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Guest Klothilde

First Solar (FSLR)

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On 6/29/2018 at 1:36 AM, Klothilde said:

I'm interested to hear whether you agree that currently wafers and cells are selling below cash cost and that we should see a correction upwards once inventories are digested.  Yesterday I read that Longi is running at 65% of utilization (can't find the article any more), which imo is a clear sign that we are below cash cost.

Enjoy the numbers. Here is a recent article that suggests that Longi is profitable with 15-20% gross margins on their newly reduced price of 3.35RMB for mono. If you read the article, they have costs of  2.7-2.8RMB per wafer. Using 5.3W/wafer for Mono these days(Perc Mono Modules 5.3W) that comes in at $0.095/W for ASP and a cost of $0.077. That gives them 15-20% margins. It is suggested that the price is planned for them to be profitable as they drive predatory prices to sway people to Mono and make it harder for Tier2 players to survive. The article also suggests they have more cost savings that can be had from processing as well as lower Si costs vs Multi that only has Si cost savings to gain.

They also cover the Tier 2 costs for wafers which is suggesting that they have 13% gross margins currently.

 

http://guangfu.bjx.com.cn/news/20180703/909913.shtml

 

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Thanks so much for those numbers.  Just as a side note, those numbers are from Jason, not to diminish, just to keep in mind.

The numbers indicate to me that there is still room to fall on the mono side and it probably is good to look at the technologies separately.

On the poly side wafers are currently trading at 6.7cts/w while the presentation I linked showed wafer costs slightly above 10 cts/w for GCL currently.  From their 2017 annual report you get a wafer ASP of 13.4cts/W with 27.2%GM for the solar materials division (95% revenue is wafers) for a wafer cost of 9.7 cts/W in 2017.  Throwing in 8% cost reduction for 2018 that still has them around 9 cts/W and thus way above the current market price.
http://gcl-poly.todayir.com/attachment/2018041618320200033111033_en.pdf

The way I see it multi wafers are currently trading around GCL's cash cost and way below competitor's cash cost and therefore are due for a correction upwards.  This is the view reflected in several CN articles as well.  If the China fiasco has taught us one thing is that economic laws DO apply in China as well and you cannot incur deficits or sell below cost (let alone cash cost) forever.

So do you see a correction upwards on the multi side as well?

Another question now relating to FSLR.  Assuming GCLs multi module costs are 25 cts/w (10 cts wafer, 5 cell conversion, 10 modules conversion), how do I approximate FSLR's entitled ASP in the U.S. from it?  Can I add two cents for shipping and warranty, then slap the tariff on, then add 3 cts premium for the efficiency and energy premium?  I.E. (25 cts/W + 2 cts) * 1.3 + 3 = 38 cts.  Or do I have to factor in a margin as well since the tariff is ad valorem?

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40 minutes ago, Klothilde said:

Thanks so much for those numbers.  Just as a side note, those numbers are from Jason, not to diminish, just to keep in mind.

The numbers indicate to me that there is still room to fall on the mono side and it probably is good to look at the technologies separately.

On the poly side wafers are currently trading at 6.7cts/w while the presentation I linked showed wafer costs slightly above 10 cts/w for GCL currently.  From their 2017 annual report you get a wafer ASP of 13.4cts/W with 27.2%GM for the solar materials division (95% revenue is wafers) for a wafer cost of 9.7 cts/W in 2017.  Throwing in 8% cost reduction for 2018 that still has them around 9 cts/W and thus way above the current market price.
http://gcl-poly.todayir.com/attachment/2018041618320200033111033_en.pdf

The way I see it multi wafers are currently trading around GCL's cash cost and way below competitor's cash cost and therefore are due for a correction upwards.  This is the view reflected in several CN articles as well.  If the China fiasco has told us one thing is that economic laws DO apply in China as well and you cannot incur deficits or sell below cost (let alone cash cost) forever.

So do you see a correction upwards as well?

Another question now relating to FSLR.  Assuming GCLs multi module costs are 25 cts/w (10 cts wafer, 5 cell conversion, 10 modules conversion), how do I approximate FSLR's entitled ASP in the U.S. from it?  Can I add two cents for shipping and warranty, then slap the tariff on, then add 3 cts premium for the efficiency and energy premium?  I.E. (25 cts/W + 2 cts) * 1.3 + 3 = 38 cts.  Or do I have to factor in a margin as well since the tariff is ad valorem?

Sure if those are the numbers you want to use for FSLR premiums. I would knock it back 2 to 4 cents or more over the next year myself. There are several reasons such as there are several GW tarrif free modules to start,  several foreign companies building factories in the U.S that is planning on using Malaysian and other sourced cells and a declining PV project pipeline in the U.S. 

 

 So how does that ASP and gross track  back track to their costs with Freight included being $0.30? They make $0.08/watt on what is guidance 3GW? That is $240M. They have had Opex at well over $300M per year and for some years $400M. So where is the profit as they dispose of the last of their project builds or do they really get out of low margin project builds?

 

Don't get me wrong, things are not going to be as nice as JKS tried to paint the second half of 2018 but for the top manufacturers with global presence it will not be as bad either.

CSIQ was suggesting that their blended cost would be $0.28 before the ASP crash by the end of the 2018 fiscal year. They had suggested in earlier con calls that their production costs for their new half cell perc multi would be as low as $0.25 for 2018 year end. With component prices falling as they have, they could easily shave another 20% off that  blended price with Cell prices at $0.13-$0.15/W and module assembly  with lower cost supplies at $0.08-$0.09/W. CSIQ could be looking at Costs of $0.24 for PERC half cell and $0.21-$0.23 all others and a  blended  cost in 2019 of $0.22-$0.23.

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18 minutes ago, SCSolar said:

Don't get me wrong, things are not going to be as nice as JKS tried to paint the second half of 2018 but for the tope manufacturers with global presence it will not be as bad either.

I expect a bloodbath without precedent.  Let's see how it plays out.

FSLR will probably pull off some small earnings thanks to the legacy projects but earnings are not a priority for them now, cash is.

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Does anyone know whether or not Series 6 has received the certifications it needs yet?

Thank you!

Matt

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36 minutes ago, Klothilde said:

Thank you Klothilde.  One less goblin in the closet.  

I noticed it has up to 445 watts.  I wonder if they are actually producing those yet?

From the last CC: 

"The current production entitlement yields 90% of the modules being produced at or above 400 watts, with the top bin of distribution at 420 watts. Over the next 90 days, we see a clear path to an average production bin of 415 watts and a top bin of 425 watts. Furthermore, the early module wattage gives us confidence in our long-term roadmap which takes us beyond 425 watts per module, as we discussed at our last Analyst Day."

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FSLR earnings today.  Good luck to the longs.

Am I crazy to hold into earnings?  Buying some 49 puts just in case.  

Anything lurking that longs should be afraid of?  Are they likely to cut guidance due to the tariffs?

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OOfff.  I didn't get the put purchase done.  Hope it doesn't sell off too deep.  

What is this about the backend of the Series 6 line?

Were bookings a little light?

Series 6 was late for Cal flats.  yikes!?

 

Edited by sunnypease

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I didn't think this was a bad call at all... typical lumpy revenue recognition and some Series 6 hiccups as expected, but by in large I felt that call was ... good?  SEems like little has changed after China, except a 'pause' in the global market, but US is still strong.  Gotta feed the kids, but I dunno... don't feel like anyone should be in a panic to sell becuase they're dropping the ball.  On the contrary, I was re-assured everything is ok after the call.  Market probably won't care, since all they care about is lumpy Q earnings, but I'm not terrified the world is ending.

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2 minutes ago, Mark said:

I didn't think this was a bad call at all... typical lumpy revenue recognition and some Series 6 hiccups as expected, but by in large I felt that call was ... good?  SEems like little has changed after China, except a 'pause' in the global market, but US is still strong.  Gotta feed the kids, but I dunno... don't feel like anyone should be in a panic to sell becuase they're dropping the ball.  On the contrary, I was re-assured everything is ok after the call.  Market probably won't care, since all they care about is lumpy Q earnings, but I'm not terrified the world is ending.

I agree.  I'm kind of amazed they are running a Series 6 line already.  

I'd just like to know what's the problem with the "back end" of the line.  That was supposed to be easy to fix last quarter.

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Yeah, I kinda zoned out when he was explaining the back end issues with that tool.  Got a bit in the weeds for me, just tell me its gonna be fixed.. which he seemed to say would be beginning of Q4 I believe.  I'm thinking through all of this again and getting a little irritated (with the market/analysts) that not much has changed with the company since it was $80/sh and everyone was in love - in fact, one could say there are actually some positives that have emerged when most of them were expecting total fear. 

The SE Asia "pause" is to be expected and is a small segment.  He didn't give the impression that existing contracts were being re-negotiated or squeezed.  Darn near fully booked to end of 2020.  I also didn't get the impression that margins would be collapsing or project sales were in limbo/turmoil.  I'll have to read the transcript again later, but in a challenging environment it seems like they're perfectly positioned to handle it.    

I didn't fully grasp the response to the Goldman Sucks question re: shifting the S4 to S6 lines faster.  I want to say he didn't say they would be... seemed like they just planned on maintaining the current course.

They'll move the stock where they want, but I'm not sure why my $69 shares are worth $50 right now after hearing the call.

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Here is a quote from a SA comment:

"I wouldn’t be so certain about next quarter’s earnings not being huge. The company has a weird tendency to overpay taxes and then claim a refund at a later date. There could be a really big refund next quarter when the company files it’s 2017 return.

Back in Q4 the company took a $405M tax hit to repatriate its overseas cash. This seems way too high as the company had said it had around $1.3B locked overseas. FSLR seems to have paid the 35% rate rather than the one-time 15.5% fee.

The company has hinted about this possible windfall the past 3 earnings calls but no one seems to have paid attention. This could easily bump EPS by well over $1."

I need to go digging for that.

Also, I suppose implied value of the module pricing is buried somewhere in the numbers?

Also, they seem to have a certain regular pace of booking out capacity.   Did they fall behind on that this quarter?  I think he said 900MW booked in the quarter?

Re: series 6 panel wattage:  

In Q1:

"The current production entitlement yields 90% of the modules being produced at or above 400 watts, with the top bin of distribution at 420 watts. Over the next 90 days, we see a clear path to an average production bin of 415 watts and a top bin of 425 watts. "

In Q2:

"Module wattage continued to improve steadily and is currently averaging 415 watts per module as compared to a production entitlement that yielded most modules near 400 watts at the end of our last call. Our top bins are currently at 420 watts per module and are approaching 425 watts. "

So.. a little slippage there.. they didn't make it to 425 yet.  

Hopefully they didn't count on getting to 425+ to make their margin numbers.

 

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1 hour ago, sunnypease said:

Hopefully they didn't count on getting to 425+ to make their margin numbers.

 

It sounded like this did impact their numbers and margins.

 

Listen starting at minute 21.

https://edge.media-server.com/m6/p/22zwcsw4

They indicated that the lower production  and  lower modules efficiency impacted revenues. That this is leading to higher costs in the California Flats and a lower nameplate as the number of modules are fixed.  

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They kept their EPS guidance for the year, so the impact must be insignificant.  In my country they would say "let's not make an elephant out of a mosquito".

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"We're lowering our expected gross margin range to reflect 2018 cost impacts, including Series 6 cost per watt increases mostly associated with aluminium cost to the module frame as well as increased POS costs." 

 

Thank you tariffs!?

What are POS costs?

Edited by sunnypease

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6 minutes ago, Klothilde said:

They kept their EPS guidance for the year, so the impact must be insignificant.  In my country they would say "let's not make an elephant out of a mosquito".

OMG, the sky is falling.

They lowered their high end range of revenue guidance in narrowing their revenue guidance range.

They lowered their margin guidance by ~4.7% where top end margin is now 21.5% which was their low end margin guidance.

They lowered their Operating income by as much as 11% or $20M from a high end range of $180M down to $160M .

Their lines are only running for several hours before failures occur and they need to shut or slow down the lines. The issues is leading to lack of inventory in the lines. Their solution is not to resolve why the line is breaking down but rather to create inventory buffers so when failures occur, they still have product to feed the lines. This suggests to me that they need more equipment to get similar through puts. Then their is the fact the efficiency is not as good as they were expecting based on the blaming of efficiency having to downgrade the California Flats DC ratings.

 

Horrible just Horrible

 

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2 minutes ago, SCSolar said:

OMG, the sky is falling.

They lowered their high end range of revenue guidance in narrowing their revenue guidance range.

They lowered their margin guidance by ~4.7% where top end margin is now 21.5% which was their low end margin guidance.

They lowered their Operating income by as much as 11% or $20M from a high end range of $180M down to $160M .

Their lines are only running for several hours before failures occur and they need to shut or slow down the lines. The issues is leading to lack of inventory in the lines. Their solution is not to resolve why the line is breaking down but rather to create inventory buffers so when failures occur, they still have product to feed the lines. This suggests to me that they need more equipment to get similar through puts. Then their is the fact the efficiency is not as good as they were expecting based on the blaming of efficiency having to downgrade the California Flats DC ratings.

 

Horrible just Horrible

Well I dunno if it's all that horrible.  They are trying to run a full line while fixing it.  

Yes the idea of fixing it by using buffers of inventory does sound crazy.

Also, I really do not understand what sort of problems they are experiencing in the "back end".  In the last quarter's call the "back end" was said to be the easy part.  Now.. almost a half year later, it's still the problem.  What the heck?

We should keep an eye on their hiring page to get a feel for how big an emergency this may be.

Frankfurt, wir haben ein problem.  

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Ok, so I read the transcript a couple of times again last night.  Are we all feeling like this is just what they said it would be?  The weakest/low point of earnings?  Obviously if they can't get their technical issue fixed, that's a big problem, but it sounded to me like they weren't terrified of that.  The only thing they did say would be a potential risk is that JP project timing that may roll into 2019 and affect FY guidance.  But that's typical lumpy solar stuff as they said it wouldn't affect the economics.

Of course the market will do what analysts and big money want it to do, but to me, it really sounds like things are on the right track with slight hiccups due to the technical issue and project timing.  Project timing, anyone who has been around solar for any amount of time knows that's how it goes.  

I'm not about to add shares here, but I don't think I'm going to sell anything either.  They feel like this is the bottom as far as their business and their contracts are locked up.  With cancellation penalties on those, it seems to me like so long as PV prices don't totally collapse, it wouldn't be of great financial benefit to cancel FSLR and buy CSIQ panels or what have you.  By the time you pay the penalty, you're cutting into your potential savings.  

One thing I wish they'd do is put out regular press releases when they have a big module agreement or pick up a project.  I didn't know about the South Carolina one... and hell, I even live here in SC.  Why they're so quiet about their transactions between conference calls really bugs me and doesn't exactly encourage new investors to come in.  Why did we have to wait for that comment about China impact for a full month?  What Widmar said could have been said the day or three after the announcement!  Their IR sucks.

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