First Solar, Inc. (NASDAQ:FSLR) Q1 2016 Earnings Conference Call April 27, 2016 4:30 PM ET
Steve Haymore - Investor Relations
James Alton Hughes - Chief Executive Officer
Mark Widmar - Chief Financial Officer
Vishal Shah - Deutsche Bank Securities, Inc.
Tyler Frank - Robert W. Baird & Co., Inc.
Brian Lee - Goldman Sachs & Co.
Paul Coster - JPMorgan Securities LLC
Sven Eenmaa - Stifel, Nicolaus & Co., Inc.
Philip Shen - ROTH Capital Partners LLC
Julien Dumoulin-Smith - UBS Securities LLC
Patrick Jobin - Credit Suisse Securities
Krish Sankar - Bank of America Merrill Lynch
Colin Rusch - Oppenheimer & Co., Inc.
Pavel Molchanov - Raymond James
Good day, everyone, and welcome to First Solar's First Quarter 2016 Earnings Call. This call is being webcast live on the Investors section of First Solar's website at firstsolar.com. At this time, all participants are in a listen-only mode. As a reminder, today's call is being recorded.
I would now like to turn the call over to Mr. Steve Haymore from First Solar Investor Relations. Mr. Haymore, you may begin.
Thank you. Good afternoon, everyone, and thank you for joining us. Today, the company issued a press release announcing its financial results for the first quarter of 2016. A copy of the press release and the presentation are available on the Investors section of First Solar's website at firstsolar.com.
With me today are Jim Hughes, Chief Executive Officer; and Mark Widmar, Chief Financial Officer. Jim will provide a business and technology update; then Mark will discuss our first quarter financial results and provide updated guidance for 2016. We will then open up the call for questions.
Most of the financial numbers reported and discussed on today's call are based on U.S. generally accepted accounting principles. Please note this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statements contained in today's press release and presentation for a more complete description.
It's now my pleasure to introduce Jim Hughes, Chief Executive Officer. Jim?
James Alton Hughes
Thanks Steve. Good afternoon and thank you for joining us today. Before we discuss our first quarter operational and financial results, I want to take a few minutes to talk about the leadership transition we announced earlier today.
As you may have seen in our press release, after four years with First Solar as CEO, I have decided that I will step down on June 30 and hand the rams over to our current Chief Financial Officer, Mark Widmar, who will assume role of Chief Executive Office at that time. As part of the transition, I will continue to support the company in an advisory role and as a Member of the Board of Directors.
The board and I worked jointly on the company’s leadership succession plan and Mark was our first and best choice as CEO as for Solar enters its next phase of growth. Mark is strong and capable leader with an extensive knowledge of our business having served as First Solar’s Chief Financial Officer since 2011 and as First Solar’s Chief Accounting Officer from February 2012 through June 2015. Mark and I have worked closely together over the past four years and I expect a seamless transition. I have deep confidence that the company will be in good hands.
It’s been a privilege to leave the First Solar and I am proud of the significant milestones we accomplished as a team. When I joined First Solar in early 2012, the company faced significant challenges from both industry specific and macro-economic factors. My intent from the start and my commitment to the Board of Directors was to work with First Solar leadership to establish a strategic plan that place the company on a trajectory of sustainable success.
As our most recent Analyst Day demonstrated, we have accomplished what we said have to do it four years ago. We not only achieved our goals but we exceeded our expectations. I’ll remain excited about the opportunities ahead for First Solar. With that let’s turn to our results.
I’ll begin by briefly reviewing our first quarter operational and financial performance. First our 30 manufacturing lines ran at 100% capacity utilization and produced over 770 megawatts of modules in the first quarter.
Our Q1 fleet average efficiency continued to improve climbing to 16.2%. Our lead line efficiency continues to hold steady at 16.4% as new efficiency process improvements are not slated until later in the year.
Coming off our recent Analyst Day where we laid out a higher compelling technology roadmap and potential capacity expansions, this represents an impressive start to 2016 and to achieving the objectives outlined at that meeting.
Turning to Slide 4, I’ll review our latest comparison of books versus year-to-day shipments. We ended 2015 with 4.2 gigawatt DC of expected future module shipments. In the first quarter, we shipped over 800 megawatts of modules against this total and it booked 600 megawatts of new volume. Of the 600 megawatts of new bookings, around 400 megawatts were booked since last earnings call in late February.
The largest single booking was the previous announced module supply agreement of over 200 megawatts DC with Silicon Ranch for delivers to their projects which schedule for construction in 2017 and 2018. This agreement is another positive indication of the strength of solar demand in the South Eastern United States beyond 2016.
International volume was an important component of our bookings since last earnings call with volume contracted in several different countries. In India, we signed a module agreement for almost 100 megawatts DC of additional volume. As announced recently we achieved a major milestone in this market with now over 1 gigawatt of volume sold in the India. These new bookings add to our strength in this growing solar market.
In Honduras we signed an agreement with Grupo Terra to provide modules and EPC services for 25 megawatt AC solar project. This is the second project in Honduras, we have constructed for Grupo Terra and further expands our presence in this region.
For the balance of the year, we continue to see a number of domestic and international opportunities that would move us closer to a one to one book-to-bill ratio. In the U.S. the ITC extension has led to an increase in overall opportunity but customers continue to work through revisions to project timing which has led to some temporary delays in new contracted bookings.
Potential international opportunities continue to be strong as well with the decision timing on a number of projects returning in the second half of the year. In addition, while the majority of bookings thus far in 2016 have been primarily module sales. This is timing related as we are pursuing a number of systems booking opportunities during the balance of the year.
For example in our mid to late stage potential bookings, we have over 450 megawatts of opportunities with offerings ranging from AC power block to a full power plant. In our early stage opportunities if we focus on the projects with the highest booking probability, there are over 500 megawatts of additional potential systems bookings. In each case, these are projects with 2017 CODs and the majority of shipments occurring in that year.
Note, then in addition to the more than 950 megawatts of opportunities discussed, there are large number of other early stage systems projects with lower probabilities that may materialize as well.
Our bookings in terms of expected revenue now stand at 6.4 billion as shown on Slide 5. The decrease in expected revenue as a result of the timing of new bookings thus far in 2016 and the higher mix of module only business compared to the revenue recognized in Q1. Now this include revenue on any module sale or systems project that we have contracted. However, it does not include our contracted O&M revenue.
Slide 6 provides the updated potential bookings opportunities which is now over 23 gigawatts, an increase of approximately 3 gigawatts from the prior quarter. Our mid to late stage bookings opportunities are 3.1 gigawatts DC with international opportunities across 20 different countries comprising almost 90% of this number.
Moving on to Slide 7, our updated potential bookings opportunities by geography reflects a net increase in opportunities across all regions. The largest increase was in the United States where new opportunities were identifying across multiple regions but especially in the South and South Eastern part of the country.
We also had a significant increase in opportunities in the Middle East, India and Asia Pacific regions. The growth in opportunities in these regions plus the large number of mid to late stage international opportunities demonstrates the results of our multiyear effort we have made to diversify into new markets.
I’ll now turn it over to Mark, who will provide more detail on our first quarter financial results and discuss updated guidance for 2016.
Thanks Jim, and good afternoon. Before I delve into the numbers, I would like to take this opportunity to express my heart filled thanks to Jim for his leadership and friendship over the past four years. First Solar is a strong company today, thanks to his guidance and dedication. I look forward to building upon this success in the future. From July, I’ll hit the ground running and work with our Board, management team and associates to drive First Solar’s next phase of growth while continuing still the strong results to our shareholders.
In addition, we announced today that Alex Bradley has been appointed Interim Chief Financial Officer. Alex has served as Vice President of Project Finance since 2012 for the responsibilities for treasury group added last year. Alex has been with First Solar for eight years and with instrumental in launching 8point3 Energy Partners last year.
I have tremendous confidence in Alex’s ability step into the CFO role until permanent successor named.
Now I’ll begin by discussing our first quarter operational performance on Slide 9. In Q1, we produced 774 megawatts DC, an increase of 2% from the prior quarter due to higher module efficiency and increased throughput. Production was 43% higher compared to the first quarter of 2015, due to higher efficiencies, improved throughput and the addition of new capacity.
Our capacity utilization remained at a 100% in Q1 and is 13 percentage points higher versus the same period in 2015. The higher year-over-year for past utilization is due to fewer upgrade activities across the fleet.
Our best line conversion efficiency remains unchanged at 16.4% as planned in our technology roadmap. Compared to the first quarter 2015, our lead line efficiency improved by 80 basis points.
Average module conversion efficiency in Q1 for our entire fleet was 16.2%, an increase of 10 basis points quarter-over-quarter. Year-over-year our fleet average conversion efficiency increased by a 150 basis points.
As indicated at the recent Analyst Day, efficiency improvements are expected to pick up later in the year as we are targeting a full year average and lead line efficiency exit of 16.7% and 17% respectively.
I’ll next discuss the P&L results for the quarter on Slide 10. For Q1 net sales were 848 million in the quarter compared to 942 million in Q4. The decrease in sales results are primarily from the timing of revenue recognition across multiple systems projects and the completion during the quarter of our Tenaska West and Southern projects.
Module plus revenue defined from the prior quarter while third party module sales increased slightly. Partially offsetting these decreases was the higher revenue on our Stateline project which resulted from an amendment to the original sales agreement with Southern to include an additional 15% interest in the project. This leads First Solar with the remaining 34% interest which is expected to be dropdown to 8point3 in the second half of the year.
As highlighted at the Analyst Day, the sale of this incremental interest in Stateline does not impact our full year guidance but thus have the effect of shipping earnings from the second half of the year into the first year.
As percent of total quarterly net sales, our solar power systems revenue which includes both our EPC revenue and solar modules used in Systems project decreased to 93% from 95% in the prior quarter.
Gross margin for the quarter was 31% compared to 24.6% in the fourth quarter. The improved margin percentage resulted from the higher mix of Stateline revenue and significant system cost improvements.
Our component segment gross margin improved to over 28% in the quarter and benefited from a lower module cost per watt.
Operating expenses decreased by almost 2 million from Q4 to 98 million. R&D expenses were lower versus the prior quarter, partially offset by higher developments. First quarter operating profit was a 165 million compared to an operating profit of 132 million in the prior quarter.
Other income and expense was 36 million for the quarter, primarily due to a 38 million gain from the sale and rebalancing a certain restricted investments associated with our module end-of-life program.
The transaction was completed in order to better align the currencies of investments with those of the corresponding collection recycling obligation. The gain was approximately 20 million net of tax.
Tax expense for Q1 was 34 million including the tax and the gain from the sale of our restricted investments.
Q1 earnings were $1.66 per fully diluted share on net income of 171 million. This compares to earnings of $1.60 in the prior quarter.
Overall it was a strong quarter for earnings and a positive start for 2016. We were able to settle an incremental legit in Stateline which now they straightens our ongoing relationship with Southern but also provides greater flexibility for 8point3.
Our manufacturing system operations performed extremely well in the quarter and contributed significantly to the Q1 results.
Turning to Slide 11, I’ll now discuss the selected balance sheet items and cash flow summary. Cash and marketable securities increased by approximately 50 million to 1.9 billion. Our net cash position also increased to 1.6 billion.
The improvement was achieved while our project related asset balance grew to 1.5 billion from 1.3 billion in the prior quarter.
For the quarter, net working capital including in the change in non-current project assets and excluding cash and marketable securities increased slightly as compared to Q4. The increase in project related assets was partially offset by a reduction in accounts receivable.
Total debt increased by 10 million from the prior quarter to 299 million as payments on our debt facility were more than offset by additional financing for international projects.
Cash flow from operation was 50 million slightly lower as compared to Q4. Free cash flow was 30 million compared to 20 million in Q4. Capital expenditures were 52 million as compared to 27 million in the prior quarter. Depreciation for the quarter was 55 million or approximately 5 million lower than the prior quarter.
Continuing with Slide 12, I will now discuss our updated full year 2016 guidance. First note the while, the strong Q1 results could be precede at the catalyst for a more substantial increase in our earning guidance is important to keep mind the factors that contributed to the revise guidance.
First, the amendment to the original Stateline sales agreement did not impact full year earnings, rather it affected the timing of the earnings and the income statement presentation. In addition, we feel it’s too early in the year to make more substantial updates to the guidance, but we have visibility to opportunities during the balance of the year that could result in making an upward revision, we believe a more measured approach at this time is proven.
Turning to our guidance on net sales, we are keeping the range of 3.8 billion to 4 billion. We are maintaining the range primarily based on the expected accounting for the sale of Kingbird project, which we will reflect in our Q2 results. The tax equity structuring for this project sale will result in a partial deferral revenue. We will provide more information related to this transaction on the Q2 call, but for now we are highlight that is factor in holding the next sales guidance unchanged.
Next, we are increasing our growth margin guidance range by a 100 basis points to a revise range of 18% to 19%. The gross margin improvement is a result of the amendment to the original Stateline project sale which result a movement of profit from equity in earnings to gross margin. In addition, the cost improvements in the first quarter have benefited gross margin and are reflected in the updated range.
It is important to keep in the mind that the expected profit and the sale of our remaining 34% interest in the Stateline is still reflected in equity in earnings in our guidance.
Operating expense is unchanged and operating income guidance has increased by 40 million reflecting the improved gross margin.
The effected tax rate unchanged at 16% to 18%. We will increase the low end of guidance for share - earnings per share guidance to $4.10 and left the high end unchanged at $4.50. As noted on Slide 12, our EPS guidance included approximately 145 million net of tax form the expected sale of our remaining interest in Stateline and First Solar share of 8point3’s earnings. In additional, approximately $0.20 of other income, net of tax is included in the earnings guidance range from the Q1 sale of the restricted investments mentioned.
The distribution of earnings toward the year is expected to be slightly less than 50% in the first half of the year although it is the subject to the timing of when certain project sales close. Our expected ending net cash balance is unchanged and operating cash flow range has increases by 100 million compared to our prior guidance. The increase in operating cash flow has a net zero impact to the overall cash balance as it is a movement from investing to operating cash flow.
With the sale of an incremental 15% interest in Stateline to Southern, the cash associated with this transaction we treated as operating cash flow rather than the prior expectations of an investing cash flow from the sale of residual interest in the project of 8point3.
Keep in mind that our operating cash flow guidance does not include approximately 320 million from the expected sale of the remaining interest in Stateline to 8point3 which we expect to be treated as investing cash flows.
Our capital expenditures and shipment guidance remains unchanged. Related to our CapEx guidance in the year, it should be noted that included in this numbers approximately 130 million related to the launch of our Series 5 product which we introduced recently at our Analyst Day.
Our dropdown plans for Kingbird, Stateline, and Moapa to 8point3 are unchanged. However, the actual execution is subject to market conditions. Following our recent Analyst Day, some has expressed concerns that we did not provide more specifics around 2017. I wish to reiterate that there are still a number of moving pieces and uncertainties related to 2017 which make it meaningful to provide an outlook at this time.
Reality should not overshadow if there is significant opportunities and technology advances we have laid out in detail at the event. We feel the company is better positioned than at any time during the past five years from a technology, operations and balance sheet strength standpoint. And we look forward to many opportunities to come.
Turning to the next Slide, I’ll summarize our progress during the past quarter. First, we delivered solid financial results for the first quarter with gross margins of 31% and earnings per share of $1.66. We updated our 2016 earnings guidance range from $4.10 to $4.50, which represents a $0.05 increase of our guidance midpoint. Our technology performance continues at a strong pace with a fleet average efficiency of 16.2% and a best line 16.4%.
We have booked 600 megawatt so far this year and we continue to see the number of opportunities increase and our potential bookings now stand at over 23 gigawatts. For the number of opportunities in the second half of the year, we see anticipated booking momentum to continue.
With this we’ll conclude our prepared remarks and open the call for questions. Operator?
Thank you. We’ll now take our first question from Vishal Shah with Deutsche Bank.
Yeah, hi, thanks for taking my question. Jim, congratulation. And Mark I wanted to just follow-up on your comments for 2017, I think you guys mentioned in the prepared remarks that there were 450 megawatts of systems bookings opportunities that you expect to be actually execute in the second half. So based on some of the backlog that you’ve announced, should we sort of think about Systems business in the 800 to 900 megawatt range for next year, is that a good starting point?
And then as you think about CapEx for next year, can you just maybe provide thoughts on how you think about - how we should think about CapEx and capacity ramp in the remaining this year and next year? Thank you.
Yeah, so I think what we said is Jim’s comments that was in our late stages I think was maybe about 450, we also indicated that if you look at the earlier stage projects these ones we return with higher level probability, there is another 500 megawatts or so in there. So there is a potential of about a gigawatt of bookings that can happen between now and the end of the year that will be Systems related. That also one reason why as we think about providing guidance for 2017 until we can crystallize those opportunities it’s not meaningful at this point in time provide guidance for ‘17, so I just want to make sure you have connected those docs.
But as it relates to next year somewhere in that gigawatt range at Systems level, that’s probably about right, we’ve kind of indicated that we would expect it to be maintained around that range at least in the foreseeable future trending upwards obviously as we start to ramp capacity. So I think that’s the right way to look at it.
You know CapEx you know I can just really point you back to what we said in the Analyst Day at this point in time, I mean we’ve gave the view of what we see capacity expansion, we gave the view of what the associated CapEx would be for that capacity expansion. We haven’t given discreet impact to ‘17, ‘18 versus ‘19. But I think the best to do is just go back and review the slides that we presented in Analyst Day, I think that will give you the color that you are looking for.
And we’ll now take our next question from Tyler Frank with Robert W. Baird.
Hi guys, thanks for taking my question and congratulations Mark. I was wondering, could you discuss a little bit about what you are seeing in terms of overall demand trends in the U.S. and has pricing improved with the recent bankruptcy announcement of Southern Edison, has projects gotten easier to bid on?
James Alton Hughes
So first let’s talk about the impact of Southern Edison. At this point, I mean it gets too early for us to really be able to distill and impact of Southern Edison on the market. And I think the concerns at Southern Edison was pricing aggressively and impacting the market. I mean we’ve really haven’t seen that dynamic in the market for at least six to nine months as there is sort of financial distress has become apparent. So I don’t expect any sudden change as a result of the filing. They at least on the North American front had been active of probably the last six to nine months.
Generally what we are seeing in the North American market is very robust demand. I think we have a lot of customers and a lot of opportunities where customers are having to resort the timing given the ITC change and try to figure out what they are going to do, when and how their procurement programs are going to be built up, but the conversations are robust and the demand is there. So I think we all feel remarkably positive about the North American market.
We will now take our next question from Brian Lee with Goldman Sachs.
Hi guys, thanks for taking the questions. First if you take the 50-50 first half, second half guidance for the earnings mix, it does just fairly big downtick here in Q2 market realize you are giving quarterly guidance but can you help us what’s the puts and takes that makes in timing that’s driving that because even when you out the Stateline sale and equity gaining in Q1 you earned a bit dollar of EPS, so trying to reconcile there?
And then second question, as you think about potentially adding new capacity, I know that fill up in the air but how much is really dependent on the visibility into new project demand and converting pipeline into project wins versus module only and with the U.S. be most critical in terms of their visibility and there are another region that you highlights is being the biggest impact moving through the year? Thanks.
James Alton Hughes
Yeah, so when you think about the guidance we brought about 50% in the first half, 50% in the second half. So really where we are right now is kind of the transition of period for our Systems business, so we are starting to see projects such as somewhere takes out in the coin you know and even Stateline start to ramp down. But at the same time we are starting to see other projects like CA Flats, we haven’t sold Moapa yet, we’re expecting to sell Moapa in the second half of the year and then we are seeing our switch station project start to ramp up in the second half of the year well. So it’s really - it’s a ramp down of some of our Systems projects have been in construction over the last year and then we don’t start to see a ramp up with the new assets until we start to enter into the July timeframe. So it’s a transitionary period. So we’ll see more module only type of and module plus type revenue in the second quarter, so you’ll see a slight drop in earnings associated with that.
In terms of capacity, visibility, you know it’s - as we’ve always said, it’s going to be driven by highly reliable predictable demand and so it’s a demand driven you know pull versus a capacity push. And you know we’re starting to see obviously not on here in the U.S. but internationally a significant you know increase in demand in our pipeline - it was reflected in our pipeline and you can see there is a lot more international. So it’s not necessarily discreet to one particular region, it’s not discreet module versus systems and you know so it’s a holistic comprehensive analysis of the global demand and expectations across multiple product offerings and ultimately kind of and form our view around the capacity and the right time to add it.
Just a couple of follow-on you know one thing to understand about the Systems business even though the ITC got extended, we had our large number of system projects that we slated for delivery in 2016. And some of those had PPA requirements such that even though the ITC was extended, they still had to be delivered. So we had what I will call an unusual alignment of deliveries at the end of 2016 and that leaves a bit a gap until you can redeploy your work force, start new projects and get those projects to the finish line and that’s a little bit of what we are seeing. We’re seeing plenty of demand but normally our Systems business the project sort of roll off in a steady rate as opposed to all being aligned to a single point in time. So it’s a little bit of a historical function of the ITC. The ITC fall off that never happened but it got extended. And so I think that’s you know just an important thing to keep in mind.
The other is, one other things we tried to highlight at the Analyst Day and I think people need to try to get it greater understanding of it, we’ve got a number of factors coming together in terms of our production platform. We’ve got our new product are rolling out in the form of the Series 5. We have a new product under development in the form of the Series 6. There is a lot of complicated decisions if we need to make about the production platform related to those and we’re trying to make sure that we’re thoughtful, careful and detailed in our analysis. So it’s not as simple as what’s the demand and when do you build the plant to supply it. It’s more complicated equation because we’ve got new products in the equation. So we’ll respond the demand when and where we see it and we will also communicate to investor when we have a clear view of what our plans going to be. But as we always have been and we are always going to be a little bit conservative and a little bit thoughtful about putting those plans together.
And we’ll now take our next question from Paul Coster with JPMorgan.
Yeah, thanks. So Jim, you alluded to the next phase of growth, if you kind of step back from things and characterize the last phase and how it’s different, how the next phase will be different from that. Can you sort of try and summarize that for us?
James Alton Hughes
So the last four years, we had a couple of overwriting factors, they drove a lot of what we are trying to accomplish as a company. One was, we wanted to restore cost leadership and substantially improve our technology and that was an overwhelming sort of focus on what we wanted to do. In addition you had the potential ITC fall away which created a very significant distortion in the market place and you were trying to plan around that distortion. And it’s not an easy business task to sort of blow those two together and figure it out.
As I look at the task that Mark and the team going to talk on over the next four years, we have a much clear view see demand with no big distorting events within the next sort of four to five year time horizon at least that we know about today. And we have a position of technology leadership that we’re going to increase upon as oppose to try to get back and achieve.
So I think it will be a little less lumpy and feel a little more robust and perhaps the last four years where we have a lot of challenges to overcome which we successfully working. I think this is less about overcoming challenges and more about capitalizing upon the strong incredible opportunities that are out there for the company.
And we’ll now take our next question from Sven Eenmaa with Stifel.
Yes, thanks for taking my questions. First, I wanted to ask about the international growth into ‘17 and if you prioritize for us the markets where we see the system and module business coming in in terms of bookings in the second half of this year?
And the second quarter relates to Southern Edison, are you seeing some of those PPAs in assets which are now in a bankrupt company backlog coming back to the market there COD dates have been missed?
So, I’ll take the international growth one and I’ll let Jim sort of - he already committed on, so I’ll let him add a little bit more color on that. But - what you said I think on the international growth side of it is you know are late stage opportunities that’s in our pipeline, about 9% of that is international, so you get little bit 3 gigawatts and 90% of that is actually international. It is relatively diverse. It’s in a number of markets.
I mean we’re seeing a lot of activity clearly in India but we are starting to see more activity across Asia Pacific, seeing activity through the Mideast, we are starting to see, we actually are close to signing an agreement in South American for about 40 megawatt. So there is a lot of opportunities even in part of South Africa. So it’s a very diverse and that’s we wanted to see. I mean over the years, we made a decision to invest in our demand generation in our sales team and we felt that overtime we will create diversity of the demand profile and then that starting to show up and it’s reflected in our pipeline, so it’s not anyone discreet market, it’s pretty robust and that’s we what to see that type of diversification.
James Alton Hughes
And what was your question on Southern Edison?
In terms of there is obviously that and did you had the number of projects in I guess backlog where PPA were signed and we are at a stage now where the questions are made whether these projects will be delivers based on their original CODs. And there my question was whether you are seeing actually utilities coming back and resourcing our finding alternative sources for those requirements, generation requirements in the market?
James Alton Hughes
So I think everybody is going to get a bit of an education on the bankruptcy proms so over the next six to nine months. The bankruptcy court has broad powers to deal with contracts and entered into. And utilities will not be able to terminate those contracts even if they have the right to do so without the approval of the bankruptcy court. So I think what we will see happen is there will be a long period of uncertainty and I personally don’t think we’re going to see a lot of progress or a lot of definition around their project for certainly the next three to four months and probably closer to six months. And then as the credit estimating and the bankruptcy state works through, all of the mechanics of bankruptcy, they’ve got bigger on everything that’s going to be challenges or preference, everything that’s going to challenges of fragile and convince.
And bear in mind the very large transactions that were done in the year prior to the bankruptcy finally they will have to work through the big pieces of litigation with the yield goes and the failed deals and try to resolve all of that. So as bankruptcies go, there is a lot of big issues that is going to have to dealt with before I think they can get to some of the more - sort of ordinary course of business types. So - and then the impact on the market whether the volumes are going to get builds and whether the utilities are going to re-procure, I simply think that that will play out very slowly over the remainder of 2016.
And we’ll now take our next question from Philip Shen with ROTH Capital Partners.
Hey, thank you for taking my questions. In terms of Series 5, can you talk about the feedback that you are getting across your customer base as you introduce the Series 5 module? What kind of risks is there for pushback from your customers and do you any contingency plans in place in case you get too much pushback especially in the new form factor?
James Alton Hughes
So there’s not been a lot of pushback from customers. There is generally been an enthusiastic response from customers especially in the North American circumstance which is where the economics work the best. There are projects or bidding opportunities out there where we have qualification issues where Series 5 is not been in existence long enough to qualify. That’s not really a challenge for us because we are going to continue to manufacture Series 4 as far into the future is we can see. And we can also adjust the ratio of Series 4 and Series 5 production relatively easily. It’s the same basic production platform with the backend added.
So there is a great deal of flexibility in shipping production between Series 4 and Series 5. And as we began to see where the demand is going to be over ‘17, ‘18 and ‘19 and began to see where the adoption of Series 5 is going to be. We’ll be able to tailor sort of the rollout of that and adjust the production of 4 versus 5 fairly easily. So I don’t think we feel like there is whole lot of challenge in those issues.
And we’ll now take our next question from Julien Dumoulin-Smith with UBS.
Yeah, actually just a follow-up on that, how long for Series 5 does it need to be kind of in the market place to qualify? And then perhaps the core of the question was you talked about a gigawatt of call it potential projects for ‘17, where and when - I suppose where are those projects principally and when we find out about those opportunities?
James Alton Hughes
I’ll let Mark comment on that. On the when does is it qualify; it’s - the rules are different everywhere in the world and even different places within the U.S. and I can’t really generalize any answer. To date, we’ve only come across one circumstance where a customer has an issue - has a problem, so it’s not going to be widespread and not something that we are losing lot of sleepover.
And then relates to the potential systems bookings, it’s somewhat diverse but mainly concentrated U.S., Japan, India are the main areas that we would make a vast majority of that gigawatt of opportunity.
And we’ll now take our next question from Patrick Jobin with Credit Suisse Securities.
Hi, thanks for taking my question. Just two quick follow-up items here, housekeeping items rather. I think in your remarks you said that the asset sale, the restricted asset wasn’t - was included in guidance, are there any other asset sales remainder of ‘16? I guess is the first question.
And then the second question is backing into about a $0.50 ASP figure here, I guess that was all modules for bookings in the quarter. Just trying to get a sense of where your cost is, I guess directionally compared to the 28% component margins today, your comfort level of your ability to extract value, your energy density advantage today in module sales, I know it’s a copulated way to ask about extracting value for modules, I am just trying to get a sense relative to that $0.50 ASP? Thanks.
James Alton Hughes
So on the asset sales, we included the investment, you know the gain on the sale of the restricted investments as we rebalance the portfolio to again better match the current currencies of investments with the underlying currency of the obligations. So that happened during the quarter and as I indication it’s about $0.20 and that in our guidance for the full year.
As it relates to other asset sales, there are not any other items in our guidance at this point in time. Are there any other potential asset sales that could happen during this balance of the year? There is a couple, you know we still have facilities in Europe, in Asia Pacific that we are marketing, you know there is always potential opportunity that something like that could happen but there is no assume benefit of that included in our guidance at this point in time.
Look, we are very confident in our ability to extract value from the module and the energy density advantages that we have and we show that in the Analyst Day that advantage will improve overtime. And then with Series 5 and particularly when you normalize for effectively the same form factor as crystalline silicon, there is advantages, we talked about that in terms of labor cost, fewer flips and connectors and those types of things that it will help drive as a cost of that product as it relates to overall cost to install. So we are very comfortable in terms of translating our technology advantage and also normalize in the form factor that that will translate into value.
The bookings, yes, the bookings that were reflected in the quarter were primarily modules and there was - it has little inventory that we sold during the quarter that would be below market expectation around value for the module. So there were some of that we sell them. It was around 40 megawatts or so, so that did bring down the average ASP that’s implied by the booking. I would also will tell you is that there is rounding in those numbers so I understand the simply later space of map is going to tell that but there is rounding both ways that won’t get exact same answer.
And we’ll now take our next question from Krish Sankar with Bank of America Merrill Lynch.
Hi, thanks for taking my question. I had three quick ones. First one is the rest of the Desert Stateline about 35% or so that they are going to drop into 8point3, is that all going to happen by in calendar ‘16 as you think it’s into early ‘17?
The second one is in terms of the module surprising added modules but you guys that driven by some of the Asian makers, do you worry about any kind of oversupply in the second half of this year as module?
Just the final question is Jim, congratulations. And I am curious on the timing of your transition, if you can give us any color any through process behind it why now, any such things that would be very helpful. Thank you.
James Alton Hughes
Sure. First on the timing and the transaction, you kwon success it’s something board not have been discussing for quite a while. And this - I would describe this is perhaps slightly accelerates from maybe where we would have thought it was going to be a year ago, but it was clearly a plan that we had in place. We’ve taken some organizational steps to prepare for it, some of which the market was aware of. We are transitioning from one strategic plan that we satisfied and we’re embarking upon a second division 2020 plan. We have a lot of big fundamental decisions, they are good decisions, they are how we are going to best capitalize on our opportunities.
And I think the board and I found like that this was the right time to let a new management team colorless around those decisions. So they don’t have - my heavy hand hanging over them and they reflect the views, thoughts and the beliefs of that team because obviously both I and the board want that team to be accountable for meeting the results that are promise. So just for a verity of reasons it felt like the right time, it felt what way to the board, it felt that way to me, Mark was comfortable with it was the right time to transition in terms of a candidate available to fill his role at least on an interim basis. So it’s a verity, it’s a whole verity of reasons and everybody is very, very comfortable with it.
The other one I think you had on Stateline and you know we still have 34% interest in Stateline. You know the guidance assumes that we drop that down into 8point3 this year. We’ve always said that there is optionality around that and as you noticed in our comments, our prepared comments, we said our current plan is to dropdown Kingbird, Moapa and Stateline to 8point3 but we also give the highlight that was subject to market execution, condition, so you know there could be some issues timing related to that, we have flexibility if we wanted to take Stateline into next year or portion of Stateline if we choose to do that. So that optionality will play itself out subject to many different variables as we progress to the second half of the year.
As it relates to over concerns you know we also have kind of healthy dense in concern of what’s going on in the market. And you know we said before the ITC extension that there was a concern around oversupplies as we went into ‘17. You know clearly I think the TIC extension provides a different view of the horizon beyond ‘16, they maybe not have as much resiliency or robustness of demand in ‘17 but currently it drive more demand into ‘18, ‘19 and ‘20 in particular. We are very though encouraged by where the international markets are trending, lot of new opportunities happening internationally, but we are obviously aware of what’s going on in terms of what the additional capacity plans are and the implications relative to support our demand.
What I will say as well as we increase the overall competitiveness of our product especially from Series 4 to 5 and then eventually get into the Series 6. We believe we have a very strong technology and a cost advantage technology that whether those types of potential disruptions around supply and demand.
And we’ll now take our next question from Colin Rusch with Oppenheimer.
Hi, guys. Can you talk a little bit about the pricing dynamics as you move through the middle of the year and then to the back half of the year, you know relative to the kind of clarity that we’re expecting to get out of China in terms of their policy? And talk a little bit the your ability to have pricing power in the market as you move into the higher efficiency range with your products in the back half this year and into next year?
James Alton Hughes
I’ll comment a little and then I’ll let Mark add to. The dynamics on pricing vary from markets to markets. And there is some markets where we feel like we have leverage often time that’s tied to specific competitive factors related to the technology or customer relationships, other markets less so. I’d say at this stage with respect to the back half of the year and certainly for the next year, we are still in the mood where we are optimizing sales against margin. In other words we are chasing every opportunity that presents itself. We have the ability to pick and choose the opportunities that were chasing in order to maximize the margin every incremental sales that we achieve.
So that is generally indicative of an environment where I wouldn’t say we have pricing power but we have that ability to optimize. So that’s a sign of at least while it’s a reasonable sign of health with respect to the market is how I would describe it.
Yeah, is only I guess I would add is just it does vary by region and it varies by customer and ultimately what is their overall consumer relationship with particular customer and their understanding of kind of the First Solar value proposition and back ability. So it all does somewhat vary and so you can see different behaviors across the region by customers and what they value. And ultimately if they looked upon and to be long term owner of the asset or they looked upon just be the developer and then sell down the asset. So al that comes into play as we think about how we engage the customer and then ultimately how do we capture the best value for our product now as communicated because we have optionality that plays to our strength, right. So we will target those types of opportunities that we can capture the highest margin entitlement relative to the product and solutions that we provide to the customer.
And we’ll now take our next question from Pavel Molchanov with Raymond James.
Thanks for taking my question guys. Just one from my end, at the beginning of the year you said that 300 megawatts would be the upper end of dropdowns and it would depend on where CAFD is trading give the yield compression in the stock since the start of the year. Are you comfortable with 300 megawatts as a baseline or is that still you know fairly aggressive target?
James Alton Hughes
So we’re continuing to assess and evaluate you know work very closely with SunPower as well as the independent directors of the board of 8point3 understanding kind of current market dynamics the ability to dropdown projects that are accretive for 8point3 as well as provide drive return to First Solar shareholder. We still believe that you know there is a tremendous value at our investment, that’s way to say it to shareholder of 8point3. Clearly there are some market dislocations right now that are impacting that. We believe overtime the investor will better understand quality of these assets, the investor grade off takers, the relatively low variability around the solar assets. The equity will perform overtime. Now whether that completely happens in time for us to dropdown more often Stateline, you know yet to be determined. We’ll evaluate that and we have other options that we choose to pursue that you know similar what we did with Stateline when we sold a portion of Stateline to Southern, so you know we went and then increased the growth by identifying switch which is a large project that will tick COD in 2017 as a potential dropdown to 8point3.
So if we made a decision around one of the other assets, you know whether it’s Moapa, Stateline, you know we have more than enough contracted assets that if we chose to we can get replaced and put them into a cadence where some more natural dropdown to 8point3. As we said in the 8point3 area, we already have with the current assets that have been dropdown now with Hooper and we had been completed here recently - excuse me Hopper and [indiscernible] being completed here recently. We have the ability to grow our dividends through the end of ‘17. So we have the luxury of optionality and patience and we’ll evaluate that and see what makes the more sense overtime.
Alright, I appreciate it guys.
And ladies and gentlemen that concludes today’s conference call. We thank you for your participation.
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