First Solar, Inc. (FSLR) Q2 2010 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the First Solar Second Quarter 2010 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Larry Polizzotto, Vice President of Investor Relations for First Solar, Inc. Mr. Polizzotto, you may begin.

Thank you. Good afternoon, everyone, and thank you for joining us for First Solar's Second Quarter 2010 Conference Call. Today after the market closed, the company issued a press release announcing its second quarter financial results. If you did not receive a copy of the press release, you can obtain one from the Investors section of First Solar website at www.firstsolar.com. In addition, First Solar has posted the presentation for this call, key quarterly financial metrics, historical data and financial and operating performance on the IR website. We'll be discussing the presentation during this call and webcast. An audio replay of this conference call will also be available approximately two hours after the conclusion of this call. The audio replay will remain available until Tuesday, August 3, 2010, at 7:30 p.m. Eastern time and can be accessed by dialing (888) 203-1112 if you're calling within the United States or (719) 457-0820 if you're calling from outside the United States and entering replay pass code 7770641. A replay of the webcast will be available on the Investors section on the company's website approximately two hours after the conclusion of this call and remain available for approximately 90 calendar days. Investors may access the webcast on the Investors section of the company's website on www.firstsolar.com. If you are a subscriber of FactSet or Thomson One, you can obtain a written transcript. With me today are Rob Gillette, Chief Executive Officer; Jens Meyerhoff, Chief Financial Officer and President of Utility Systems Business Group; and Bruce Sohn, President of First Solar. Rob will present an overview of the company's second quarter and give an update of the market and our business. Jens will review the second quarter operational and financial results and update guidance for 2010. We will then open up the call for questions. During the Q&A period, as a courtesy to those individuals seeking to ask questions, we ask that the participants limit themself to one question. The company has allocated approximately one hour for today's call. All financial numbers reported and discussed on today's call are based on U.S. Generally Accepted Accounting Principles, except free cash flow, which is a non-GAAP measure, which is reconciled to operating cash flow in the back of our presentation. Now I'd like to make a brief statement regarding forward-looking remarks you may hear on today's call. During the course of the call, the company will make projections and other comments that are forward-looking statements within the meaning of the Federal Securities laws. The forward-looking statements in this call are based on current information and expectations and are subject to uncertainties and changes in circumstance and do not constitute guarantees of future performance. Those statements involve a number of factors that could cause actual results to differ materially from those statements, including the risks as described in the company's most recent annual report on Form 10-K and other filings within the Securities and Exchange Commission. First Solar assumes no obligation to update any forward-looking information contained in this call or with respect to announcements described herein. During the third quarter of 2010, the company will be attending the following conferences: Canaccord’s Global Growth Conference in Boston on August 11; Citi's Technology Conference in New York City on September 8; Cowen's Clean Energy Conference in New York City on September 14; ThinkEquity's, Kaufman’s and Ardor’s conferences in New York City on September 15 through 16; and Wedbush Clean Technology Conference in San Francisco on September 15. It's now my pleasure to introduce Rob Gillette, Chief Executive Officer of First Solar. Rob?

Thanks, Larry, and thanks, everybody, for joining our second quarter earnings call today. I want to quickly turn to the performance summary. We had a really strong quarter with net sales of $588 million, which was 12% growth year-over-year. Our net income was $159 million or 27.1% of net sales, and diluted earnings per share was $1.84. The return on net assets was 21.1% on a fourth quarter rolling basis, and marketable securities were $960 million, which is $232 million increase year-over-year. Our production in the quarter was 344-megawatt, up 19% versus prior year and 7% quarter-over-quarter. The annual capacity per line increased to 59-megawatt, which equates to adding two new production lines to our existing and planned capacity. This improvement increases our current and announced capacity to 2.2 gigawatt by 2012. Our conversion efficiency was 11.2%, which is an improvement of $0.03 year-over-year. The cost per watt was $0.76, which is down 13% year-over-year and down $0.05 from the first quarter of 2010. We're on track with our expansion to the Malaysian facility and the addition of Plants 5 and 6. Shipments will begin in the first half of 2011. We also recently announced the addition of a new four-line plant in Frankfurt (Oder), Germany, where shipments will begin in the fourth quarter of 2011. On July 1, we launched our Series 3 module, which is an extension of our industry-leading design. The Series 3 product is our low-voltage platform that further improves efficiency, lowers module and balanced systems costs and provides field energy yield advantages, relative to polycrystalline or crystalline silicon. I'll discuss this further during this presentation today. Finally, in Q2, a reflected cost, associated with a module replacement program. During the period from June of 2008 to June of 2009, a manufacturing excursion occurred affecting less than 4% of the total product manufacture within the period. The excursion could result in possible premature power loss in affected modules. The root cause was identified and subsequently mitigated in June of 2009. Ongoing testing confirms the corrective actions are effective. We have been working directly with impacted customers to replace the affected modules, and these efforts are well underway and, in some cases, complete. Some of these efforts go beyond our normal warranty coverage. We accrued the estimated full cost of these additional efforts in our Q2 results, and Jens will discuss the financial impact in more detail. I now would like to spend a few minutes highlighting the progress we've made on our Utility Systems business and the project that we have underway. So first turning to Page 7, the picture on Slide 7 demonstrates the progress we've made on expanding the 20-megawatt site to 80 megawatts for Enbridge in Ontario, Canada. The construction is on schedule and highlights the progress our EPC team has made in cycle time and Balance of Systems cost. The 60-megawatt expansion is expected to be completed at a velocity that's 2x the rate of the first phase built less than a year ago. Half the site is now producing power and another quarter will be connected very soon. Turning now to Copper Mountain. Slide 8 shows 48-megawatt expansion of our original 10-megawatt installations at the El Dorado site for Sempra Generation. El Dorado is the first site we constructed in North America in late 2008. The expansion also highlights the progress made in design and execution of Utility-scale solar plants. Cimarron project in New Mexico for Southern Company is our first large-scale installation of the Series 3 product. The construction is underway and progressing well. Our mention of Series 3 and the installation at Cimarron Park. Now you can see on Page 10, the Series 3 provides higher efficiencies with initial product launch having 2/10 improvement over the existing Series 2 product. The higher efficiency also lowers cost per watt. Series 3 retains the band gap and temperature coefficient strength of Series 2 and continues the energy yield advantages over crystalline silicon. The low-voltage enables up to 50% more modules per string, which further reduces the Balance of Systems costs. In addition, it has new locking connectors, which provides faster installation and improved connection reliability. Series 3 retains the same form factor, module construction and semiconductor processes as Series 2. This will be our new technology platform for the future energy improvements that we make. Agua Caliente is the first project we expect to realize from the NextLight acquisition. The CPUC has approved the 290-megawatt project, and the major permits are in place. We plan to begin construction in 2010 and start installation of modules in 2011. In addition, yesterday, the first NextLight Silver State project of 50-megawatt received Public Utility Commission of Nevada approval of the PPA with NV Energy. Work is ongoing to obtain BLM approval to a final environmental impact study in 2010. The NextLight acquisition was closed on July 12 and increases our North American contract pipeline to 2.2 gigawatt. We've already benefited from the experienced team at NextLight and expect to begin to realize the value of the 570-megawatt PPA pipeline starting in 2011. The purchase price at closing is about $297 million in cash, and we expect to incur $12 million of additional operating costs in the second half of 2010. As previously announced, the acquisition is expected to reduce 2010 earnings by $0.09 to $0.10 per diluted share. With the completion of the NextLight acquisition, we also announced the formation of a Utility Systems business. This signifies the importance of this segment to our future growth and our objective of expanding global demand for solar power. On Slide 13, we've outlined our mission for the Utility Systems business. I’ve asked Jens Meyerhoff to lead this business. Many of you know Jens is our CFO, but in addition, he's been a significant contributor to the development of our business strategy and to the acquisition of the development businesses which constitute what we now call Utility Systems. He is uniquely qualified to lead this business, and I’m really excited about the contributions that both he and the team will make to the continuing success of First Solar. With our goal of providing solutions at the lowest cost for our Utility customers and to ultimately provide an asset which competes with fossil fuel sources, we have to consider all aspects of the value chain. We want to minimize LCOE, while at the same time, maximize the return for our project owners, and First Solar is uniquely positioned to provide both through driving performance and execution from the module to the Balance of Systems, project development and financing. All four of these elements must be optimized to achieve our goal of future cost parity. I'd like to give you an update of the market and what's happened and changes that we've seen since last quarter. First of all, in Germany. The German government, as you know, decided on the new 2010 and 2011 FiT disgression, implementation timing and growth corridors [ph] (25:25). We expect the German market to remain strong for the remainder of 2010. We implemented some price adjustments in the second half to ensure sell-through at the new FiT and to position us for 2011 and beyond project sales. The 2010 German market demand is expected to be in the range from six to eight gigawatts. We expect to remain capacity-constrained in the second half of 2010 and have allocated modules from our Systems business to serve our module customer demand. Our 2.2 gigawatt of captive projects acts as a buffer against potential demand fluctuations in the European market. We continue to work with our partners to expand the business in Europe. In Q2, we've made a lot of progress to that end, diversifying our country mix as Germany's portion of our net sales declined from approximately 71% to 50% year-over-year and the United States became our #2 market, followed closely by France and Italy. As it relates to Italy, Spain and France, Italy has decided on a 2011 FiT reduction. The level of digression and implementation over several quarters is expected to continue to enable investor returns and encourage demand growth in the second half of 2010 and into 2011. The Spanish government is developing a new energy bill that will reset PV FiTs at lower levels. The mw cap level is expected to remain unchanged. The bill is expected to be published in the third quarter of Q4 and for implementation then. Due to stronger French PV systems demand than anticipated, the government has begun to consider a FiT digression sooner than planned and a planned 2012 reduction. It's too early, really, to access the magnitude or timing of changes, but a change is possible in the second half of 2010. First Solar continues to believe that good solar ratings in Italy, France and Spain and the support for the policy of the European Union’s 20% goal in renewables by 2020 will continue to drive robust demand for PV. In North America, California SB 722 mandating 33% renewables by 2020 is making progress in the legislature with a possible vote in late August. Utilities are continuing to show high interest in the Utility-scale PV, driven by RPS goals and improving solar economics. First Solar is well positioned to grow rapidly in the United States market. We plan to increase our Systems project construction from 175-megawatt DC in 2010 to between 500- and 700-megawatt in 2011. China has begun the 280-megawatt concessionary bidding process. The bidding is expected to be completed in August and to be the basis for FiT program economics. First Solar is reviewing concessionary bid documents to formulate its strategy for responding. First Solar is continuing to work with provincial and federal agencies on the Ordos project, the development for the first 30-megawatt phase of our two-gigawatt Cooperation Framework Agreement. We anticipate formal approval of the Ordos pre-feasibility study soon. Due to delays in receiving any energy price either via Chinese FiT or a bilateral negotiation, construction is not expected to begin until the first phase, until the beginning of 2011. Slide 16 updates analysts’ consensus view of the global PV market size between 2009 and 2012. Very strong growth in Germany driven by the FiT reduction has increased the 2010 estimates for the total global demand from 10 gigawatt to 12 gigawatt with a more modest growth rate in 2011 to 14 gigawatt total. Industry demand is expected to increase at a rate of 30% compounded growth -- rate from seven gigawatt in 2009 to over 16 gigawatt in 2012. We illustrate here on Slide 17 that we are increasing annual capacity through improving line run rates and adding new factories. Q2 annualized line run rate rose 14% year-over-year to 59 megawatt as we continue to make good progress towards our goal of exceeding 80 megawatt per line by 2014. We're in the process, as we've mentioned, of significant capacity expansions that will add 14 new production lines or about 826 megawatt at current run rates in the coming years. Slide 18 summarizes the second quarter module manufacturing cost per watt of $0.76 and continues to trend towards our goal in 2014 of between $0.52 and $0.63 a watt. We now are at less than half of our costs in 2005. Our module cost per watt is less than total best-of-breed polysilicon processing cost, which excludes raw material. In summary, we had a really solid Q2. We had a lot of activity as you can tell, and we drove the Module cost down to a record low number and production up through a lot of good work in the operations side and throughput gains. We launched the Series 3 new product for low-voltage and improved efficiency. And as we said and mentioned, our demand will exceed our supply in 2010. Our second half pricing is expected to help drive sell-through and to position us for continued growth in 2011 and beyond. The global market is very strong in 2010, and we expect it to continue into 2011. We’re very well positioned through our acquisition of the North American pipeline and the establishment of our Utility-scale business to grow in North America and expand the business overall. With that, I'd like to turn it over to Jens Meyerhoff to give a summary of the financial status.

Thank you, Rob, and good afternoon. During the second quarter, we continued to experience strong module demand ahead of the July 1 German feed-in tariff change, continued growth in France and Italy, as well as growing sales through our project development and EPC business. Net sales for the second quarter were $588 million, an increase of 12% year-over-year and a sequential increase of $20 million compared to the first quarter of 2010. The sequential increase of 3.5% was mainly driven by a higher percentage of system revenue recognition for the 48-megawatt Copper Mountain and 30-megawatt Cimarron project, partially offset by a decrease in module ASPs due to a lower blended foreign exchange rate and the mix implications. Please note that we did not recognize any revenues for the Sarnia 50 project during the second quarter, due to the completed contract nature of this project. EPC system net sales increased from 7% of total net sales in the first quarter to 15% in the second quarter. The blended exchange rate in Q2 was down $0.03 quarter-over-quarter to $1.36 per euro, demonstrating the effectiveness of our hedging programs. We produced 344 megawatts during the second quarter, up 7% compared to the prior quarter. The increase was a result of the fixed percent improvement in line, production to 59-megawatt per line annually and to more production days in the second quarter. Most of this increase will shift into construction in progress and inventory for the projects currently under construction and not yet recognized in our net sales. Module cost per watt produced for the second quarter was $0.76, down $0.05, benefiting from higher throughput rates, improvement in conversion efficiency, lower material costs and the decline in the euro, partially offset by stock-based compensation comps. Core manufacturing cost per watt declined by $0.06 quarter-over-quarter to $0.74 per watt. We'd like to remind you that our long-term cost-reduction roadmap assumes annual cost declines of approximately 10% and that we expect more modest cost per watt declines in the second half of 2010. Q2 gross margin was 48.3%, down by 1.4 percentage points over the prior quarter. The decrease was the result of increased EPC system mix impacting margins by approximately 2.3 percentage points, lower module ASPs and the accrued module replacement costs described earlier by Rob. These factors were mostly offset by the reduction in module manufacturing costs. During the second quarter, we accrued $17.8 million in cost of sales for expected module replacement cost in our cost of goods sold. In addition, we accrued $5.6 million of operating expenses, associated with this process excursion, bringing our total accrued expenses to $27.4 million at the end of the second quarter. Module gross margins were 52.2% during the second quarter of 2010, essentially flat compared to the first quarter. Operating expenses were up $12.8 million quarter-over-quarter due to increased stock-based compensation expenses, higher plant start-up costs and the aforementioned $5.6 million of one-time expenses. Our operating income for the second quarter was $180.5 million or 30.7% of net sales compared to $191 million or 33.7%, primarily due to the higher operating expenses, slightly offset by a higher gross profit. Net income was $159 million or $1.84 per fully diluted share. The effective tax rate was 11.9% for the second quarter. In the second quarter, free cash flow consumed $57 million of cash with operating cash flow for $76 million due to approximately $170 million in project assets and unbilled accounts receivable that we expect to collect in the second half of 2010. We spent $134 million in capital expenditures against depreciation of $36 million. Cash and all other marketable securities decreased by $59 million quarter-over-quarter to $960 million. That decreased by $24 million to $139 million. Our debt-to-equity ratio remains low at 5%, providing us with the strongest balance sheet in the industry. Please note that our cash balances subsequently [ph] (37:31) declined to $667 million with the close of our NextLight acquisition. This brings me to our updated guidance for 2010. We have made several key assumptions on the line of our guidance. We have allocated further modules from the EPC and Systems business to the Module business due to strong module demand discussed earlier, causing a reduction in our net sales outlook for 2010. Third quarter pricing is set to reflect the 2010 feed-in tariff changes in Germany, while fourth quarter pricing has been set to position our channel partners for sales for 2011 in anticipation of further feed-in tariff declines. We have reduced our euro spot exchange rate assumptions from $1.30 to $1.20 per euro, reducing foreign exchange exposure to our 2010 outlook. For the remainder of the year, approximately 53% of our net sales and 64% of our expected net income exposed to the euro are hedged at an average rate of $1.33. For the third quarter, 71% of our net income is hedged at a rate of $1.32. As of today, the $0.01 change in the dollar to euro exchange rate impacts revenues by about $3 million and net income by about $2 million, providing approximately $0.20 of EPS buffer at today's foreign exchange rate. The impact of the NextLight acquisition remains unchanged at $0.09 to $0.10 EPS reduction, subject to final purchase accounting in the third quarter. We plan to begin shipments for KLM 5 and 6 in the first half of 2011. Capital spending includes KLM Plants 5 and 6, our Frankfurt (Oder) Plant 2 and our French facility. Based on these assumptions, we are increasing our earnings per share guidance, while reducing net sales due to mix shift from Systems to Module sales and less pass-through revenues. Net sales are forecasted to range from $2.5 billion to $2.6 billion. Gross margin guidance of 44% to 45% is up from prior guidance due to increased Module segment mix and a better pricing environment, partially offset by the more conservative foreign exchange assumption. 2010 module gross margins are expected between 49% and 51%. We expect plant start-up costs of $20 million, primarily from Malaysia Plants 5 and 6 in the second half of 2010, down from $27 million in our previous guidance. Stock-based compensation is estimated at $90 million to $100 million with approximately 20% allocated to cost of goods sold in line with prior guidance. GAAP operating margin is expected to be 27% to 29% with module operating margins at 32% to 34%, up from prior guidance due to the more favorable pricing environment, partially offset by the weaker euro. We expect our 2010 tax rate to be 12% to 13%. We estimate year-end 2010 fully diluted share count of 86 million to 87 million shares. Earnings per diluted share are increased to an estimated range of $7 to $7.40 for the year 2010. CapEx for the year is expected to be $575 million to $625 million. Operating cash flow is projected to be in the range of $575 million to $625 million, down from prior guidance due to investments in the development of the NextLight project assets. RONA guidance is 18% to 19%, slightly below our 20% target as we continue to scale up our Utility Systems business. Finally, Slide 31 shows the expected quarterly profile of revenue recognition by segment and the resulting mix impact on our consolidated gross margin. Please note that as you read horizontally across each line, the quarters will add up to 100%. The majority of our EPC and project development revenues remain in the second half of 2010. However, the further reduction in EPC sales for 2010 comes from the fourth quarter. The margin profile follows the segment mix. The growing EPC mix is expected to dilute our consolidated gross margin in the third quarter. Module margins declined in Q3 and Q4 due to the revised foreign exchange rate assumption and the anticipated pricing assumptions built into our guidance. With this, we complete our prepared remarks, and we open the call for questions. Operator?

[Operator Instructions] And we'll take our first question from Mark Wienkes with Goldman Sachs.

How should we think about the improved build velocity affecting the planned 500, 700 megawatts of the Utility System installations in the year? And then, I guess, just more broadly, what are the other items you see that could result in the company falling outside of that range on either side?

On the advancements -- this is Bruce. In terms of the advancements of the constructability of our facilities, this is actually an area of focus for us. One of the things that we've always said is that we wanted to apply in the field the kind of expertise that we have in the factory, and the engineering and construction teams have worked diligently to improve the constructability of our systems as well as the effectiveness in actually doing the engineering and construction work. This should prove valuable in reducing our working inventory from a financial perspective. It also helps to ensure that we begin producing energy as rapidly as possible so that our customers are the ultimate owners of these systems. We’ll be able to begin securing revenue as quickly as possible.

And we'll go next to Satya Kumar with Crédit Suisse. Satya Kumar - Crédit Suisse AG: Quickly on pricing. Is your second half pricing set in stone in terms of contracts? The reason I ask is because in the past, you’ve had rebate mechanisms to level your pricing closer to market prices, which are clearly flat or going up. Just trying to understand some sensitivity around that.

[indiscernible] (45:06) Satya, that the rebate program and the processes around there, right, are still actively working. So I think there is a certain degree of flexibility around it. However, at the same point in time, as you know, for some of our market segments, there's a longer lead time. So we're starting to give indications on pricing to our customers right as they're reaching out even into 2011 to bid and secure projects.

And we'll go next to Vishal Shah with Barclays Capital.

If you look at the Slide 31, it implies that pricing will be down double digits sequentially in Q3, Q4. Is that for all markets? Or is it only for Germany? And the Balance of System cost implies, based on your comments of 175 megawatts, it's about $2 per watt. Why so high?

So I would say, so if you look at the price declines that you see and the thing that you're implying probably out of the margin trend pricing. As usual, we don't like to detail, really, our pricing strategy out here. But keep in mind, obviously, that pricing gets adjusted to respond to the feed-in tariff declines, right, which are a double-digit percent. At the same point in time, please keep also in mind that we drastically reduced spot rate on the euro here from $1.30 down to $1.20. Right, so the further you go out, if you look at some of the margin decline on the Module side into Q4, Q4 has a level of a hedge rate applied in Q3, so you get a slightly bigger impact on that. As it relates to implies [ph] (46:51) the system prices and so on, I'm not sure, Vishal, that I follow exactly your math there. And again, I mean, we're usually not discussing [indiscernible] (46:48) module or system ASP due to the competitive nature of our industry.

And we'll go next to Sanjay Shrestha with as our Lazard Capital Markets.

Just a quick question on the Utility Systems side of the business. Now that we have permitting in place for Agua Caliente, can you give us a sense as to what can we expect in terms of selling the project, getting financing in place? Can you give us a sense as to the type of the discussion you’re having? And maybe talk a bit about the time on that -- just to when we might be able to hear some incremental information on that.

Yes. I mean, I would say this was obviously a project, right, that’s pretty much ready to go at this point in time. So we're in discussions with multiple equity investors who have followed the same processes that you've seen us deploy in other projects. So at this point in time, we're maintaining a competitive environment around the bids on the asset. At the same point in time, we're in the position to have established grant in lieu of the IDC eligibility for the project, which ties into the timing of the construction start in order to get the qualification, which, as you know, right, broadens the equity investor universe because we don't necessarily rely solely on tax equity capacity. At the same point in time, we're in active discussion around DOE application, which we're in for this project, right, which guides the overall debt side of the financing. So I would say, at this point in time, we're fairly far down the road. Obviously, this is a project we acquired through NextLight. NextLight, I think, did a lot of work up front. We're now bringing this project right into a much broader equity investor pool that we had established prior to the acquisition, and I think you should obviously expect that the financing will be in place right, ahead of any meaningful construction start because we do not intend to build an asset of that size off our own balance sheet.

And we'll go next to Dan Ries with Collins Stewart.

I had the same question as Vishal. On Slide 15, you talk about constructing 175 megawatts this year and then on a later Slide you refer to $400 million of revenue from the EPC. Do you have EPC projects outside of North America at this point? Or is that $400 million attributable in a sense to that $175 million?

So in the total system revenue for the year, I think there is a small kind of European content I think included in that. And then we talked a little bit about our host project on our last call, so that factors into that as well. And then obviously, I think we've got the project here in North America between the U.S. and Canada.

And we'll go next to [ph] Smitty (50:01) Srethapramote with Morgan Stanley.

Maybe just a follow-up on the previous question. Can you give us an update on your organic pipeline development in both North America and Europe and any progress that you've made on the Edison Mission pipeline that you purchased earlier this year?

Okay. So obviously, with the NextLight acquisition, we've tried focused, right, on the overall organizational integration. We're looking now at the portfolio in its entirely. So each of the projects, right, are following their due course through the different permitting stages. I would say, I think generally, the progress is in line with our plans and expectations. As I mentioned, on the Agua side I'm seeing a parallel, right, we're following these processes on the project finance side with generally encouraging and positive results. So overall, I would say I think we remain on track with respect to our outlook as it relates to megawatt realization of these projects in line with the 500 to 700 megawatts. But as you know it's a combination, right, of our own development efforts and some of our partner efforts. At the same point in time, I'd like to reiterate that it's probably not the most useful exercise to track each and every milestone on the permitting side on these projects. Some projects will accelerate, some projects may face certain delays. So we're much more focused on when do the projects get over the [ph] hurdle rate (51:35), get financed and are ready to march forward to be constructed. And I think the guidance we're giving right now, the 500 to 700 megawatt for next year has that purpose.

And we'll go next to Stephen Chin with UBS.

I was wondering if you could just share some more information on the module problems that you [ph] called at (51:56), how many megawatts of panels does this affect and how much longer will these one-time charges continue for?

Yes, this is Bruce. About 4% of the production during the time frame from June 2008 to 2009 was affected, in the neighborhood of about 30 megawatts. And we've been working with our customers since that time frame and expect to continue to do so for about the next six months or so.

And we'll go next to Christopher Blansett with JPMorgan. Christopher Blansett - JP Morgan Chase & Co: A quick question about the change in the guidance for the gross margin for the EPC business. I want to understand what's behind that change in your outlook?

Okay. So I think if you look at it, so mathematically, as you know, the EPC business has been an enabler, right, that in any scenario results to an operating income of breakeven. So what you see underlying in this guidance, if you compare our module guidance to the prior quarter, the module margin guidance is flat. One reason for that is that the EPC margin mathematically increases through the reduction of revenues on the EPC side; however, still requiring a certain contribution margin in order to cover all the fixed costs. So this is purely a mathematical impact out of this enabler concept, it is not really an implication of a change in profitability in the EPC business. As a matter of fact, to some degree, the module business is indirectly, right, subsidizing the lack of scale in the EPC business because it utilizes the EPC business at the channel.

And we'll go next to [ph] Steve Milunovich (53:48) with Merrill Lynch.

Could you be a bit more specific in terms of how you got the core module cost from $0.80 to $0.74 with a very slight improvement in efficiency?

Yes, Steve, the improvements are basically along the core methodologies that you would expect so the improvements in efficiency have had an impact that drive up the general yield. We have continued to drive down our costs on the bill of materials and improved our productivity and run rate as you could see by the increasing line run rate this quarter. And then also, the change in the euro exchange rate also provided some enhanced benefit as a result. The combination of all of those helped to drive down the costs over the last quarter.

And our next question comes from [ph] Steve O'Rourke (54:46) with Deutsche Bank.

First, can you give us an indication of what Balance of System costs are now, and how that should progress down to your goal through 2014? And just as a follow-up to the last question, were the material cost reductions anything more substantial than what you've been able to do in prior quarters?

Yes, Steve. So the Balance of Systems costs have come down steadily. We have been able to be effective from the early days with the first El Dorado facility a couple of years ago. The increase in our installation rates, the lower costs, the improved engineering designs, have all allowed us to drive down the cost. And then, of course, the scale going from just a few megawatts a couple of years ago to the 175 or so this year that we're looking at and the 400 to 700 next year that we're looking at, also contribute to driving the cost down. We do expect to be able to hit our roadmap for costs over time, and the challenge will continue to be to address the effects of inflation over time. In terms of the materials costs, yes, we've made steady progress. I think that our supply-chain folks have done an excellent job, actually, going out into the marketplace, making good use of the scale at which we are procuring materials today and finding the good quality suppliers that are able to satisfy our needs over the long term. And that has proved beneficial throughout this year, and we're going to continue to work on it.

And we'll go next to [ph] Jesse Pichel (56:39) with Jefferies.

My question's for Mr. Gillette. Mr. Gillette, First Solar is operating extremely well, but the market is growing much faster than your capacity in 2010 and thus, you're not reaching the market share targets that you set earlier. I'm wondering, what market signals would you need to expand production more aggressively?

Well, as you know, we've announced quite a bit of expansion already and we're considering what we may do in the future. It does take time to get the assets in the ground and the equipment in place, so we're working as quickly as we can, I think, to get that achieved. So, yes, we definitely have a near term challenge as it relates to getting product out the door and we tell Bruce, we'd like to get more out every day, so we work on that. And you saw the throughput improvements in the quarter. So we are continuing to evaluate our next increments of capacity and once determined, we'll advise you all of what they are.

And we'll go next to Timothy Arcuri with Citi.

I had also asked you this last call, but I know that you guys have sort of gotten away from sort of giving a market forecast next year. But maybe you can answer the question of whether you feel better or worse about 2011 demand today than you did when I asked you the same question three months ago?

Better or worse, I think like we state in the front part of the presentation in terms of market, we think, given the changes in FiT and other advances and changes in Germany, that the market is going to grow significantly in 2010. So we -- and the range is, I guess, kind of the consensus forecast is in the 6.5% to 7% range, we gave a range of six to eight -- so we think there's significant growth there. We think that, as we've mentioned before, the markets in Europe outside of Germany are going to grow more rapidly than Germany. So we think these FiT changes may slow the growth or change the market in Germany quite a bit in 2011. But we also think that the other markets, Italy, France and Spain will continue to grow. I think our last estimates on the call were in the range of 60% compounded. So we're putting a lot of focus on that growth, that [indiscernible] (59:13) of it. So I think that we feel good about the demand and our position in 2011. It's those changes and what the impact of those changes that will affect the market and what happens there. I think as Jens mentioned and I mentioned in the body of the presentation, we also have the captive pipeline that buffers the fluctuations that are there and the changes that are there, and we'll still be producing everything we can to fulfill the commitments to external customers as well as our captive pipeline.

And we'll go next to Stuart Bush with RBC Capital Markets.

You're targeting 500 to 700 megawatts in system projects for 2011. Have you been able to delay some North American projects this year to feed module demand? Are there any end service deadlines for 2011 or would you have continued flexibility to shift that business out if you needed to?

I will tell you there is, if you look at the underlying DBAs, there is some flexibility. However, there is also certain projects, I think, for example, if you look at some of the projects we moved out in Canada, that we probably do want to complete next year. So I mean the flexibility is there for some projects, but flexibility is not eternal. So at some point in time, you want to move forward. Once the financing's stamped on these projects, you want to execute, right, because you don't want to idle the funds on the financing. It has a negative IRR on cash. But I say, we still maintain a good amount of flexibility in the execution.

And our next question comes from Kelly Dougherty with Macquarie.

Just going back to 2011, can you maybe talk about the level of visibility you have for your non-pipeline expectations? Kind of what you're selling to the general market and then maybe how you're thinking about pricing for First Solar relative to some of the Chinese peers?

Well, as Jens said earlier, we don't really talk about pricing on the calls or externally. So in terms of the market overall and the growth that exists, we think that there's significant opportunity to grow outside of Germany and continue to expand the market there. And for 2011, as we said, the big change that'll take place is the growth in Germany relative to the growth corridor and what changes in the FiT that is out there. So I think that we have pretty good visibility with our customers. And as we mentioned, we have supported some pricing changes to support our customers' development and future development on the project side, and are working with them to grow a market outside of Germany and made a lot of progress to that end. So we feel good about that, and we feel good about the visibility on the project side, both our partners' and our own in the market, and we'll continue to see how it evolves.

Yes, maybe just to add one comment to that, Kelly. I will tell you that if we find ourselves in discussion about capacity and the amount as we're looking for sure to first half of '11, the discussions circle more around how to satisfy the demand, not necessarily at this point in time how to sell the capacity for what that's worth.

And we'll go next to Marc Bachman with Auriga.

First, Jens, can you just put a dollar amount on the module replacement program to go along with the 30 megawatts or so, so we don't need to wait for the queue? And then, Bruce, I believe Steve O'Rourke asked you what your current Balance of System cost was but I never heard you actually give a number. Can you take another shot at answering that question from a quantitative point of view?

Yes, I'll actually answer both of them for you real quickly here, Mark. So the cost of the program in total is about $23.4 million, $17.8 million in COGS and $5.6 million that we have reserved in this quarter. That reserve completes our current estimate of the cost of the program. In terms of the Balance of Systems costs, you're right, I didn't get too specific on the exact number. On the other hand, the trend is well en route to our goal of being under $1 a watt. The progress is, as I mentioned earlier, is in really good shape. I anticipate that we would probably be on the more assertive side of hitting our goal, but as I said earlier, the challenge is to keep it there while inflationary pressures ensue.

So maybe just to add real quick, so the numbers Bruce gave you, right, were what we booked in Q2. As we publish our queue, you're going to see in our footnote (a), the accrued liability, that the total accrual stands at $27.4 million.

And we'll go next to Burt Chao with Simmons & Company.

Just taking a quick step back, looking at Washington with Senator Reid's proposal for an energy bill, you've got an energy bill that, (a) doesn't include our renewable energy standard, and secondly, excludes any benefits really to solar? What is your view on that? Is the North American market forever a state-by-state market when you're looking at projects? And secondly, outside of North America and maybe South Europe, or Europe in general, where are you focusing your efforts on looking for projects and also customers and end markets mostly?

It's Rob, I'll take a stab at that. I think that as it relates to the bills that are on the table and considered today, we do our best through government relations to position the industry and ourselves for growth. I think that development is clearly a local effort and one that requires local knowledge and relationships. So it still is driven quite a bit both locally and from a state standpoint with the RPS objectives. We continue to -- we find our definition of what we believe will be a sustainable market, our focus and strategy as we've put together and presented it before is to maximize our penetration in the markets that are subsidized and focus on markets that are in transition that we believe will be sustainable over time. So that relates to a certain amount of available solar resource combined with what we believe about the future costs of energy in given regions. So the southern United States is definitely the Southwest. France, as you know, has a lot of good installation and good support from a [indiscernible] (1:06:21) tariff standpoint, especially in the South, as does Italy and Spain. We've had a number of visits and conversations with how do we grow that market and work with partners there to do so? And we mentioned what we're doing in China, as well as some efforts under way in Australia. So those are all markets that I would highlight that are in transition. And we've made a significant investment in monetary terms as well as now people on the Utility Systems business to grow and more rapidly grow the market overall. So those are the areas that we focus on and we will do development in areas of the world that we believe, over time, will be sustainable and as we define them beyond what I just described, we'll let you know.

And we'll go next to Gary Hsueh with Oppenheimer & Co. Gary Hsueh - Oppenheimer & Co. Inc.: Just kind of a high level question if you could address it qualitatively. It looks like there's a little bit of inverse relationship between the EPC project business revenue and operating or gross margin. Looking into 2011, as you start to veer back more towards a normalized model, with the Project business coming back online, I'm wondering, what the margin structure would look like for the company? And specifically, what the risk is with a billion dollar kind of plus expectation for EPC project business in 2011, that the margin model isn't below 10% or below 8%, which you guided originally for 2010?

Okay, so I'll take a quick crack at this. Obviously, we haven't given any specific guidance on 2011. But I think that the mechanics that I described, I think, on an earlier answer have to do with the EPC and Systems business, still as a relatively small size and scale, and our conscientious decision to actually remove volume from that channel to satisfy the current demand in Europe. So I think what we should expect as we go into next year, obviously, that, that business goes to scale. There's a fixed cost component organizationally to that business that will scale rapidly as we move from 175 to 500 to 700 megawatts. So now as you state the specific margin guidance, I'd like to refrain from that, I think that's obviously subject to our continued cost reductions, as well as subject to pricing for next year, and we haven't given guidance yet. But I think I feel comfortable for you guys to revisit our long-term models, the information we shared around the [ph] second (1:09:11) performance over time embedded in those long-term models because we believe we continue to track against those.

And we'll go next to Pavel Molchanov with Raymond James. Pavel Molchanov - Raymond James & Associates: Some of your customers, especially in Germany, might start to see you as more of a competitor as you get further into systems. Given that, do you see any logic for a spin-off of the Utility business group?

So I mean, I would say, I think there is here and there, once in a while, a misconception of this creating any type of competitive nature. So if you look at what we're doing in the U.S., in the U.S. we're developing sites, we're building power plants for sale. We're not in the business, as you know, of owning and operating those power plants. So if you think about this, in our mind it actually amounts to a synergy between many of our IPP customers and ourselves as it relates to partnering. It's [ph] all (1:10:11) the development efforts in driving mutual success and penetration. If you look at Europe, I mean, if you think about in Europe, any system effort that we've taken in Europe -- so, for example, the [indiscernible] (1:10:24) Project, always has occurred with a partnership of all our local customers in Europe. So the EPC side on this project is usually performed by one of our customers, whoever is best fitted in the area where they are most competitive. And as you may recall, we've done -- we also have partnerships on the project financing side together with some of our customers. So I would not describe it as a competitive environment. It's actually more of a synergistic mutually enabling environment.

Yes, I would just further it to say that we're focused on developing, really growing the market overall and focused on developing utility scale applications to drive the adoption of the technology. So a few of our partners get into that type of range in terms of constructing power plants. But many of them understand, we're really focused on driving the growth in the market and working together with them.

And we'll take our final question from Colin Rusch with ThinkEquity.

Can you talk about, in the Systems business, how you're approaching management of voltage [ph] fluttering (1:11:34), reactive power and low-voltage reactor, especially if you get into the larger projects that have a lot of geographic concentration?

Yes, Colin, the engineering of these projects is really developing -- this is something that we're working very closely with the utilities, as well as the grid operators. As we bring on these new and larger systems, these types of control capabilities are the kinds of things that are going to be needed in order for the grid to see a solar array much as they have seen a traditional fossil fuel power plant. And we're currently working on exactly what the right mechanisms are for handling the control and at what scale. To date, the size of the projects is relatively small compared to the size of the demand in the regions in which we are installing these things. Over time, as we become a larger and larger percentage of the regional load, those kinds of issues are ones that we will have to engineer. And today, we've got our folks working on it and working with the other key stakeholders.

Maybe to add to that, if anything, an experience indicative of what we're seeing in Europe, it would seem that we're still far away from that being a meaningful problem in the U.S. market.

And this does conclude today's conference. Thank you for your participation.