Robert Gillette - Chief Executive Officer and Director Mark Widmar - Chief Financial Officer Larry Polizzotto - Vice President of Investor Relations

Good day, everyone, and welcome to the First Solar First Quarter 2011 Earnings Conference Call. This call is being webcast live on the Investors section of First Solar's website at www.firstsolar.com. [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.

Good afternoon, everyone, and thank you for joining us for First Solar's First Quarter 2011 Conference Call. Today after the market closed, the company issued a press release announcing our first quarter financial results and our guidance update for 2011. If you did not receive a copy of the press release, you can obtain one from the Investors section of First Solar website at firstsolar.com. In addition, we have posted the presentation for this call, as well as key quarterly statistics and historical data on financial and operating performance on our IR website. We'll be discussing the presentation during the call and webcast. An audio replay of the conference call will also be available approximately 2 hours after the conclusion of the call. The audio replay will remain available until Sunday, May 8, 2011, at 7:30 p.m. Eastern daylight time and can be accessed by dialing (888) 203-1112 if you're calling from within the United States, or (719) 457-0820 if you're calling from outside the United States, and entering the replay pass code 3266707. A replay of the webcast will be available on the Investors section at firstsolar.com approximately 2 hours after the conclusion of the call, and will be remain available for 90 calendar days. If you're a subscriber of FactSet or Thomson One, you can obtain a written transcript. With me today are Rob Gillette, Chief Executive Officer; and Mark Widmar, Chief Financial Officer. Rob will present an overview of the company's first quarter results and give an update of the market and business. Mark will review the first quarter financial results and update guidance for 2011. We will then open up the call for questions. During the Q&A period, as a courtesy of those individuals that seek to ask questions, we ask that participants limit themself to…

Great. Thank you, Larry, and welcome to everyone to our Q1 earnings call. We have a lot to talk about, so let's get into it here. We'll talk about the market, as well as our financial performance. So first, we had a solid quarter with net sales of $567 million. The first quarter net income was $116 million or 20.4% of net sales, resulting in diluted EPS of $1.33. Return on net assets was 17% on a 4-quarter rolling basis, representing an EVA of approximately 5% in line with our target. Our cash and marketable securities balance is $713 million, decreased $400 million sequentially, as we invested in CapEx and new factories, paid down $100 million of debt and began construction at several systems and system projects, as well as funded our recycling program. The Q1 production was 407 megawatts, up 26% versus the prior year. And up 3% quarter-over-quarter. The sequential increase was driven by the production ramp of the KLM 5 factory and improved by conversion efficiency, partially offset by 7 fewer calendar days than in the fourth quarter. The annual capacity per line increased by 1.5-megawatt quarter-over-quarter to 64.1-megawatt. Our conversion efficiency was 11.7%, which is up 0.6 percentage points year-over-year and in line with our roadmap. As a result of continuous improvement in efficiency and process, we recently released our series 3, 85-watt module for higher efficiency applications. The module manufacturing cost per watt was $0.75 which is flat quarter-over-quarter. The benefit of increased efficiency and material cost reductions were offset by factory ramp costs and fewer calendar days. Core costs which excludes the ramp penalty and stock-based compensation was $0.73 per watt, down 9% year-over-year in line with our cost reduction roadmap. To summarize our capacity build out, in March, we announced Mesa, Arizona as…

Thanks, Rob. I'm excited about the opportunity to be at First Solar to support our mission of making solar affordable and to deliver value to our shareholders. In my first 30 days, I've had an opportunity to meet with the executive management and financial leadership teams. I'm truly happy and impressed by the depth of First Solar's management team and the strength of the finance and accounting organization here. First Solar is uniquely positioned in the market and I'm looking forward to helping the company scale and achieve our goals.

Great. Thanks, Mark, and welcome to the team. On Page 9, you can see some of the project type activity in the first quarter. We delivered the 5-megawatt Tilbury site to Enbridge and completed the 2-megawatt Greece [ph] project for PNM in the first quarter. Greece [ph] is the first of 5 we are building for PNM. We continued site work on Agua Caliente and we expect to begin module installation in the third quarter. The 20-megawatt Santa Teresa project is under construction and is our first project resulting in the conversion of a CSP site to PV, and the first to employ trackers to increase energy yield. The next slide lists the projects in our contracted pipeline in North America. We highlighted the projects in green for which execution has begun in 2011. Our current North American pipeline is 2.4 gigawatts AC of PPA, EPC, on Ontario RESOP contracted projects. We plan to execute on about 450-megawatt DC with contributions from a dozen projects in 2011, up from 3 in 2010. And we currently have the flexibility to build to up to 600 megawatt DC in 2011. We expect to sign new EPC agreements to continue adding to our contracted pipeline developed by First Solar and our partners. Overall, we're experiencing strong buyer demand for our utility scale systems projects due to our proven systems performance, execution record and attractive financial profile. Turning to Slide 11. I want to update you on how we see the key markets evolving and how this relates to First Solar's growth strategy and our investments. In Europe, Germany, France and Italy are implementing changes to their feed-in tariff structures, market caps and tender processes. The industry will require a period of adjustment and understanding of the changes, since some of the implementation details…

Thank you, Rob, and good afternoon. Looking at Slide 16, during the first quarter, we delivered solid financial results in line with our full year guidance. Net sales for the first quarter were $567.3 million, down $42.5 million or 7% compared to the fourth quarter of 2010. The decrease was primarily driven by lower volumes as we allocated modules to system builds to meet contracted delivery schedules. Revenue recognition is expected for those volumes later in the year. Additionally, we had 7 fewer days in Q1 resulting from our adoption of a calendar fiscal year in the fourth quarter of 2010. ASPs declined slightly due to a full quarter's impact of 2011 prices which we implemented in December of 2010. These impacts were partially offset by the positive effect of increased systems revenue recognition. Our EPC revenue mix increased from 5% of net sales in the fourth quarter to 8% of net sales in the first quarter. The blended exchange rate in the first quarter increased $0.01 sequentially to $1.34 per euro, while the spot rate also increased $0.01 to $1.37 per euro. The stronger euro had a minor impact on net sales as we were heavily hedged in line with our long-term strategy. We produced 407 megawatts during the first quarter, up 3% compared to the prior quarter. The increase was driven by the ramp of our FiT factory in Malaysia, KLM 5, which reached full production by the end of the quarter. We also improved our line throughput rate to 64.1 megawatt per year. These positive factors were partially offset by the impact of 7 fewer days during the quarter. Looking at our cost per watt, our module cost per watt in the first quarter was $0.75, flat with the prior quarter. Our core manufacturing costs per watt…

[Operator Instructions] And we will go first to Mark Wienkes from Goldman Sachs.

Just wondering could you comment on the slight delay in the DOE funding, and then could you characterize the status of the other non-Agua Caliente DOE loan applications, if any, the overall market for access to financing, and then how you think the proposed Sun Power acquisition affects that competitive landscape?

Okay. Mark, this is Larry Polizzotto. So the DOE loan program, the Agua Caliente financing is really 2 parts. It's the DOE debt and then equity from NRG. Both of those need to close in order to close the deal, and the process on the DOE side is just taking a little bit longer than expected. It could turn out that, that gets done at the end of the second quarter but the deal may not get completed until the third quarter. And so we're not sure at this point. So at this point, we believe that it'll be in the third quarter before that deal is completely closed. But no issues with the process. It's just taking a little bit longer than expected. As far as other projects, there's 3 other projects that are applied for in the DOE process and those are progressing through the process.

And we'll go next to Sanjay Shrestha from Lazard Capital Markets.

Upon this guidance question for 2011, a 2-part question. One, you guys did mention it was all Agua Caliente for Q2, but given a lot of focus on what's happening in Europe and the Italian market, was there anything related to that where you guys actually ended up having any cancellation of any potential opportunity in that market given the change in the FiT? Is there anything in that Q2 guidance related to that? And two, how big do you think your European exposure is going to be, let's say, 12 months out, given what's happening in that part of the world?

Sanjay, it's Rob, Mark can comment but I'll start out. I mean, with a lot of the changes or pending changes that are out there especially Italy, the market started out really slow in 2011, and so there's some build in channel inventory. Due to that build and the uncertainty, there's pressure on average selling prices. So I think prices are moving faster than people expected. So additionally there is -- that's not just that, but it's also the financing costs are rising in Germany and elsewhere that's impacting the project economics overall. So our outlook in terms of a year carries some of that lower ASP assumption, and that's embedded in our guidance, which as Mark described is partially offset by the FX and what we're seeing. And as we've discussed, we're going to look at what we have in our cap at pipeline and now are planning to build 450 megawatt versus the 400 we've talked about before. So I would tell you that the market has been delayed, and as we said, relative to Italy, especially we saw something came out today as we were just joining the conference. We haven't had a chance to review that. But the impact of Italy has created a challenge and a delay that'll take another quarter or 2, I think, to sort out once they tell us what the rules are.

And we'll move next to Stephen Chin from UBS.

Just a question on the increase in inventory at the end of the quarter. I know you said higher inventories for the utility projects, but how quickly do you think you can work through this inventory? And when do you think you'll get back to like seeing normal inventory days?

Yes. We saw a inventory build there during the quarter which about almost 1/2 -- a little over 1/2 of the related in the systems business. We did see a little bit of inventory build, though, as well as we were ramping up KLM and our plants in Germany, which drove a little bit of additional inventory, as well as we increased our investment in strategic inventory that we currently are carrying on the book. The systems-related business will obviously follow the revenue recognition, so I would not anticipate a dramatic change in the inventory profile until we see the second half of the year.

And that's to some degree, that's Agua.

And we'll go next to Smitti Srethapramote from Morgan Stanley.

I just wanted to follow-up on the Total [ph] investment in Sun Power that occurred last week. Just wondering if the fact that Sun Power you will now have a lower cost of capital will give them a competitive advantage when they go up for bidding against you guys for large-scale projects. And do you see some other deals occurring in the industry in the near-term?

Yes, Smitti, it's Rob. I think it was a little bit of a surprise in terms of the partnership overall, but I think there'll be probably more and more large companies as we now invest in the industry, and we really -- to continue to drive the industry forward, we need a lot of viable competitors to continue to drive the technology adoption and really drive it in the Utility Systems. So I think it will help to create greater awareness and drive the industry as a whole. And I think there's plenty of room for competitors in the industry. And I think it'll be something we'll have to wait and see. So obviously, the cost of capital is a plus in general, but a lot of it comes down to having the projects and executing to them. So that'd be what I'd say

And we'll move next to Steven Milunovich from Bank of America Merrill Lynch.

Could you comment a bit more about what's going on in Europe? Do you have contracts? Are you being impacted in your ASPs to the same degree as some of the other vendors? Are you able to reallocate modules? Are any of your counter-parties renegotiating contracts, and are you having to use rebates more than you expected coming into the year?

Well, I think what we're doing from, we talked a lot. I tried to kind of emphasize each of the countries as I went through the prepared remarks. But in general, there's 2 things. I mean obviously, we're positioning our product as we always do for sell-through so we'd talked about it in 2010 for 2011, and then we always work with our customers to manage the feed-in tariffs and the other things that are happening. So I think what's driving a lot of the challenge is the uncertainty, and we want to be able to price for sell-through in the future, so '12 and '13 beyond. So we continue to do that. I think the other part of it is, so we did include what we anticipate as some of those price impacts in the guidance that we provided. And so we continue to work with our customers. They were also placing material in developing regions of the world, to see some of this market growth and geographic diversification that you know is our focus. So we're -- that's impacting us a little bit, but we think it's a great investment for the future in terms of the people that we're putting there and what we're doing to expand the use of PV in places like India and Australia, China, elsewhere.

We'll go next to Satya Kumar from Crédit Suisse.

I was wondering if you could provide a quick update on the marketing of the AV Solar Ranch? Will that sale proceed or occur after any loan guarantees? And for you to hit the low end of the 450 to 600-megawatt system guidance, are you contemplating any direct from AV this year? And a quick question for Mark, if you can give us an operating cash flow and CapEx guidance for Q2.

Sanjay, this is Larry. Yes, we are planning on building AV Solar Ranch this year and getting some recognition for that this year. At this point, we will start building that after we sell that project and that's something we're working on right now. It's something we planned on doing in the second half of the year. So we continue to expect to do that. So no change in AV Solar Ranch.

Yes. And in regard to the CapEx and the cash flow discussion, we really don't provide any specific guidance for the quarter. What I can say, though, as we said and related cash flow, our cash flow will probably be more towards the second half of the year. So as the systems business ramps up and we start seeing the revenue recognition-associated cash receipts, we'll see much stronger cash flow generation in the second half of the year versus the first half.

We'll go next to Robert Stone from Cowen and Company.

With respect to the North American systems business, you mentioned that your ability to pull forward another 150 megawatts declined through the year. Can you give us a sense of by when you would have to pull the trigger to execute on that? And also, any comments on when you might add to the 2.4 gigawatts in the pipeline?

Okay, it's Rob. We're always focusing on adding to that, we just don't announce it until it's complete and contracted, as you know. So we still plan on that and continuing that effort. The lumpiness in Agua Caliente revenue recognition as Mark had talked, we kind of now have it positioned starting in Q3 and then really accelerating in Q4. So that's kind of a big deal for us and some of the RESOP projects that we're involved with are also to the real estate type of accounting, so we got to get to completion on them. So that's part of what drives a little bit of the movement from quarter-to-quarter.

Keep in mind, Rob, we added a lot of projects in the fourth quarter in our call just a couple of months ago, so it hasn't been that long since we reported recently. So but there are quite a few projects in our pipeline that we'll announce in the next few quarters.

And next question comes from Daniel Ries from Collins Stewart.

You mentioned India as a potentially 100-megawatt market. Will that remain a module opportunity for you? Or do you think you'll go into systems in that country as well? And how does that 100 megawatts compare to what you were perhaps expecting entering the year? Has that changed meaningfully?

Yes, it's Rob. I would say it's changed meaningfully in a positive way. And so we said in 2010, we almost did 10 megawatts there in total, so when we talk about this 100-plus opportunity, we're doing it on a module basis with partners and customers today. So we're evaluating the market, putting people on the ground and determining the best way for First Solar to establish a leading position in the market. So we're open to all avenues of approach, but as of now, it's a Module business with our partners, existing and new.

And we'll move next to Timothy Arcuri from Citi.

I was wondering if you can give us some sense of finished goods inventory. They were -- it was $59 million at the end of the year. I'm wondering what it went up to? Obviously, it went up. And then I'm also wondering whether you can give us some sense of what the module EPC revenue split will be for June?

Yes, the actual finished goods inventory I think went up around $13 million -- $12 million, $13 million somewhere in that range. So it's a nominal increase of the total inventory build. Again, the majority of the inventory build related to the Systems business and again, we had some increase in raw materials as we were ramping for KLM and Frankfurt. And then the other part of your question, excuse me, was again?

I was just kind of wondering, you had previously given guidance on your 2011 guidance call for about $620 million of module inventory in June, and that's obviously gone down. So I'm wondering what the module EPC revenue split is that's assumed in your June quarter guidance.

The EPC revenue in Q1 was around 8% of the total, and we would expect that number to approximately double maybe a little bit more than that as we move into Q2.

The next question comes from Chris Blansett from JPMorgan.

Rob, I had a quick question about future capacity expansion plans. Although you have a longer-term positive outlook, with all the uncertainty going on in Europe right now, just the thoughts on why you're continuing to add right now as opposed to maybe taking a pause, letting it settle up before starting up again?

Well, I think that a couple of things. One is we still have the strategy in place to build larger facilities to buy the flexibility to add or not. We did talk about taking the 2 lines out that we had intended for France, given the uncertainty. So we did that. So we do also have the pipeline of business in place, which is different from our past where the 2.4 gigawatts that we continue to grow. And then starting in 2012, we have 1 gigawatt of installations planned on a go-forward basis on our own captive pipeline. So in general, that's a significant change for us. And then our investment in developing the new markets that we've talked about versus the traditional agreements that we have in place in developed areas of the world. So we talked about India, we feel we're very pleased about that opportunity. We see some opportunity in Saudi Arabia we talked a little bit about. We didn't highlight any significant detail over the call as we went through a lot of things during the call. We feel good about Australia and what's happening there. Some of the comments that came out of China recently would reflect that there may be good opportunities to put together a commercial business that's viable, that's been our challenge there. So I would say that those are the differences, and as we look to the market and we assess it and find that there are challenges that are impacting us, we can always modify our plans on a go-forward basis. So our plan is to create flexibility with our capacity.

And the next question comes from Jesse Pichel from Jefferies.

I have a 2-part question. Just wondering, how exactly do you have the flexibility to pull in from 450 megawatts to 600 megawatts? Would your customers thus be allowed to get the PPAs in the states started early? And my second question -- part question is, what's the margin impact of shifting more of your systems to the roof given the BoS penalty that may be involved along with more abundant silicon modules?

Well, first is, of the 600 and that opportunity, we deliberately have -- we have read multiple contracts that we talked about 11 projects that are in play in 2011 that where we had 3 in 2010. So each of those contracts has some range in it, in terms of what you build when and milestone commitments in terms of total. So that's where we can do part of that upside. In addition, there are unannounced customer projects. So they're customer developed projects where we would provide EPC and module installation in total. And then also, we can -- because of our focus and effort in cycle time, we've increased our ability to put megawatts on the ground. So that also provides the flexibility and opportunity to meet customer demands and drive it that way. So I think that, that's where that range comes from, and what we try to do is moderate it with the external module demand. So we view the external module demand as perishable. So when we want to be able to serve that demand with our customers and ensure that they can develop their applications, and this gives us a buffer to some of these fluctuations that take place. So that's where that comes from. And the second part of your question, can you restate? What's that?

With the impact of shifting more of your systems to the roof, given the BoS penalty and perhaps more abundant silicon modules?

Well, I think when we started the business 5 or 6 years ago, a lot of our product went to the roof because of our competitive scenario, and has for many, many, many years. So I think I mentioned, despite a lot of the big volume ground mount systems that were installing in North America and elsewhere, still 30% of our business is rooftop in total. So it's really -- we've focused on the 30-kilowatt and above, in large part because we've been sold out throughout our history and a lot of our customers have always wanted to pursue that market. And I think it's an opportunity for us to apply some of our know-how and application development and beat [ph] installation rates and other things in that market as well. So we've not focused on it, and I don't anticipate it would have a significant effect on our margins in total.

And we'll move next to Kelly Dougherty from Macquarie.

I apologize if this has been asked we get cut off, but we've been hearing about material cost increases from some of your peers and understood that you're using different materials. But maybe can you help us think about what's going on with some key material cost, glass, encapsulants, things like that and then maybe how we think about the production costs improving by the end of the year?

Yes, it's Rob. So I would say that -- a couple of things. One is we see the similar commodity pressures that many people see in the BoS area, so if you think about copper or some steel, things like that, so that kind of commodity pricing, we try to do opportunistic buys and negotiate, but there's definitely some pressure there. So that affects us. Anything that you would read about transportation and costs related to transportation, so surcharges for transportation, whether it's on a sea or over land, that is something that would affect us that we do our best to manage. We have long-term contracts in place for the major commodities that we acquire. So like as you mentioned encapsulants or glass or other things. And you remember we've gone from being basically a very small buyer of glass 5 years ago to one of the top 3 flat glass buyers in the world today, so we've done a lot of good work, I think, there. So there is pressures for sure, but given the fact that a large part of our costs are within our control, in our operational control, and we use so little key raw materials to make the semiconductor, that it is a different scenario, I think, than some of our competitors.

Yes, we're not affected by things like silver [ph]

No.

And we have time for one more question, that comes from Jake Greenblatt from Barclays Capital.

Just a quick question on the guidance, I noticed that both RONA and operating income are down from the previous guidance. Curious what drove that decision.

From a full year standpoint, the actual operating income is down just slightly. We're talking a nominal change of a few million dollars. Some of that is driven by the ASP pressure that we were talking about. And again, some of that is more to see higher growth or new emerging growth markets, right? So that we move some volume away from Europe where we're seeing some slowness and we're moving that into other growth markets like India. We are seeing a little bit of an ASP pressure from that standpoint. The only other thing that was significant that was in this round of guidance that we didn't have, we do have some severance-related expense that was not in our prior guidance and to be honest with you, I'd make the majority of the drop of $10 million.

And that does conclude today's conference. We appreciate your participation and have a wonderful day.

Thank you.