We recently did a deep dive into the Inflation Reduction Act (IRA) and its key provisions here. We identified First Solar (FSLR) as a key beneficiary of the bill and analyzed how it would impact its profitability. First Solar has been one of the few companies that have provided clear guidance on how Section 45x of the Inflation Reduction Act and the related Corporate Tax Credits (IRATC) would impact its 2023 earnings.
First Solar is due to report their q123 earnings on 4/27/23 (amc). This is an important quarter because it is the first where the market will be able to assess the impact of the IRATC. There are several key factors that investors will be looking for.
1. Any revisions to the treatment, timing or total amount of the 2023 IRATC?
2. On track to meet production targets and update on contracted backlog?
3. Update on capex plans and related financing
4. Outlook on ASP per watt?
5. Any improvement in logistics costs that was a significant drag on 2022 earnings?
6. 2023 earnings expectations
We will cover each point in more detail below.
1. Update on IRATC
In its Q422 earnings call, First Solar stated that it had consulted with various regulatory bodies and was advised to treat the IRATC as a reduction in the cost of sales. This accounting treatment has a direct impact by increasing gross margins.
“Following consultation review with outside advisers, our auditors and the SEC, we expect to recognize these credits as a reduction to cost of sales in the period such modules and the integrated eligible components are sold to customers”
“I’ll now cover the full year 2023 guidance ranges. Our net sales guidance is between $3.4 billion and $3.6 billion; gross margin is expected to be between $1.2 billion and $1.3 billion, which includes $660 million to $710 million of advanced manufacturing production tax credits under Section 45X of the IRA This results in a full year 2023 earnings per diluted share guidance range of $7 to $8.”
Taking the mid-point of the 2023 IRATC and sales guidance, this would result in gross margins of 36% compared to 16% without the IRATC.
We will look to see if management provides any updates to the guidance above. Management indicated that the IRATC will begin to make a more meaningful contribution after Q1. Indicating that the gross margin uplift will be more visible after Q1.
“Section 45X credits, recognized, will increase after Q1, driven by both the timing of volumes sold as well as the inventory lag, whereby products sold in the early part of 2023 may have been manufactured in 2022.”
2. On track to meet production targets and update on contracted backlog?
First Solar ended 2022 by manufacturing 9.1 GW of capacity. For 2023, they have guided for 11.5 to 12.2 GW. Meanwhile, their contracted backlog stands at 61.4 GW. This is about 5x their estimated 2023 production capacity.
First Solar is currently expanding its capacity in Ohio and Alabama. By 2024, they estimate that about 50% of their total production capacity will be US based.
We will look for updates on these targets for any meaningful changes. For example, if their US capacity is ahead of plan, how this may impact the amount and timing of the IRATC.
3. Update on capex plans and related financing
In the Q4 call, First Solar indicated they did not require external financing.
“Operationally, in 2023, we’re expecting to produce 11.5 to 12.2 gigawatts of modules, and after taking into account reductions in inventory, fell 11.8 to 12.3 gigawatts. From a capital structure perspective, our strong balance sheet has been and remains a strategic differentiator, enabling us both to weather periods of volatility as well as providing flexibility to pursue growth opportunities including self-funding our Series 6 and Series 7 transitions.”
We ended 2022 in a strong liquidity position. And coupled with strong forecasted operating cash flows, modular advance payments and our existing India credit facility, we expect to be able to finance our current capital programs without acquiring external financing. We are evaluating putting in place our revolving credit facility to support jurisdictional cash management as well as to provide short-term optionality and expect to address more details on our capital structure and liquidity outlook at our Analyst Day.”
4. Outlook on ASP per watt?
In Q4, First Solar stated:
“We had a total contracted backlog of 61.4 gigawatts with expected future revenue of $17.7 billion for a portfolio average base ASP of $0.288 per watt, before the application of potential adjusters”
The potential adjusters apply to their domestic production and are impacted by the IRATC. These adjusters are an important source of potential upside to domestic ASP and earnings.
First Solar has also guided to an IRATC of $0.17 per watt, which is effectively an addition to the ASP per watt ($0.288 + $0.17). Any indication that either or both will increase is a positive.
We will look for updates on these pricing dynamics for 2023.
5. Any improvement in logistics costs that was a significant drag on 2022 earnings?
2022 was a difficult year for First Solar. Gross margins were 2.2% vs 25% in 2021. A main factor was higher than average logistic related costs due to the pandemic that other solar companies faced. Demurrage costs – financial penalties incurred for leaving goods on the port beyond the agreed time – were particularly a heavy burden.
Management indicated that they expect a return to normalized levels over the course of 2023. Other solar companies that reported Q4 after First Solar had begun to see significant improvement in logistics related costs. This could be an additional source of margin improvement for First Solar sooner than expected.
It’s important to point out that between the 2023 IRATC and the one-time nature of the 2022 demurrage costs, a year over year comparison of earnings between 2022 and 2023 is not necessarily an apple to apples comparison.
The IRATC has fundamentally changed the earnings profile of First Solar starting in 2023.
6. 2023 earnings expectations
Given the new post-IRATC investing world, consensus expects Q1 sales to be $720m, an increase of 96% y/y. And earnings to improve from a loss of $0.41 to a gain of $0.94. FY 2023 earnings are 2nd half weighted.
Given the accounting treatment of the IRATC, the primary focus should be on earnings per share.
Quarterly
Yearly
Yearly
How to position ahead of Q123?
Year to date First Solar is up about 45%, reflecting the optimism post their 2023 IRATC guidance in their Q4 call. Consensus revisions have also been increasing as a result, mainly 2nd half weighted.
Suffice to say, positive expectations have been building up going into the report. Given First Solar’s prior comments that “Section 45X credits, recognized, will increase after Q1”, this timing effect may provide a better entry point.
First Solar has guided for 2023 EPS of between $7-8 and total 2023 IRATC of between $660-710m. Any upward revisions to this guidance will be viewed positively. Additionally, if they provide any insight into beyond 2023, that will also be positive although it’s probably too early to expect that.
Fundamentally, we believe that the IRA is a significant piece of legislation and First Solar has positioned themselves as a National Champion in its implementation.
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