First Solar, Inc. (FSLR) Q3 2010 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the First Solar Third 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 First Solar's Third Quarter 2010 Conference Call. Today, after the market closed, the company issued a press release announcing its third quarter financial results and our guidance update for 2010. If you did not receive a copy of the press release, you can obtain one from the Investors section of First Solar's website at firstsolar.com. In addition, First Solar has posted a presentation for this call, key quarterly statistics and historical data on financial and operating performance on our IR website. We will be discussing the presentation during the call and webcast. I want to remind you that an audio replay of the conference call will also be available approximately two hours after the conclusion of the call. The audio replay will remain available until Tuesday, November 2, 2010, at 7:30 Eastern Daylight Time and can be accessed by dialing (888) 203-1112 if you're calling from the United States, or (719) 457-0820 if you're calling from outside the United States and entering replay pass code 8458462. A replay of the webcast will be available on the Investors section of our website approximately two hours after the conclusion of the call and remain available for 90 calendar days. Investors may access the webcast on the Investors section of the company's website. If you are a subscriber of FactSet or Thomson One, you can obtain a written transcript as well. 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 third quarter and give an update on the market and business. Jens will review the third 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 of those individuals seeking to ask questions, we ask that all participants limit themself to one question. First Solar has allocated approximately one hour for today's call. I want to remind you that all the financial numbers reported and discussed on today's call are based on U.S. Generally Accepted Accounting Principles, except of free cash flow because it's 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 that 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, 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 the call with respect to the announcements described herein. Now during the fourth quarter of 2010, the company will be attending the following conferences: Goldman Sachs Clean Energy Conference in New York City on November 10; Credit Suisse Technology Conference in Scottsdale, Arizona, November 30; Barclays Technology Conference in San Francisco on December 8. And I also want to mention today that we intend to provide guidance for 2011 for analysts and investors on December 14 by a call. It's now my pleasure to introduce Rob Gillette, Chief Executive Officer of First Solar. Rob?

Great. Thanks, Larry, and welcome to our Q3 earnings call. We had strong quarter with net sales of $798 million, which is a 66% increase over Q3 of 2009. The quarter includes revenue recognition of the 60 megawatt Sarnia project. The net income was $177 million or 22.2% of net sales, and our diluted EPS was $2.04 a share. Earnings per share was negatively impacted by $0.17 due to a $14.7 million charge onetime tax expense to repatriate $300 million in foreign earnings. Jens will describe the transaction during the financial portion of today's presentation. The return on net assets was 20.4% on a four quarter rolling basis, representing an EBA of 8% or 300 basis points above our target. Our cash and marketable securities balance of $997 million is an increase by $37 million sequentially. We drew down $100 million of our revolver and paid for the NextLight acquisition in the quarter. Our production was 350 megawatts, up 20% versus prior year and 2% quarter-over-quarter. Also, our manufacturing team recently achieved a significant milestone by producing a cumulative three gigawatts of PV panels. The annual capacity per line increased to 59.6 megawatts. Our conversion efficiency was 11.3%, which is 3/10 of a percentage point improvement year-over-year. Our manufacturing cost per watt was $0.77, which is down $0.08 or 10% year-over-year and up $0.01 over Q2 of this year. During the quarter, we started to qualify process changes to increase our Module conversion efficiency that impacted our cost per watt by reducing yield and equipment uptime. We recently announced plans for two new four line manufacturing locations with 477 megawatts of the annual run rate capacity in 2012. The specific location of the U.S. from Vietnam facilities will be finalized and announced at a later date. Both of these sites are planned to have enough land to accommodate additional production capacity that we can build out in the future depending on market demand. Moving on to Page 7. In terms of the market, we've made progress in several areas. We completed the Sarnia 60 megawatt expansion in the quarter and construction on both the 30 megawatt Cimarron and 48 megawatt Copper Mountain facility is progressing very well. The 290 megawatt Agua Caliente project is fully permitted and initial construction has begun. And the PNM resources received PUC approval for 22 megawatt of projects in New Mexico for which First Solar is the EPC contractor and the Module supplier. Initial construction is planned to begin in the first quarter of 2011. We also achieved a number of milestones in developing our project portfolio. The CPUC approved SCE's [Southern California Edison] request for the 250 megawatt Sunlight and 300 megawatt Stateline power purchase agreements, and as well, PG&E received approval for their 300 megawatt Sunlight PPA. The 230 megawatt AV Solar Ranch project received approval of its final environmental impact report and conditional use permit from L.A. County in September. However, an appeal of this permit approval was filed with the L.A. County Board of Supervisors. We hope to resolve the appeal without any substantive delay to the project but do not yet know if it will result in a delay. At Silver State North 50 megawatt project received its right of away grant from the Bureau of Land Management to proceed with construction. This grant is subject to a 30-day appeal period. In Europe, we constructed 380 megawatts of new Module volumes for 2011 under our existing framework agreements with seven of our customers. When combined with our North American projects, this gives us good visibility to 2011 in demand and our production is well contracted. A majority of our pricing is set for 2011 at levels to drive sell-through. First Solar's Australia Solar Flagship submission with Tru Energy for 180 megawatt AC plant in Victoria was selected by the Victorian Government, who is also committed $100 million of complementary state funding. The project still needs to receive a federal government award to proceed. But if successful, we could start supplying Modules to Australia in 2012. We made progress on Phase I of our 30 megawatt Ordos project in China. We received approval of the pre-feasibility study from the National Energy Administration, and we continue our economic discussions with the government of inner Mongolia. On Page 8, you can see progress made on three of our North American projects. The Sarnia 60 (sic) [80] megawatt expansion was completed in August and is now the world's largest operating solar PV system at 80 megawatts. The link you see in the slide will take you to a short video which provides a better view of the scope of the project. In addition to pictures you see here at the El Dorado and Cimarron project, showed that we are approaching completion and a substantial portion of these sites are already producing power. On Page 9, we've updated the analyst's consensus of the global PV market through 2012. The growth in Germany driven by the FiT reduction has increased expectations for 2010 to 13.5 gigawatt, with a modest growth rate of approximately 11% in 2011 to 15 gigawatt. The market is forecasted to continued diversification in 2011 and the German market is expected to decline from 7.2 gigawatt in 2010 to 5.9 gigawatt in 2011. Recent enthusiasm about the 2011 European demand should be tempered by a few risk factors, which I will discuss in just a moment. The overall industry is expected to grow at a 33% compound annual growth rate from seven gigawatts in 2009 to 17 gigawatts in 2012. The market will also continue to diversify globally. On Page 10, First Solar continues to execute on our strategy for growing the market and geographic expansion. In the third quarter, the German portion of our net sales declined from approximately 77% to 29% year-over-year and from 50% in Q2 of this year. North America became the largest contributor to net sales primarily due to the completion of the Sarnia project. We expect the German portion of our revenue to decline from about 45% in 2010 to between 25% and 30% in 2011. We continue to work with our partners and through the execution of our captive pipeline to grow the markets in the U.S., France, Italy, Australia and the rest of the world. Based on consensus expectations for the market, First Solar expects to have a greater percentage of our sales in non-German, European and North American countries than the industry in 2011. Let's spend a couple of moments now talking about the specific markets and how they relate to First Solar's growth strategy. The European markets are finishing strong in 2010, and we are essentially sold out to the remainder of the year. Germany, France, Italy, Spain and other European countries continue to reduce FiTs toward great parity which is driving the demand growth that we see. There is a potential for a softer market in Germany in 2011 as the industry adjusts to the lower feed-in tariff and there is a possibility of further government action at the EEG and power grid is under review in 2011. The Italian market should have strong growth in 2011 given the implementation of the new feed-in tariffs there. France and Spain FiT reviews could impact 2011 economics and market opportunity. So given all those things, we've taken a number of steps to mitigate these uncertainties. Number one, we've implemented price adjustments in Europe that we believe positions us positively for 2011. Number two, we're incenting our partners to continue to diversify across Europe and other transition markets to grow the industry. Three, as we have in 2010, we plan to use our two gigawatt North American pipeline as a buffer against demand fluctuations in Europe. And four, we continued to invest to drive the lowest LCOE [Levelized Cost of Electricity] and maximum energy yield. The North American market driven by renewable portfolio standards, the ITC in cash grant, DOE loan guarantees and attractive ROE economics for supporting strong growth that could double the market to two gigawatts in 2011. Utilities are beginning to adopt solar PV technology and realize large-scale PV power plants. We've been working with the industry to promote extension of the ITC cash grant and DOE loan program beyond expiration to support project economics. The California market has been driven by the 20% RPS by 2010 mandate, which fully supports our existing two gigawatt of contracted pipeline. Future incremental growth is likely to be driven by the 33% by 2020 renewables target. Currently, there is an uncertainty around the sustainability of the 33% goal, given a November state ballot initiative, but there is also the opportunity to convert it from regulation to law. To expand U.S. market beyond California, we have been working to drive policy in other states and expand our channels to market. Meanwhile, the number of utilities pursuing development and project ownership is continuing to grow. We continue to develop our pipeline of projects and secure the necessary permits. To mitigate the inherent risk of project development, we are managing the pipeline as a portfolio where some are realized, get revised, have delays or canceled and new ones are added. In 2011, we plan to start building plants over 200 megawatt in size. We are also focused on investing to reduce system LCOE and maximize plant performance and reliability. The goal being to achieve parity with combined cycle gas peaking generation. This will expand our market opportunity and lessen the dependency on policies and subsidies. The Chinese government views the development of a low carbon economy with a focus on renewable energy generation and energy efficiency as a top priority. In addition, the electricity demand expected to double between 2010 and 2020. If Chinese are committed to a goal to build a multi-gigawatt per year solar market and at least 20 gigawatt by the year 2020. Although the market has long-term potential, the systems providers needs sustainable economics to drive growth. China recently completed a 280 megawatt concessionary bidding process that provided very low prices and IRRs. As we discussed last quarter, due to these delays in receiving the energy price on Phase 1 of the Ordos project, construction is not expected to begin until early 2011. First Solar is committed to building a long-term presence, and we are building relationships at the regional and provincial level. We recently received the pre-feasibility study approval from the national government for the Ordos Phase 1 30 megawatt project and opened our office in Beijing. We're also working on several other potential projects across China. We are hopeful that China can be a very large, sustainable market that First Solar can participate in. In India, India has the potential to become a very large market. It is rapidly growing economy, and the electricity deficit is expected to drive strong demand for new generation for many years. India has an excellent solar resource and PV technology is a great fit for the country. Federal and state government programs are driving an acceleration in PV deployment, with the national solar mission objective of 22 gigawatt by the year 2022. We are investing resources in time to help the Indian market realized its full potential and are working with partners to deploy several projects in 2011. Finally, Australia has excellent solar resource, site availability and policy support to drive project development. The Federal Government Solar Flagship Program and state feed-in tariffs are promoting market growth. We are participating in both of these programs. Although the solar markets and government policies continued to evolve, First Solar's growth strategy remains the same. We are focused on our mission, which is to enable a world powered by clean, affordable solar electricity by driving the LCOE of solar power to parity with fossil fuel peaking and ensuring that system owners achieve an acceptable ROE. Our goal continues to be $0.10 to $0.12 per kilowatt hour to compete with peaking assets by combined cycle gas generation. Our decisions are guided by the goal of earning a RONA that exceeds our weighted average cost to capital by at least 5%. We intend to lead the industry from the existing subsidized markets through transition markets to large sustainable markets based on economics and minimal subsidies. Our strategy in existing feed-in tariff's subsidized market is to price for the long term to grow penetration, enable throughput and to scale production costs. Our marketing and pricing strategy is not to be opportunistic for the short-term margin gain. For instance, the majority of our 2011 production is now sold and price set under our existing framework contracts for North American PPAs. We have been working to develop transition markets that have good gradients and/or a strong potential to achieve price parity over time. Some of these markets include the U.S., France and Italy. In transition markets, our approach is to drive down LCOE by pricing in anticipation of cost declines, add solutions that drive technology adoption and energy yield and add capacity that develops markets or lowers costs. We are investing a significant portion of our revenues in R&D, process development and CapEx. Over the long term, we believe several of the transition markets can become sustainable economically, with solar PV at price parity. To lead in sustainable markets, we are focused on reducing system solution, LCOE costs to the level of $0.10 to $0.12 per kilowatt hour with minimal subsidies and integrating into the grid. We expect to add further production capacity and build integrated solutions to access the large peak electricity market. To support our growth strategy, we illustrate on Slide 13 that we are in the process of significant capacity expansions that will add 22 new production lines or 1.3 gigawatt of new capacity by 2012 at our current run rates. This is planned to nearly double our current annual capacity by 2012 to 2.7 gigawatt. This new capacity will enable First Solar to meet increasingly diversified global demand for our modules while balancing our global supply base as we extend our cost leadership. We are confident in our ability to scale, and we have a strong track record of execution. Our expansion of the Malaysian facility is going well. Malaysia Plant 5 is expected to ramp in the first quarter and Plant 6 is planned to ramp in the second quarter of 2011. The Frankfurt-Oder plant expansion is on schedule and production is planned for the fourth quarter of 2011. For the Blanquefort French plant construction, it's planned to begin in the current quarter, and we recently began hiring site management. The new U.S. and Vietnam factories are expected to ramp production during 2012, adding 477 megawatts of annual capacity at today's line run rate. In summary, we delivered a solid Q3 results with record revenues and operating income. The solar market is finishing strong in 2010 and First Solar has made significant progress in diversifying geographically and focusing and developing the markets that are in transition. We continue to execute our mission and growth strategy. The operations team is executing very well on the expansions in Malaysia, Germany and France. We announced more expansion in the U.S. and Vietnam that we expect to almost double capacity by the end of 2012 to support our growth. We made significant progress in our Systems business and project construction, signed a 380 megawatt of incremental European contracted volumes for the year 2011, and First Solar's 2011 demand is strong and well contracted with the majority of pricing being already set. With that, I'd like to turn it over to Jens Meyerhoff who will discuss the third quarter financial performance and updated guidance for 2010. Jens?

Thank you, Rob, and good afternoon. During the third quarter, we experienced strong demand led by growing sales in our Systems business and by continued strength in our Module business. Net sales for the third quarter was $797.9 million, a sequential increase of $210 million or 36% compared to the second quarter of 2010. The increase was primarily driven by the completion of and revenue recognition for the 60 megawatt AC Sarnia Phase 2 Project and by a continued percentage of completion recognition for the Copper Mountain and Cimarron project, partially offset by a decrease in Module average sales prices. EPC revenue mix increased from 15% of total net sales in the second quarter to 28% in the third quarter. The blended effective exchange rate in the third quarter declined 3.7% sequentially to $1.31 per euro but remained above the average spot rate during the quarter as we continued the consistent execution of our hedging program. We produced 350 megawatts during the third quarter, up 2% compared to the prior quarter. The increase was driven in part by the 1% improvement in the annual line run rate to 59.6 megawatt. We recognized revenue for more megawatts that produced during the third quarter as we met the revenue recognition criteria for the Sarnia Phase 2. Module cost per watt produced for the third quarter was $0.77, up 1% sequentially. During the third quarter, we started the qualification of certain trough exchanges that tended to result in future conversion efficiency, improvement in throughput gains, which impacted line on rates and cost per watt unfavorably. As a result, core manufacturing cost per watt increased by $0.01 quarter-over-quarter to $0.75 per watt. Third quarter gross margin was 40.3%, down eight percentage points from the prior quarter. The decrease was the result of increased EPC system mix, impacting margins by approximately the full eight percentage points alone but also by FX and lower Module ASPs and higher cost per watt, which were offset by higher conversion efficiency in nonrecurring Q2 manufacturing expenses. Module gross margins were 49.1% during the third quarter of 2010 and negatively impacted by FX declining average sales prices mix and the increase in cost per watt. Operating expenses were up $6.6 million quarter-over-quarter due to expenses related to the restructuring of certain office leases, the write down of project assets and our SAP implementation. Operating income for the third quarter was $211.6 million compared to $180.5 million in the second quarter due to the increase in total net sales. Operating margin for the quarter was 26.5% compared to 30.7% in the prior quarter due to the mixed impact of higher EPC system revenues. Net income was $176.9 million or $2.04 per share on a fully diluted basis. The effective tax rate was 16.9% for the third quarter. In the third quarter, we recorded a onetime income tax provision of $14.7 million, which negatively impacted our fully diluted earnings per share by $0.17. This was caused by our decision to repatriate $300 million of earnings from certain of our foreign subsidiaries in advance of the change in the U.S. tax law that would limit our ability to fully utilize foreign tax credit in the future. Excluding that impact, EPS for the quarter would have been $2.21. In the third quarter, we generated $230 million of free cash flows with operating cash flows of $248 million due to the receipt of payment for Sarnia Phase 2. During the third quarter, operating cash flows were negatively impacted by $102 million due to the U.S. GAAP requirement to present that amount as a reduction of cash flows from operating activities for the excess tax benefits resulting from our decision to repatriate $300 million of earnings, with an offset to cash providers for financing activities for the same amount. We spent $138 million for capital expenditures against depreciation of $37 million. Cash and all other marketable securities increased by $37 million quarter-over-quarter to $997 million despite the cash payment of $296.7 million for the NextLight acquisition. Debt increase by $112 million to $250 million as we drew down $100 million on our revolving credit facility. As reported previously, First Solar increased its facility from $300 million to $600 million this month while also increasing its term from three to five years. Our debt to equity ratio remains low at 8%. This brings me to our updated guidance for 2010. We have made several key assumptions underlying our guidance. We have increased our euro spot exchange rate assumption from $1.20 to $1.35 per euro. For the fourth quarter, approximately 77% of our expected net sales and 92% of our expected net income exposed to the euro are hedged at an average rate of $1.33. As of today, the $0.01 change in the euro spot rate impacts revenue by about $1 million and net income by about $500,000. The impact of the NextLight acquisition to full year 2010 guidance remains unchanged at $0.09 to $0.10 per share diluted. We plan to begin shipments from KLM 5 in the first quarter and KLM 6 in the second quarter of 2011. Capital spending, includes KLM Plants 5 and 6, Frankfurt-Oder Plant 2 and Blanquefort, France. First quarter pricing is set to reflect the reduced the feed-in tariff in Germany. Additionally, we have adjusted effectively, effective December of 2010, our pricing to position our channel partners for sell-through in 2011, an anticipation of the feed-in tariff decline from Germany and other European markets. I would like to briefly comment on our pricing strategy. Our pricing philosophy is guided by our mission to reduce the levelized cost of electricity to sustainable levels to drive sell-through and most importantly, to provide a predictable outlook and execution capability to our channel partners. This means that we do not adjust prices based on short-term market signals since the segments we serve have longer development cycle during which economic for projects are being established. We do not subscribe to near-term price hikes that increase subsidy burdens to ratepayers but instead focus on our mission to make solar PV affordable and subsidy independent. Based on these assumptions and principles, we expect net sales to range from $2.58 billion to $2.61 billion; gross margins of 45% to 46%, up from prior guidance due to favorable foreign exchange trends and mix. 2010 Module gross margins are expected between 50% and 51% for the year. We expect plant startup costs of $18 million to $19 million primarily from Malaysia Plants 5 and 6, down from previously guided $20 million. Stock-based compensation is estimated at $95 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 28% to 29%, with Module operating margins of 34% to 35%, up from prior guidance. We expect our 2010 tax rate to be 13%. We estimate year-end 2010 fully diluted share count of 86 to 87 million shares. Earnings for fully diluted shares are increased to an estimated range of $7.50 to $7.65. This range includes the $0.17 onetime impact in the third quarter due to the income tax provision I described earlier. Capital expenditures for the year are expected to be $550 million to $600 million. Operating cash flow is predicted to be in the range of $595 million to $620 million, slightly higher than prior guidance but also incorporates the $100 million and $102 million reduction due to our repatriation decision discussed earlier. RONA guidance is at 19% at the high end of our prior guidance. With that, we conclude our prepared remarks and open the call for questions. Operator?

[Operator Instructions] And the first question comes from Vishal Shah with Barclays Capital.

Can you provide an update on the Agua Caliente financing with timing and return expectations, please?

So on Agua Caliente, Agua Caliente financing is progressing in line with our plants, but I think we're on track to close the financing latest early first quarter of next year. As you know, you finance a project like this and sometimes in your Q&A where it's said why you can't go faster, why hasn't this happened already, I'd like to remind you that we're financing $1 billion-plus PV power plant which is something that has not been done before. So the process of not only contract negotiation, but also educational customers, due diligence requirements take their due time. But we're looking at a good execution here. We have down and shortlisted partners and we're progressing according to plan.

And the next question is from Steven Milunovich with Bank of America Merrill Lynch.

Question about your Project business, number one, can you talk about your confidence in doing 500 to perhaps 700 megawatts next year? And could you also talk about economics of that? I think Rob alluded to wanting to have that 5% RONA above the cost of capital. Do you expect to do that on the Project business? And given the EPC component, how do you get there? Do you have lower expenses so you can potentially get to a similar operating margin once you get the scale?

Okay. I'll take a crack at this one too. On the confidence, yes, we can reiterate the range of 500 to 700 megawatts today. I think we have the optionality in the existing portfolio and obviously, also through the development efforts of some of our partners where we provide EPC to hit that range. So I think we can reconfirm that range here today. As you think about the economics and as you think about that a large portion of the portfolio that we are realizing or intend to realize in 2010 came through acquisitions, I'd like to remind you under our framework these acquisitions were made. These acquisitions were made by valuing the acquired assets against our RONA requirements and RONA thresholds, so which means that the project portfolio in aggregate, out of these acquisitions, meets or exceeds that return requirement. Now what it means on an individual project basis as you may have project in the portfolios that could exceed those requirements, and you could have some of them that possibly could slightly fall short, so you've got to look at the entire mix of project in aggregate. But yes, they would need that.

And we'll take the next question from Stephen Chin with UBS.

The questions on the higher cost per watt. Has all the equipment been updated so we won't see the cost for our penalty again? And is it possible that the company could see an expansion increase in the efficiencies from these upgrades at some point next year?

Steve, it's Bruce. As mentioned earlier, we've got a variety of improvements that are going into the factories and what might be easy on smaller scale is something that is more complex when we're dealing with 24-line spread globally. We have good quality systems in place to ensure that the product that we're shipping is to our standards. But in the implementation, it becomes somewhat of a challenge and affected us in terms of yields and our equipment uptime to do the implementations. Nevertheless, we expect to continue to be on a cost-per-watt roadmap over the long term. We'll continue to implement changes routinely over time, but it takes a while for those things to propagate out.

And the next question is from Satya Kumar with Credit Suisse. Satya Kumar - Crédit Suisse AG: I was wondering if you could talk about the factors that were driving the increase in accrued expenses. And specifically, could you talk about whether the warrant issues that you had last quarter? Are there any additional allocations that you expect to make in the second half of the year compared to the amount that you've already disclosed in Q2?

As mentioned, the increase in costs was really a direct result of the improvements that we're putting into the factories, and we expect to see those generate better efficiency in performance and lower costs. In terms of the exclusion that we mentioned last time, there were no additional costs incurred in Q3.

And the next question will come from Sanjay Shrestha with Lazard Capital.

I have a quick follow-up on Agua Caliente here guys, considering that you're going to be breaking ground before the end of this year, you get the cash grant so you don't necessarily wait for ITC and with yield market where it is, can you sort of talk in some more detail as to shouldn't it be at least somewhat easier even though it's a larger sized project that given the yield and you might be able to even go to a broader pool of people to get this thing closed and sort of standardized as to how some of this larger projects can be done in the solar industry?

Let me repeat, the constraints in the execution of this project is not necessarily how many bidders you have, how much liquidity is offered throughout these transactions through various interested of parties. This is a very large scale power plant with the largest power plant in PV to date. And the due diligence requirements, the financing structures are more complex, so are the arrangement that take more time to structure and just to go through to due diligence and the whole legal review process. So as these things take time, I think should look at this as any other very other large scale financing. You don't complete a financing of this size and magnitude in a week or two. So at the same point in time, we like this process to be very competitive too. So we're trying to -- now that the price of electricity and everything is set, we're trying to maximize returns while at the same point in time, offer a very attractive investment opportunity.

And the next question comes from Smitti Srethapramote from Morgan Stanley.

I was wondering if you can give us some more color on where the incremental 380 megawatts of Modules that you originally signed for 2011. Which countries are they going to in Europe? What percent is going to Germany and other markets?

It's not specifically assigned to a given country, but it's with seven of our key partners and framework agreement, customers who have developed and applied new businesses. As I've said, we're developing and supporting them to develop markets beyond Germany, especially in Europe, but elsewhere in the world, help us grow markets in transition. And that business is incremental to the overall volume. So we have approximately a gigawatt or over contracted in that area in Europe when you combine these things. So we feel pretty good about that and so do our customers.

And we'll take the next question from Mark Wienkes with Goldman Sachs.

Sort of a follow-up, if I do the math on the expected allocation of megawatts to Germany next year, it looks like the expectation is for 2011 about equal to 2010 sales on a volume basis? I'm just wondering if that's the pricing actions that you've already put in place or what is that drives confidence that, that can be flat year-over-year?

Well, we forecast really that Germany is, I think we mentioned or not specifically to be around seven to 7.2 gigawatts this year, which is an incredible growth year-over-year, driven in large part by the feed-in tariff changes and everyone wanting to get product in place and take advantage of that. So our forecast is for Germany to be in the range of four to five gigawatt. And as I think we've mentioned, 25% to 30% of our production in sales in 2011 would be tied to Germany.

And we'll take the next question from Timothy Arcuri with Citi.

I sort of had a question on pricing. Your Module pricing is about $0.20 or lower than what some of the Chinese peers are. I sort of wonder what the breaking point is. You're certainly selling everything that you make, so I'm sort of wondering where there might be an opportunity for you to actually capture some pricing upside because certainly, you haven't gotten to a point where you're not able to develop these new markets. So sort of how do you think of that mix between trying to develop the new markets and also trying to sort of be opportunistic and sort of capture pricing wherever you can?

It's Rob. As we said, we really don't necessarily price for the short term, we're focused on the longer term. And some of these cases, the markets that we think will be or that are in transition and could be sustainable over time are taking longer in some cases than we'd like them to. But our strategy is still driven relative to pricing by our mission, and that really is to make sure that we'll enable our customers to develop these applications around the world. The shorter cycle would be Germany at eight to 12 kind of months. And as you move out of Germany, it can take as long as 48 months or more depending on where you're doing it. So really, we don't pay attention to the near-term or week-to-week type of pricing. All of our focus is to drive the LCOE down and get to a point where we can compete with these traditional sources especially on the peak inside. So that helps us drive the costs down which enables us to open the market. That's what we're focused on.

And we'll take the next question from Rob Stone with Cowen and Company.

A follow-up on the pricing question, leaving aside the issue of where the Chinese might be, how do you think about your pricing philosophically in relation to FiT changes broadly? How much of the decline in overall system costs that should be borne by the Modules versus BoS improvement?

Well, I think that we work with our customers and through our efforts on our own project development and applications have a pretty good understanding of what's required. I think in terms of BoS or panel costs to develop applications that are going to be profitable for customers, I think in line with that, some of the interest rate expectations have been lowered because of it. There's more comfort in financing a lot of these transactions. So yes, it impacts the panel also to BoS. But also there's financing available and people have lowered, in many cases, their return expectations, which has helped collectively as well. So we think all those things combined will continue to drive growth to the market.

And we'll take the next question from Chris Blansett with JPMorgan. Christopher Blansett - JP Morgan Chase & Co: I had a quick one related to continuity of demand as you see it in Germany as we get to this feed-in tariff cut on January 1, just thought process, how much of the Agua Caliente build-out are you going to use as a buffer? And maybe what we as analyst should expect from that transition?

I think we've mentioned what we expect at least directionally as it relates to Germany which will be a decline year-over-year. I think that we have multiple opportunities with our own pipeline to offset some of those fluctuations. I think back to the pricing strategy, we worked hard with our customers and partners to enable them to develop applications and grow our position in Europe, which includes Germany. So we feel pretty good about that. And we don't really talk specifically and are not providing guidance relative to 2011 here, but I think that the pipeline enables us to weather any of those transitions and changes in demand. So I think we're in pretty good shape.

And we'll take the next question from Dan Ries with Collins Stewart LLC.

You mentioned some of your activities in India and China and some other developing markets. I was wondering if you could comment specifically on the Middle East and North Africa. And how you rank that opportunity, the opportunity in those markets over the next say, two to three years?

Well, I think they definitely have significant solar resource, obviously. There's a lot of activity and energy there. We and our customers have had interactions and we're reviewing some of the submittals and potential opportunities. They're just starting, quite honestly. In some cases, the markets are relatively small, so there's opportunity, but I think not the size and the market that you may see in other regions of the world, but there is a great deal of interest. And we are actively pursuing opportunities in that region of the world.

And we'll take the next question from Jesse Pichel with Jefferies. Jesse Pichel - Jefferies & Company, Inc.: And a follow-on to that prior question, there seems to be about 150 gigawatts of oil pickers, especially in the Sun Belt, and I'm wondering why the focus of the company is on a long-term gas peaking rates are not the more near-term opportunity of these oil pickers which are mostly in the Sun Belt such as the Middle East?

I think we probably didn't mention it at least in this call, but we've had a lot of conversation about opportunities that could be created and how we might position our technology in the future which is why we are excited about to be in a position to provide the development and construction and technology to help drive LCOE down and look at the growth opportunity, not just with the oil burning applications, but also where coal retirements are, and we continue to track and look at that as a market opportunity in the future. So we may be fail to mention it but in our market research, we include that.

And we'll take the next question from Kelly Dougherty with Macquarie.

Given your contact structure, how do you think pricing trends next year? Do you think we get a big step down in line or because of the feed-in tariff change, that it moderates? Or does it move down throughout the year?

Based on our position, like I said, we don't pay a lot of attention to the shorter-term things you may read about or others do. But our pricing is essentially set. And as I said, we're essentially sold out in terms of our production which is why we made all these announcements about adding incremental capacity and basically doubling between now and 2012 as to keep up with that demand. So I don't know that -- I think for us, we have a good view of both the demand and the price scenario for 2011.

I think, maybe to add this, for the industry as a whole, I would expect that given that Germany as a market, right, is going to pull down the feed-in tariff by about 13% down, I think that should create at an industry level, a step function down a price decline. There's not enough surplus economic left on the market. Cost of capital are fairly well if rationalize. And so now on aggregate and the fact that we have not opportunistically raised prices in any type of spot market activity recently and already start to settle our prices towards 2011 expectations, the step function would be significantly less pronounced for us.

And we'll take the next question from Ahmar Zaman with Piper Jaffray.

This is Shawn for Ahmar. I just wanted to step back to the cost per watt. You guys talked about some qualification expenses. Can you walk us through that in a little more detail and let us know if whether that cost per watt we should look for that to improve in 4Q?

Well, it's an ongoing process of implementing these things but certainly, we've learned considerably. And so the challenges that we had with equipment availability and yields, we don't expect to continue and expect the advantages of the process improvements to start to roll out and see better throughput, better performance, better efficiency and lower costs.

And we'll take the next question from Marc Bachman with Auriga Securities.

Jens, you've really substantially increased your available credit lines here and you're also looking at taking a meaningful tax here to repatriate these funds. How should investors be thinking about your need here for U.S. dollar liquidity? And is there other types of activities that we need to be cognizant of? In other words, this large projects here in the U.S., are they going to take a large amount of cash here to fund them going forward?

So obviously, there's a certain working capital intensity to the fully integrated business model. And as we've stated in the past, on the large-scale projects, we generally seek financing to add up significant construction expenses. So in that case we're funding the development effort including the downpayment and deposits through our balance sheet or through letter of credit. But then we'd expect right to sale and half the project fully financed. So if you look at U.S., their liquidity needs based on our projection given the cash generation that we will see in the U.S. with a significant ramp of business activity, and given the increase, the revolving credit facility at the very attractive terms, those two pieces will provide adequate liquidity. The repatriation actually was not more driven by the change in tax loss rather than by bringing the money back in the future time that will create adverse impact with respect to cost of such repatriation. If you look at the two separately, they're really not necessarily being seen together.

And we'll take the next question from John Hardy with Gleacher & Company. John Hardy - Gleacher & Company, Inc.: Rob, you made a comment in your prepared remarks about incentivizing customers to diversify outside of Germany. I was wondering if you're referring to something specific there. And then also around the question of the majority of your pricing being set for 2011, are we to assume that the rebate program is sun setting at the end of this year?

No, I think that we continue to look at what's necessary to enable customers to grow so that's a big part of what we do in positioning strategy. We didn't necessarily -- we maintained the opportunity to the look at rebates or something that may make sense in the future. So I don't think that we completely rule that out. I think that there are, as Jens said, a number of reasons because mainly this decline in Germany, there is going to be price pressure we think. So I think that what we are trying to do is make sure that our customers have what they need to go out and develop the market and continue to drive growth.

And we'll take the next question from Peter Kim with Deutsche Bank.

Just as a follow-up to the previous question, I think that in your recent filings that you talked about potentially expanding your relay program beyond Germany next year. I was wondering first, if that is say, they're still on the table, and was it included in your ASP pricing for the contracts in 2011 and whether or not that would drive some flexibility in the pricing in 2011.

So the rebate, there's a continuation on the rebate program into next year. It would be broadened out. I mean, the way we monitor is obviously, we look at the rebate program. We also look at deal-by-deal pricing that we review. So from that perspective, I think we get a realtime feedback through the pricing process. Many also of fuel pricing events are happening in an open book process. So we understand cost structures, we understand economics across the different market segments well. So those programs, I think, have proven successful for us in 2010, and we've decided to continue those programs in 2011.

And our final question will come from Burt Chao with Simmons & Company.

As you've spent production, your production footprint globally, as well as your sales footprint, how do you think about the systems business? Do you partner with any local ANC [ph] to build on the projects in some of the far-reaching areas? And also, is there point at which probably wouldn't make sense for First Solar to not only sell into those markets, but also build in certain markets? How are you thinking about that going forward?

We've got a lot of discussion about that. I think the answer is that it varies by region and varies by region of the world and market conditions. In some cases, you need to pursue the market with a partner for political requirements as well as the actual legal requirements. So I think that would have an effect on how we would pursue it, especially as it relates to EPC and other types of actions. I think we are very interested in the markets that we designated as what we believe to be sustainable, which is tied to the cost of electricity today and what it may be in the future plus available solar resource and a political will. So those countries we mentioned, we believe have all those things and we'll continue to work and develop it. So I think the answer is, we may consider different approaches in different marketplaces that we believe can be sustainable and which we think will accelerate technology adoption. So I think we'll be willing to look at them all with an open mind and take the best approach to drive growth there.

Thank you, everyone, for joining us today. Operator, the call is now complete then. Thank you.

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