Capacity expansions are out, improving manufacturing line efficiencies and productivity is in, according to First Solar’s chairman Michael Ahearn, who took over the CEO role from ousted Rob Gillete last week. Capacity expansions had seen average module efficiencies rates increase modestly in 2011; on the downside, production cost per watt merely flat-lined. Almost unheard of was the fact that manufacturing line utilization rates had dipped below 100% as capacity outstripped demand. Back at the helm, Ahearn said that First Solar would re-focus on markets without energy subsidies such as the Middle East as well as markets with critical energy needs such as India, North Africa and China.
“Excess supply relative to demand has led to pricing and margin reduction because demand in the short term is inelastic, and by that, I mean lower prices might enable a company to take more share with declining subsidy pool, but they won't increase aggregate demand. Because of that, returns on capital have also declined,” commented Ahearn in the conference call to discuss third-quarter results.
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“So for First Solar, the central task is to transition from these less attractive markets towards the market that will drive the future, and to do so in a manner that will allow for operational and financial stability,” he added.
Ahearn also revealed in the conference call that the company will postpone commissioning of its new factory in Vietnam. The facilities will be completed but not tool installed until improved market demand.
However, he was quick to support the build-out and commissioning of its massive new plant in Mesa, Arizona which will support First Solar’s 2.7GW North American project pipeline requirements.
In separate news, First Solar officially opened its Frankfurt plant expansion, doubling production to 500MW.
Module efficiency and line productivity
With massive overcapacity impacting pricing across the PV supply chain, First Solar is to focus on efficiency gains. Management highlighted in the call that in the third quarter, some of its best-performing production lines had reached an average module conversion efficiency of 12.4%.
Ahearn noted that the company would further reduce the cost per watt to between $0.52 and $0.63, and plans to increase conversion efficiencies from 13.5% to 14.5% by the end of 2014.
Renewed focus on line productivity was also highlighted. Management expect average line throughput to increase from 63.5MW per line in the third quarter of 2011 to 70MW by the end of 2012.
“Now these cost reduction and conversion efficiency improvement plans are not without risk, but the plans are reasonable and the targets are feasible,” noted Ahearn in the call. “Achieving these goals would enable us to price solar electricity for as low as US$100 to US$120 a megawatt hour, which makes solar electricity affordable in many parts of the world.”
Q3 production
First Solar reported that module production in the third quarter was 551MW, up 58% versus the prior year, and up 14% quarter-on-quarter. The increase was due to the ramp of its expansion at KLM 6 in Frankfurt (Oder). Annual capacity per line increased by 1MW quarter-on-quarter to 63.1MW.
Project pipeline
The company has added 654MW of new contracts to its project pipeline so far this year, including 222MW in the third quarter alone. These included a 130MW EPC agreement with Tenaska, a 66MW EPC agreement with NRG and a 16MW agreement with Constellation Energy, and 10MW for the company’s first utility-scale project in Australia with Verve Energy and GE Energy Financial Services. Management noted in the call that it planned to install approximately 450MW (DC) of systems projects in North America in 2011.
The significant increase in quarterly sales reported last week were due primarily to the higher level of North American systems business, and in particular to one project, Agua Caliente. Net sales for the second quarter were just over US$1 billion, up US$533 million from last quarter.
The company reported module gross margin of 41.4%, up from 40.2% in the prior quarter. Operating margin for the quarter was 22.1% compared to 12.1% in the second quarter. Third quarter net income was US$197 million.
Financial guidance
Management guided that 2011 revenue would be in the range of US$3 billion to US$3.4 billion. However, the company said it would provide 2012 guidance in December.
