Stick with us, don’t judge us by profit or loss this year, and you won’t regret it. This seems to be the message SunPower, country’s second largest solar panel manufacturer is sending to its investors.
Despite a record-breaking year for solar panel installations in the country, manufacturers are far from having a good time. For them, 2016 saw the biggest downturn since the last one five years ago. And it doesn’t look like things are going to get better anytime soon.
“Solar industry is experiencing a market dislocation that will impact our fourth quarter and 2017 financial performance,” said SunPower CEO Tom Werner in earnings call early November.
Excess supply in face of low demand in the solar market has pushed the price too low for manufacturers to function normally. Nowhere is the struggle caused by this imbalance more evident than SunPower’s recent announcement for this year’s plans.
The management said they are not going to think about profits but instead devote their resources in making sure they don’t run out of cash. They are going to lay off about 25% of total work force, close down a plant, and idle manufacturing lines.
The plan is to survive the downturn by cutting spending, selling the excess inventory and get back to making profit once things are normal, which could take as long as early 2018.
These actions can have the impact of shifting or reducing our income, but they will help over long-term, said CFO Charles Boynton during the same earnings call.
Which means, investors won’t earn much on their shares this year. And while that isn’t good news for them, it’s the right move for SunPower to focus on generating cash, according to analysts.
Since most of their competitors like SunEdion, LDK Solar filed for bankruptcies because they ran out of cash.
A downturn in this industry is neither new nor surprising given its cyclical nature.
Five years ago solar panel manufacturers were in a similarly difficult position.
It was due to the usual reasons like the significant decline in price of panels and weakened global demand, especially in China, the largest solar market.
Even this time around, SunPower is a casualty of the Chinese adding too much capacity just as the central government there has slowed demand, said Jeffrey Osborne, analyst at Cowen.
But a major difference between now and then is the drop in panel prices.
In 2012, the lowest prices fell was around $0.90 per watt but this time, the cost dropped to around $0.30 per watt, making it painful for manufactures to earn even a little profit on their product.
While the decline in prices is expected to slow down, industry experts believe it is going to take some time for things to stabilize.
“With regard to module pricing, we project a much slower decline in 2017, 6-8% by year-end,” said Pavel Molchanov, analyst at Raymond James. “In a more stable price environment, SunPower and other industry players should be able improve margins.”
In order to survive the unprofitable low pricing environment, SunPower’s first move is to close down their costly Fab 2 facility in Philippines that employees around 1,900 people.
This plant mainly produces E-series panels, which have become unattractive since they fall in middle range of both the price and efficiency spectrum. So it fails to draw customers looking for cheap options as well as those willing to pay more for highest efficiency.
“People don’t need to buy the latest technologically advanced panel,” said Cy Yablonsky, vice president of PowerLutions, a solar installation company. “It’s like computers, the older panel gets cheaper.”
Yablonsky explained that like in case of computers, people often go for the option that is cheap and works well instead of the latest model, even though the latter has better features.
But shutting down the Philippines facility is not SunPower’s only step to cost structuring. It also plans to cut spending overall and reduce excess inventory.
The management wants to bring down operational expenses from roughly $400 million annually to less than $350 million this year. They also plan to spend 50% less on machines and other items that fall under capital expenditure, bringing it down to $100 million.
Along with the cost cutting, they hope to sell off the inventory that has piled up, ensuring a stream of cash coming in. But they haven’t being doing so well in that department. The company recently saw its lowest inventory turnover ratio, an indicator of sale of inventories, in the last six years.
During the last downturn, the lowest the ratio went was 4.45 compared to last year where it was less than four for two quarters straight, indicating weak sales.
All these steps are in the hopes to exit this year with $300 million in cash. If SunPower is unable to generate enough cash then it will have to eat through it already disappearing reserves. The last time SunPower was this low on cash was in 2010.
Fortunately for SunPower, it has help in case selling inventory and cost cutting don’t go according to plan. It has the advantage of having the energy giant Total as its parent and the company has already stepped-in.
Total, which has two-thirds stake in SunPower, has signed an agreement to equip 5,000 its service stations worldwide with solar panels from SunPower within four years. The energy company will prepay around $90 million for the project and play an increased role in SunPower’s R&D.
The parent company might also be getting involved with many of SunPower’s global power plant projects, an area that has been hurting the panel manufacturer financially. This provides support for SunPower and also some reassurance to its investors.
The market already showed signs of confidence and rose almost 14% on Dec. 7 the day SunPower announced its cost structuring plans. But after that, it has been a slow decline as investors are now waiting to see if this plan works.
“SunPower is doing the right thing by making the difficult decision on headcount reductions and fab closure. These are steps that the company is able to control,” said Molchanov. “But beyond this, it will be important to monitor what happens to industry wide conditions.”