First Solar addresses the ongoing challenges in crystalline silicon cell technology. Traditionally, infringement claims in this sector, especially among Chinese producers, have been limited due to the open-source nature of technology advancements within the ecosystem. However, the landscape is changing. As highlighted on Slide 5, several leading manufacturers are now engaged in patent disputes, particularly focused on TOPCon patents.
Notably, Trina filed a Section 337 complaint with the U.S. International Trade Commission against Runergy and Adani earlier this month, alleging patent infringement related to TOPCon solar cells and components. As part of First Solar’s strategy, the company owns a TOPCon patent portfolio, obtained through the acquisition of TetraSun in 2013, enabling it to develop the next generation of PV technologies. This portfolio includes patents across several countries, with protections extending to 2030.
While First Solar does not hold a TOPCon patent in India, it maintains patent rights in multiple other jurisdictions that are relevant to India-bound manufacturing and exports. The company believes it can enforce its rights against infringing products. Other market participants also claim ownership of TOPCon patents; in mature technologies, it’s common for multiple parties to possess key patents. Without a license covering all relevant patents, manufacturers cannot freely produce and sell products infringingly.
Since July, First Solar has been investigating several crystalline silicon producers for potential patent infringements. This ongoing effort has reinforced the belief that First Solar’s patents are valid and enforceable. The company has initiated discussions with various solar manufacturers through legal channels to address unauthorized use of its TOPCon patents. Recently, First Solar celebrated a decision in China upholding the validity of all 17 claims of its TOPCon patent, providing a strong affirmation of its IP rights.
First Solar’s commitment to respecting property rights is underscored by its proactive approach to patent protection, which is reflected across the solar industry. Many major manufacturers are reporting significant financial losses due to increasing competition, signaling a likely continuation of aggressive IP claims. The uncertainty in IP rights related to crystalline silicon manufacturing may affect developers, project owners, and financing parties who need to consider these potential complications when planning PV projects.
Now, I will hand over the discussion to our Chief Financial Officer, Alex, who will review our financials and bookings pipeline.
Alexander R. Bradley — Chief Financial Officer
Thank you, Mark. As of December 31, 2023, our contracted backlog stands at 78.3 gigawatts, valued at $23.3 billion. By September 30, 2024, we recognized 9 gigawatts of sold volume and contracted an additional 3.5 gigawatts. This figure includes a reduction of 0.4 gigawatts due to the termination of a contract with Plug Power.
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A former corporate customer caused project delays, initially mentioned during our earnings call in February. After an unsuccessful negotiation attempt to revise the contract, we decided to terminate it in Q3 and pursue our agreed-upon termination remedies. This leaves us with a total backlog of 72.8 gigawatts at the end of the quarter, valued at $21.7 billion, translating to an average selling price (ASP) of about $0.298 per watt, excluding certain adjustments. Following the third quarter, we secured an additional 0.5 gigawatts in contracts, raising our total backlog to 73.3 gigawatts.
What are the ASPs for our 0.8 gigawatts of gross bookings following the prior earnings call? This includes roughly 180 megawatts of shipments to domestic India at an ASP of approximately $0.19 per watt. The India market price environment warrants further discussion regarding our strategy related to our India-manufactured products. In addition, we booked 50 megawatts of aged low-bin inventory. Given that this inventory does not meet the standards for our utility-scale customers, we arranged a sale through a nontraditional contracting framework with a module distributor at an initial ASP of $0.05 per watt. We expect to share in the revenue based on the final selling price, which will be recorded as incremental revenue once sold to the end user. The remaining bookings—about 560 megawatts—are targeted at our traditional U.S. utility-scale customers at an ASP of roughly $0.304 per watt, with the potential to reach $0.32 per watt dependent on adjustments.
In the U.S. utility-scale market, the Department of Treasury and IRS issued updated domestic content bonus safe harbor guidance in May 2024. This emphasizes a point-based calculation for renewable energy projects, rewarding vertically integrated manufacturing with domestically sourced components. First Solar’s expanding domestic manufacturing capabilities position us well to meet these criteria. Our U.S.-produced Series 6 and Series 7 modules feature domestically manufactured solar cells, enhancing our clients’ chances of qualifying for the domestic content bonus. The new elective safe harbor offers opportunities for us to improve supply chain efficiency by optimizing module delivery and production across our global operations. We started implementing this optimization strategy during the last quarter, amending existing contracts while keeping the ASPs consistent with the original agreements.
A significant part of our backlog contains chances to enhance the base ASP through performance adjusters related to our ongoing technology advancements. At the end of Q3, approximately 37.3 gigawatts of contracted volume included these adjusters. If fully realized, they could generate an additional revenue of around $0.7 billion or about $0.02 per watt, with most revenues projected between 2026 and 2028. This figure does not encompass other potential adjustments applicable to the entire contracted backlog. Changes in the final module delivered to customers—whether upward or downward—and fluctuations in sales rates or commodity prices for aluminum or steel might also affect the ASP under sales agreements. Our total pipeline saw a robust increase in bookings opportunities, totaling 81.4 gigawatts, reflecting an additional 0.8 gigawatts since the previous quarter.
The mid- to late-stage booking opportunities dipped by approximately 5.1 gigawatts, now sitting at 23.5 gigawatts. This includes 20.9 gigawatts in North America and 2.3 gigawatts in India. Among this mid- to late-stage pipeline, there are 3.9 gigawatts of opportunities under contract but subject to conditions. In the U.S., we hold a 620-megawatt module supply agreement with a customer providing power to a hyperscaler, as mentioned in our last earnings call, alongside 0.8 gigawatts in India. Note that in India, signed contracts are not recorded as bookings until full security against the offtake is secured.
We recently reduced our opportunities in India by 0.4 gigawatts due to the termination of a defaulted module supply agreement with an Indian affiliate of a European oil major, who is reportedly looking to sell this business. A positive highlight in our third-quarter revenue came from a contractual termination payment linked to this customer default. As reiterated in past earnings calls, we’ll focus on aligning customer project visibility with a balanced approach toward ASPs, payment security, and essential contractual terms, particularly given the uncertainty driven by the upcoming U.S. election. We remain committed to leveraging our strong contracted backlog and exercising caution with new bookings this year.
Our goal is to prioritize long-term relationships with customers through forward contracts while maximizing our unique competitive advantages. On Slide 8, I will outline our financial results for the third quarter. Net sales for Q3 totaled $0.9 billion, showing a $0.1 billion decline compared to Q2. This decrease stemmed from a 12% drop in megawatts sold and an increase in the warranty liability for our Series 7 products, offset partially by expected payments from contract terminations in the U.S. and India.
Gross margin rose to 50% in Q3, compared to 49% in Q2. This improvement primarily results from higher termination payments and a greater proportion of modules sold from our U.S. factories, contributing to $264 million in Section 45X tax credits during the period. However, this was somewhat counterbalanced by the rise in the Series 7 warranty liability, along with higher underutilization charges and inflated inventory reserves for lower-bin modules from international factories. We faced planned downtime for CuRe technology enhancements and unanticipated downtime due to operational challenges, including equipment repairs.
Additionally, we incurred underutilization charges at our new Alabama factory as we began ramping up production during the period. SG&A, R&D, and production start-up expenses totaled $123 million in Q3, reflecting a $3 million decrease from Q2. This reduction was driven by lower R&D testing expenses as we optimized production throughput, transitioning specific testing activities to our new Jim Nolan Center for Solar Innovation, coupled with a decrease in incentive compensation expenses. Our operating income for Q3 stood at $322 million.
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Company Reports Mixed Financial Results Amid Operational Challenges
In the latest financial update, the company showcases a complex balance of earnings and expenses from the third quarter of the year. At a glance: the depreciation and amortization, along with accretion, amounted to $111 million. Meanwhile, ramp costs, production start-up expenses, and share-based compensation expenses totaled $25 million, $27 million, and $7 million respectively.
During this quarter, other income stood at $5 million, mirroring the figure from the second quarter. Notably, tax expenses dropped to $14 million compared to the preceding quarter’s $28 million. This significant decrease owes itself to improved income forecasts in lower tax jurisdictions and adjustments made regarding the reinvestment of foreign subsidiary earnings, which had led to additional tax costs in the earlier period. Consequently, earnings per diluted share for the third quarter reached $2.91.
Moving to Slide 9, let’s check some key balance sheet figures and cash flow summaries. The company’s cash, cash equivalents, restricted cash, restricted cash equivalents, and marketable securities totaled $1.3 billion at the quarter’s end, a decline from $1.8 billion observed at the end of the previous quarter. This reduction primarily stems from significant capital expenditures related to the establishment of new factories in Alabama and Louisiana, coupled with a rise in working capital demands.
Total debt at the close of the third quarter reached $582 million, reflecting an increase of $23 million since the second quarter due to elevated working capital loans in India. These loans support ongoing operations at the new plant in that region. As a result of these developments, the net cash position dipped to approximately $0.7 billion, down by around $0.5 billion. For Q3, cash used in operations was $54 million, and capital expenditures totaled $434 million. Let’s discuss the updated financial guidance moving to Slide 10.
Originally set in February, our full-year profit and loss guidance remained steady throughout our Q1 and Q2 earnings discussions in May and July, respectively. However, after a European power customer terminated 0.4 gigawatts of contracted capacity due to asset sales, we anticipated lower sold volumes, revenue, and net cash guidance at the lower end of our projections. There are several reasons for the adjustments in our forecasts.
Firstly, since our last earnings call, where we mentioned the CrowdStrike IT outage that paused our operations for about two days, we have encountered additional challenges. Hurricanes Francine, Helene, and Milton struck the Southeastern U.S., delaying module deliveries and affecting construction at our Louisiana factory. Furthermore, distribution centers in South Carolina and Texas faced logistical disruptions partly due to a strike by the International Longshoremen’s Association. An external security alert at our Ohio plant, although ultimately unfounded, led to a full evacuation, impacting scheduled production significantly.
These occurrences, while not momentous alone, collectively have detrimentally affected the operational and financial performance. Additionally, we maintain concerns over Chinese market practices in India, which have led to artificially low selling prices and lower average selling prices (ASP). In light of this, the Indian government has commenced an antidumping investigation into solar cell imports from China. Despite these measures, ASPs in India remain pressured, illustrated by our recent booking’s ASP of approximately $0.19 per watt.
With these low ASPs in mind, we view the updated safe harbor guidance alongside the IRA domestic content bonus expected in May 2024 as opportunities to transition production in India from fixed tilt to tracker products. We anticipate that part of our output from India could be shipped to U.S. markets at higher ASPs, although this transition will likely lower the volume produced in India by about 0.9 gigawatts in 2024.
Thirdly, as discussed in previous earnings calls, we observe requests from clients to adjust delivery schedules due to development delays. We are collaborating with these customers to optimize their contracted delivery timings when feasible. This situation is shifting some revenue and gross margin expectations to Q4 of this year.
In several cases, we are exercising our rights under contracts to ship modules to storage if clients aren’t ready to accept them as scheduled. While the termination of the Plug Power contract will impact planned sales, our strategies have enabled us to manage this setback effectively, resulting in a minor reduction of around 0.3 gigawatts in our sold volume guidance.
Lastly, we are actively pursuing contractual rights after breaches. The termination of the Plug Power contract has entitled us to termination payments recognized as revenue for Q3. We also enforced termination rights on two contracts in India that yielded similar revenue outcomes. To recover the outstanding balances, litigation is anticipated against Plug Power, as well as arbitration proceedings initiated against our Indian clients.
These cumulative effects are projected to lower our 2024 volume, revenue, and net cash guidance compared to the previous estimates from our Q2 earnings call. Nevertheless, we expect that termination payments will help offset reduced sales volume, keeping gross margins, operating income, and earnings per diluted share within previously communicated ranges. In light of these factors, we now forecast volumes sold at 14.2 to 14.6 gigawatts, yielding projected net sales of between $4.1 billion and $4.25 billion.
Gross margins are anticipated to be between $1.95 billion and $2 billion, which includes tax credits from Section 45X between $1.02 billion and $1.05 billion and costs from ramping up between $60 million and $75 million. SG&A expenses are projected to range from $445 million to $475 million, which incorporates $185 million to $195 million for SG&A, $190 million to $200 million for R&D, and an additional $70 million to $80 million.
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First Solar’s 2024 Earnings Guidance: Key Insights and Strategic Directions
First Solar has outlined its financial expectations for 2024, anticipating operating income between $1.48 billion and $1.54 billion. This estimate includes $130 million to $155 million in combined ramp-up costs and plant start-up expenses, alongside $1.02 billion to $1.05 billion from Section 45X credits. Interest-related expenses are expected to total about $80 million.
Consequently, the company has set its earnings per diluted share guidance for 2024 between $13 and $13.50. Capital expenses are predicted to range from $1.55 billion to $1.65 billion, showing a decrease of $250 million to $350 million compared to earlier forecasts, primarily due to the timing of payments for capacity expansion and research and development. The year-end net cash position for 2024 is projected to be between $0.5 billion and $0.7 billion, influenced by these adjustments and reductions in capital expenditures. I will now pass the call back to Mark for his closing thoughts.
Mark R. Widmar — Chief Executive Officer and Director
Thank you, Alex. With U.S. elections occurring next week, our industry is closely watching the possible outcomes and their effects.
Despite the uncertainty surrounding the elections, we remain hopeful. Our efforts to engage with policymakers have highlighted the economic benefits of domestic high-value manufacturing. We believe that, regardless of election results, we can strengthen our company as we move forward. However, we also acknowledge ongoing challenges. The irrational pricing and overexpansion of the Chinese crystalline silicon industry creates obstacles. We must stay agile, especially with project delays in the United States.
Moving ahead, we will focus on disciplined growth backed by a strong order backlog. When necessary, we plan to enforce our commitments, especially if discussions fail. Our continuous investment in capital and research will support the development of next-generation thin film photovoltaics, which we view as the industry’s future. Moreover, we aim to solidify our technology leadership through strategic intellectual property and advocate for fair laws that promote domestic manufacturing. By maintaining our promises to customers, including addressing any shortfalls proactively, we are poised to enhance our status as industry leaders over the next decade.
To summarize, here comes Alex with key points from today’s discussion.
Alexander R. Bradley — Chief Financial Officer
We have secured 4 gigawatts of net bookings year-to-date, contributing to a robust contracted backlog of 73.3 gigawatts. Our commitment to manufacturing excellence has yielded a record quarterly output of 3.8 gigawatts. Our Alabama factory is now operational, and our Louisiana facility is on track. We expect to launch our CuRe lead line and commence our perovskite development line in Q4.
Additionally, we have issued notifications to certain manufacturers regarding unauthorized use of our TOPCon patents, asserting our rights. Financially, we’ve achieved an earnings per diluted share of $2.91, ending the quarter with a gross cash balance of $1.3 billion, or $0.7 billion after debt. We have updated our 2024 earnings guidance to reflect an anticipated range of $13 to $13.50 per diluted share.
With that, we conclude our prepared remarks and open the line for questions. Operator?
Questions & Answers:
Operator
[Operator instructions] We’ll start with Philip Shen from ROTH Capital Partners.
Philip Shen — Analyst
Thanks for taking my questions. My first question is about the CHIPS ITC. I heard that wafer and ingot facilities might benefit from it in the U.S. Can you confirm if your recent facilities could qualify? Also, what do you expect regarding bookings prices? I noticed a slight decrease in the incremental 400 megawatts, down to $0.304. Lastly, concerning India, how do you see the utilization of your India facility moving forward?
Mark R. Widmar — Chief Executive Officer and Director
Phil, I’ll handle the first and last questions, and then I’ll have Alex address the bookings prices. Regarding the CHIPS ITC, we are carefully evaluating its applicability to our facilities. The intent seems to be to treat various technologies equally, which can benefit sectors like ours as well.
We view the decision positively. It offers a chance to develop a vertically integrated supply chain, aligning with the goals of the IRA. We intend to explore our eligibility, particularly for our Alabama and Louisiana facilities. Now, as for India, we’re currently navigating a challenging market affected by global competition, predominantly from China. This makes it tough for domestic industries to thrive.
I’ll turn it over to Alex to comment on bookings prices.
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Manufacturing Shift Sparks New Opportunities in Solar Sector
Amid bearish local manufacturing conditions and changes in trade policy, companies are adapting in innovative ways to harness market potential.
Domestic production of solar cells and wafers has recently faced challenges. Prices have dropped to levels where U.S. manufacturers struggle to compete with imported goods, even with tariffs in place. However, a new antidumping case is currently being evaluated, addressing this issue and fostering optimism for a more level playing field. The goal is to implement a non-trade barrier for cell manufacturers, specifically targeting imports from China, with a plan to have this initiative operational by the end of the first quarter of 2026.
In this evolving landscape, companies are prioritizing their focus on the domestic market while also seeking strategic international opportunities. For instance, one firm is venturing into exports by adapting their mounting systems for the U.S. market. Their product offerings in India have primarily centered around fixed tilt systems; however, they plan to introduce a tracker model specifically for the U.S. market. This adaptation allows them to use the same technology while catering to varying market needs.
The facility in India is currently operating at maximum capacity to produce the tracker product meant for the U.S. market. Although they faced some challenges last quarter with lower production levels of the fixed tilt product, they report full utilization now and are optimizing output to support further U.S. endeavors.
Alexander R. Bradley — Chief Financial Officer
During a recent discussion, CFO Alexander R. Bradley clarified the financial performance details surrounding average selling prices (ASPs). He indicated that the current ASP of $0.304 doesn’t reflect accurate volumes due to a selective sales approach. Exploring the numbers, they reported net bookings of 0.4 gigawatts, which included a breaking down of their volume contributions: approximately 180 megawatts from India and 50 megawatts bound for the U.S., primarily low-quality inventory slated for resale.
This lower ASP stems from a unique sales strategy that will ultimately yield higher returns thanks to revenue sharing with buyers who will resell the product at better prices. Hence, the actual new U.S. bookings amount to around 0.6 gigawatts. When adjusted for upcoming technological upgrades, the ASP could rise to $0.32.
Operator
Next, we will accept a question from Brian Lee at Goldman Sachs.
Brian K. Lee — Analyst
Good afternoon, team. I appreciate you taking my questions. Following up on the earlier discussion, I remember during your previous call, you projected 2.6 gigawatts of production in India, with over 1 gigawatt directed to the U.S. Clearly, this dynamic is shifting. Could you provide insight into what this mix might look like moving forward? Also, how many quarters would it take to adjust India’s production back to serve the U.S. market in light of the improved pricing opportunities you mentioned?
Mark R. Widmar — Chief Executive Officer and Director
Brian, regarding adjusting production from India, transitioning from fixed to tracker products can typically be done without extensive downtime—involving just a day or two to switch the mounting structures. Our company has invested heavily into ensuring this production flexibility is efficient, allowing adaptations in response to market demands.
In terms of future projections, we foresee leveraging 14 gigawatts of Series 7 capacity, enabling easy integration of domestic and international Series 7 products within the same projects. This seamless blending is key as we scale production while managing our relationships with suppliers for consistent output.
Looking ahead, I anticipate that in a year or two, we might produce less than 1 gigawatt in India while focusing on elevating the U.S. market supply. However, demand will ultimately dictate our distribution plans. Regarding the fourth quarter projections, they reflect a record high in sold volume, yet we remain cautious about potential risks with customer timelines and project delays. We are actively communicating with our clients and adjusting our strategies to ensure smooth logistics and resource management.
Financial Update: Addressing Manufacturing and Warranty Challenges
In a recent call, executives discussed critical aspects of the company’s operations and financial outlook, emphasizing the need for inventory management and clarifying manufacturing issues.
Addressing Inventory Concerns
As CFO Alexander R. Bradley noted, the company is adjusting its strategy due to inventory accumulation in the first three quarters of this year. The focus now shifts toward redistributing this inventory to different locations and projects, though not directly to customer warehouses at present.
Volatility in Volume Production
Regarding the CuRe initiative, Bradley explained that the company anticipates selling some volume, although it remains a small amount. Early production carries inherent risks, especially in the U.S. market where IRA dollars are involved. Even minor sales could significantly impact financial results. Additionally, operational challenges, including weather disruptions, could complicate shipping efforts, particularly as the year progresses.
Analyzing Warranty Liabilities
Jefferies analyst Julien Dumoulin-Smith raised concerns about the $50 million warranty liability linked to the Series 7 manufacturing. CEO Mark R. Widmar provided clarification, stating the issue stems from inconsistencies during the initial production of Series 7 modules. Some models may underperform while others do not encounter similar issues. This variability only becomes evident once the modules are deployed in real-world conditions.
Manufacturing Process Improvements
Widmar explained that the warranty problems arose from two main factors during the initial launch. Firstly, a longer “dwell time” between the grinding and washing processes resulted in certain materials calcifying to the glass, which hampered cleaning. This issue has now been addressed by refining the washing protocol. Secondly, an error in calculating the engineering performance margin led to an inaccurate prediction of future module performance. This calculation error has also been corrected.
Commitment to Quality Assurance
The company has been shipping Series 7 modules for just over a year. Widmar emphasized that comprehensive testing occurs prior to deployment, but some manufacturing inconsistencies become apparent only after field usage. Despite these challenges, the firm remains committed to its technology and stands ready to resolve warranty matters with customers. Actions have been taken to improve the quality operating system to prevent similar issues in the future.
Operator
The floor is open for the next question.
First Solar CEO Discusses U.S. Market Demand and CuRe Product Rollout
Kashy Harrison — Analyst
Good afternoon, and thanks for taking the questions. I have two quick inquiries. It seems there is a potential shift towards increasing the volume of products sent to the U.S., possibly approaching around 25 gigawatts in the coming years. Based on your discussions with customers, do you believe the U.S. market will have adequate demand for these volumes? Additionally, could you clarify our expectations regarding the CuRe plan, specifically the gigawatts we could recognize next year, expected average selling price (ASP) increases, and the additional margins for CuRe?
Mark R. Widmar — Chief Executive Officer and Director
Regarding the U.S. market, you are correct. Given our current trajectory and contracted backlog, we see a strong match between supply and demand, particularly for ’25 and ’26, with enough demand to absorb the products we want to bring into the Indian market. Furthermore, we’re in a solid position for ’27 concerning U.S. bookings. As we progress toward ’27, we need to evaluate additional U.S. demand, and we hope to see a stronger market in India by then as well. Ideally, if we split our focus, about 7.5 gigawatts should be absorbed in the U.S. market, as demand appears strong at this stage. It’s worth noting that we’re still enhancing domestic value with our customers, which they are willing to pay for.
Additionally, there are indications that domestic content criteria will evolve, possibly including wafers in domestic content calculations. To qualify, a U.S. wafer may be necessary to maximize the value of the cell. This vertical integration allows us to optimize the blend between domestic and international products. Looking ahead to ’25 and ’26, we feel confident. However, we are still evaluating ’27. If the Indian market demonstrates resilience by then, it could alleviate some of the demand from the U.S., but we anticipate being able to meet the projected demand in the U.S. for 2027.
Alexander R. Bradley — Chief Financial Officer
Regarding the CuRe plan, we previously mentioned about $0.7 billion in adjusters, mostly affecting 2026, 2027, and 2028. We plan to launch the lead line for CuRe at the end of this year and expect to produce just under 0.5 gigawatt of product by the end of this year and into Q1. Following this, we will conduct field performance testing before re-launching CuRe in late 2025, in Phase 2. During this interim period, we won’t see significant upside from CuRe as we will produce the current product. Eventually, we aim to implement CuRe across our production facilities, beginning with the Ohio plant by the end of 2025, allowing us to benefit from those revenue adjusters moving into 2026.
Operator
Our final question today comes from Andrew Percoco, Morgan Stanley.
Andrew Percoco — Analyst
Thank you for taking my question. I want to revisit your volume guidance for the year. It appears that a significant portion of the reduction stems from operational challenges and specific headwinds in India. I did not hear much about U.S.-based project delays affecting this guidance, so can you provide further insight into customer requests for project delays? Are these requests more prolonged than previously seen?
Alexander R. Bradley — Chief Financial Officer
I will begin, and Mark may add more details. Our updated guidance puts the low end at 14.4 gigawatts, down from a previous estimate of 15.6. This includes nearly a 1-gigawatt impact from India, influenced by current pricing challenges there. On the other hand, we see the opportunity to transfer that volume to the U.S. market at higher ASPs. Currently, the market in India faces difficulties, but given the domestic content guidance, we anticipate a notable margin improvement by shifting some volume. We have fixed tilt products in inventory that will still be sold in India. Although switching production to tracker products requires only a few days, shipping those products to the U.S. won’t contribute this year’s sales volume, which is why our guidance has dropped. For non-India products, we have managed risks effectively, with the Plug Power termination generating about a 0.4-gigawatt impact, but we are down only 0.3 gigawatts in non-India volumes thanks to our mitigation strategies.
We are storing some product in warehouses due to customer readiness and project delays, but we have contracts to fulfill. Generally, we have seen a slight increase in customer requests for delays, with some extending beyond previous norms. While we strive to work with customers as we can, we also enforce contract shipping obligations. Overall, we’ve seen project delays predominantly tied to interconnection rather than financing issues, and we’ve minimized the impact through proactive management.
Operator
[Operator signoff]
Call Participants:
Mark R. Widmar — Chief Executive Officer and Director
Alexander R. Bradley — Chief Financial Officer
Philip Shen — Analyst
Brian K. Lee — Analyst
Julien Dumoulin-Smith — Jefferies — Analyst
Kashy Harrison — Analyst
Andrew Percoco — Analyst
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