First Solar, Inc. (FSLR) Q2 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Solar Second Quarter 2011 Earnings Conference Call. Just a reminder, this call is being webcast live on the Investors section of First Solar's website at www.firstsolar.com. [Operator Instructions] Also as a reminder, today's program is being recorded. I would now like to turn the call over to Mr. Larry Polizzotto, Vice President of Investor Relations for First Solar. Mr. Polizzotto, you may begin.

Good afternoon, everyone, and thank you for joining us for First Solar's Second Quarter 2001 (sic) Conference Call. Today after the market closed, the company issued a press release announcing our second 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's website at firstsolar.com. In addition, we have posted the presentation for this call, as well as well as key quarterly statistics and historical data on financial and operating performance on our IR website. We will be discussing the presentation during this 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 August 9 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 6647385. A replay of the webcast will be available on the Investors section of firstsolar.com approximately 2 hours after the conclusion of the call and 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 second quarter results and give you an update of -- on the market and our business. Mark will review our second quarter financial results and update guidance for 2011. We will then open up the call for questions. [Operator Instructions] First Solar has allocated approximately one hour for today's call. I want to remind everyone that all the financial numbers reported and discussed on today's call are based on 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 our forward-looking remarks that you may hear on today's call. During the course of this 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 circumstances, 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 with the Securities and Exchange Commission. First Solar assumes no obligation to update any forward-looking information contained in this call or with respect to the announcements described herein. During the third quarter, First Solar will be attending the following conferences and events: first, Pacific Crest Tech Conference in Vail, Colorado, on August 8; Bank of America Merrill Lynch Clean Tech Conference in New York City, September 13; DnB NOR Renewable Energy Conference in Oslo on September 13; ThinkEquity's Growth Conference in New York City on September 14; Ardour's Capital Tech Conference in New York City, September 15; Credit Suisse Future of Energy Conference in New York City, September 27. And now it's my pleasure to introduce Rob Gillette, Chief Executive Officer of First Solar. Rob?

Great. Thanks, Larry. Welcome to our Q2 earnings call. As all of you know, it was a challenging quarter for the solar PV industry, including First Solar, but our business model and our execution served us well, and we're positioned for a significant and better second half. Starting with Slide 6. Q2 net sales of $533 million, that's about 6% lower than last quarter, primarily due to lower average selling prices. Solar PV' policy uncertainties in Italy, Germany and France adversely impacted demand in the second quarter. Net sales were also impacted as we allocated modules to the Systems business which we did not recognize as revenue within the quarter. Second quarter net income was $61 million or 11.5% of net sales, resulting in diluted EPS of $0.70. Return on net assets was 13.1% on a 4-quarter rolling basis representing an EVA [ph] of about 1.1%. Our cash and marketable securities balance of $515 million declined $198 million sequentially as we invested CapEx for new factories and continued construction in several systems projects. In addition, shipments were weighted to the end of the quarter as customers delayed orders until European policy changes were better understood. Despite the challenging European market in the first half of the year, our 2011 outlook remains solid due to our differentiated and resilient business model. We expect significantly better performance in the remainder of 2011 as we build projects from our systems pipeline, develop promising new markets and execute our cost and efficiency roadmaps. As a result, our updated 2011 EPS guidance is $9 to $9.50 per fully diluted share, which includes 450 megawatts at system sales, and some updated assumptions which Mark will discuss later. Significant drivers in the change is a 2% increase in the effective tax rate or about $0.20 per share reduction, driven by the increased portion of profits in the U.S. Moving on now to operations. Q2 production was 483 megawatts, up 40% versus the prior year and up 19% quarter-over-quarter. This sequential increase was driven by the production ramp of the KLM 6 factory and early startup of Frankfurt-Oder 2. Module revenue shipments were up 6% quarter-over-quarter, which partially offset the decline in average selling prices. A portion of this incremental production also went to systems project construction for which revenue has not yet been recognized. Our conversion efficiency was 11.7%, which is up 0.5 percentage points year-over-year and flat quarter-over-quarter. Module manufacturing and cost per watt was $0.75, which is flat quarter-over-quarter. The benefit of our modules from low-cost manufacturing sites was offset by FX, lower line throughput, higher spending and factory ramp costs. Core costs, which excluded the ramp penalty and stock-based compensation, was $0.73 per watt. And we're very pleased to announce that our Malaysian plants have achieved a new core cost milestone of $0.69 per watt. Annual capacity per line decreased by 2 megawatts quarter-over-quarter to 62.1-megawatt per line. Line throughput and cost per watt were both impacted this quarter as we decided to take advantage of softer industry demand to schedule downtime and begin to implement conversion efficiency improvements which we expect will have a meaningful impact by the end of the year. We also reached a milestone with our standard utility-scale Balance of Systems by achieving a cost level of $0.99 per watt. BoS is down 29% from the second quarter of 2009. We are now also close to our 2014 target for standard BoS of $0.91 to $0.98 per watt and can improve further as our planned module efficiencies increase to 13.5% to 14.5% by the end of 2014. This major accomplishment is the result of our experience in team teaching [ph], investment in engineering and R&D, and cycles of learning from almost 400 megawatts of DC of projects built to date. To summarize our manufacturing capacity addition. Malaysia 5 and 6 are at full production. Frankfurt-Oder 2 began ramping a month early and is expected to be at full production by the end of the third quarter. Construction of our Mesa, Arizona, and Vietnam sites are progressing on schedule for shipments in the third quarter of 2012. Moving now to Page 7. Despite the recent market turbulence, our growth strategy remains unchanged. We are focused on our mission of making solar affordable and sustainable to gain access to the multi-terawatt peak electricity generation market. We are currently in a transition phase as FiTs and other government policies are progressing towards parity and market diversification continues. First Solar has made significant progress reducing a levelized cost of electricity, diversifying geographically, and we expect price declines to continue to drive demand elasticity. On the next page, you can see we've made significant progress in lowering our total systems costs by 30% in 3 years. If we can reduce that by another 19%, we believe that we can provide turnkey utility-scale systems that generate power at an LCOE of $0.10 to $0.12 per kilowatt hour in high-radiant zones like the U.S. Southwest, India, China, Australia, the Middle East, Spain and Italy. This is what will drive our participation in the peak electricity generation market. Now turning to Page 9. Our module manufacturing cost, as you know, has steadily declined since 2008. And future improvements to our year-end 2014 target are primarily driven by conversion efficiency growth, 13.5% to 14.5% efficiency and annual line throughput improvements to 80 megawatt per line. We are committed to our long-term module conversion efficiency roadmap, and we invest heavily in technology to achieve this end. Our investments in technology are not focused on hero cells. We emphasize practical improvements with a low-cost pathway to implementation and production. However, it is nice to see that when we integrate several of these improvements, we are able to deliver a device that does exceed the prior world record. We recently received confirmation from NREL that First Solar's cells achieved a record 17.3% efficiency for CdTe thin-film, which breaks the previous record of 16.7% which was set in 2001. Unlike other cell records, this cell was constructed using only full-scale manufacturing processes and commercial materials. Therefore, we believe they can be reproduced economically. This is an important milestone because it validates our technology capabilities and significantly improves CdTe thin-film efficiencies and it provides confidence in the improvements we have planned over the next few years. Our achievement is a direct result of our industry-leading annual investment in research and development and the efforts of the committed team that you see here. We are considering approaches to accelerate module efficiency quicker than our current roadmap of the 13.5% to 14.5% by the end of 2014 to support rooftop and other high-efficiency applications. The next page shows how we have been steadily diversifying geographically and investing in market development. Our North American business has grown from 17% to 25% of megawatt shift and is expected to be our #1 market in 2012. In India, supportive policies and new local partners are driving strong growth, and we expect India to account for more than 10% of our megawatts this year. Our North American pipeline and new markets like India are helping to offset European market uncertainties, and both are expected to be multi-gigawatt, sustainable markets. In the second quarter, North America and India combined represented almost 50% of our revenues. Moving to Page 11. In market development we're focused on executing our North American systems pipeline, managing through European market uncertainty and developing new markets. In North America, we made progress executing on the 450-megawatt DC of planned 2011 systems build and have flexibility to build up to 500 megawatts. Agua Caliente now has a significant portion of the BoS completed and we have begun installing modules. The sale of Agua Caliente to NRG and the closing of the debt financing including the DOE loan guarantee are expected soon. All major steps have been completed, and we are in the funding stage. We will begin to recognize the revenue for the construction of this 290-megawatt AC system in Q3. When completed, it will be more than 3x larger than any PV power plant currently operating. We are focused on adding to our systems pipeline on a global basis through new RFPs, EPC agreements and acquisitions. For example, we recently added 150-megawatt AC, EPC agreement with Sempra Generation for Copper Mountain 2 in Boulder City, Nevada. This grows our systems pipelines to about 2.6 gigawatts. Sunlight, Topaz and AVSR1 achieved $4.5 billion of DOE loans and conditional commitments in Q2. Topaz received its conditional use permit and is in the legal appeal period. AVSR is expected to begin construction in the third quarter. In Europe, we are managing through market uncertainty due to feed-in tariff and policy changes. The delayed implementation of a new decree in Italy, the slow start to Germany after January's FiT reductions and lack of clarity with respect to France's tender process contributed to excess channel inventories for the industry. During the second quarter, we worked with customers to enable discrete project realization, and we increased rebates to enable distributors to sell through. In France, First Solar and our partners are realizing 250 megawatts of projects in 2011. Now we have a clearer picture in Italy, Germany, France and the U.K., but the new policies have created a more challenging operating environment. We are making progress in developing new markets. Our 2011 planned shipments in India have now grown to more than 200 megawatts, which is up from 100 megawatts in Q1 and 10 megawatts sold in 2010. We recently signed 4 new module customers in India and have contracted more than 250 megawatts year-to-date for deliveries in 2011 and into 2012. We are seeing an increasing number of tenders as well in the Middle East for 2012 and beyond. On Page 12 is the latest analyst consensus forecast of global PV market demand. On average, the 15 analysts included in this survey estimate that the 2011 market will grow to 19.8 gigawatts, up 19% year-over-year, primarily driven by North America, Italy, India and China. The analysts' estimates -- estimate a compound growth rate of 12% from 2010 to 2013 as the markets diversify to North America, India, China, Japan, the Middle East and the rest of the world beyond Europe. Government policies, lower pricing, solar [ph] resource and economics are driving market diversification and demand elasticity. These markets are transitioning to sustainable markets as we anticipated in our growth strategy. In general, we believe demand in the major solar markets will improve in the second half of 2011 after a difficult first half. We see significant growth opportunities long term as new markets are emerging and we advance towards group parity. The German market is recovering from a slow start and appears to be ramping towards around 4 to 5 gigawatt in 2011. The recent EEG decision provides good long-term visibility, and we are well-positioned as at the German manufacturer. In Italy, the market is adjusting to the new CE4 [ph] published in May and is recovering from a policy interruption in the first half. Demand is improving and is expected to be 2 to 3 gigawatts in 2011. Stable and reliable regular utility frameworks will be the key elements for long-term sustainable development of the Italian market. First Solar technology and Europe manufacturing expansion will help to position us for success in the Italian market. France's policy does not provide sufficient long-term visibility at the moment, while we continue to be optimistic about the longer-term opportunity. In the short-term, due to building grandfathered projects, the French market should range from 500 to 800 megawatts. Our 2-line facility planned for Blanquefort remains on indefinite hold. The North American market should double to more than 2 gigawatts this year. In California, over 1 gigawatt of RFOs were issued for the 2011 cycle to comply with the 33% RPS requirement. Over time, the requirement for government subsidies may decline as ROEs or early adopters do the same. In China, the government is in the process of developing a longer-term plan for the market, with the potential to increase their 2020 goal from 20 to 50 gigawatts. China recently announced the new national FiT with the potential to provide sustainable economics at 1.15 RMB per kilowatt hour. We continue to see strong momentum in India. The market is expected to grow to about 500 megawatts in 2011. In Australia, we were unfortunately not selected for the first phase of the Solar Flagship's program but remain well-positioned for the second phase. Solar growth will be strongly supported in the future by the recently announced national carbon legislation, which has committed to invest $10 billion in non-wind large-scale renewables and to the implementation of state solar programs targeting utility-scale projects. In Southeast Asia, we see encouraging signs of early-stage development in Thailand, Indonesia, Malaysia and the Philippines. Finally, we see great potential in the Middle East. There are challenges facing oil-exporting countries with rapid growth in domestic energy needs, tongue [ph] tenders for utility-scale projects are underway and we expect to see more robust renewable policies that could drive a several-hundred-megawatt market in just a few years. On the next page, you can see how we've grown our systems pipeline over time. We signed a 150-megawatt AC EPC agreement with Sempra Generation for the expansion of Copper Mountain in Boulder City, Nevada. This site was originally developed by First Solar and sold to Sempra, which has signed a PPA with PG&E for the electricity generated at Copper Mountain 2. Our goal is to continue to replace current year construction with new PPA or EPC agreements to continue to grow our pipeline. The orange line shows our increase in project construction from 12 megawatts in 2008 to the planned 450 megawatts in 2011, and we expect to build 1 gigawatt in 2012. The slide also illustrates the expansion and diversification of our utility systems customer base, including IPPs, utilities, and financial investors. In the back of this presentation, Slide 23 shows the details of the North American contracted project we are executing and have under development. On Page 14, you can see some of the project activity in the second quarter. We now have completed a significant portion of the mounting structures on Agua Caliente and have begun module installation. The Amherstburg 2 and Santa Teresa projects are nearly completed, and Paloma and PNM projects are ahead of schedule. To summarize, we continued to execute in the quarter despite a challenging European market and remained focused on achieving our mission. Our visibility is improving for the second half of the year. An increasing portion of our revenues and profits are under our control as we construct our systems pipeline and continue to diversify geographically. Our LCOE is approaching grid parity, which should drive elasticity and demand and a growth of sustainable markets. We are investing for growth in the United States, India, the Middle East, Australia and China. We are executing a systems pipeline and we're adding to it. We continue to expand our factories and drive our products' roadmaps. We achieved a major BoS in module efficiency milestones as a result of our investment in R&D and our continuous improvement processes, and we have the financial strength to continue investing in the long-term future of our business. Finally, our 2011 guidance is solid due to our differentiated and resilient business model. Now I'd like to turn it over to Mark who will discuss our second quarter financial performance and updated guidance for 2011. Mark?

Thank you, Rob, and good afternoon. Looking at Slide 17. Net sales for the second quarter were $533 million, down 6% quarter-over-quarter. The decrease was primarily driven by lower ASPs, which were down 13% quarter-over-quarter as the reduced prices to sell-through shifted our geographic mix. As Rob said earlier, the quarter started slowly due to the European policy uncertainties, which adversely impacted demand for the quarter. These impacts were partially offset by the positive effects of increased systems revenue recognition driven by Santa Teresa, Paloma and PNM. Our EPC revenue mix increased from 8% of total net sales in the first quarter to 11% of net sales in the second quarter. We also increased the module allocation for the System business during the quarter to meet contract auxiliary schedules, which will result in revenue recognition in the second half of the year. The euro increased from Q1. However, the stronger euro had a minor negative impact on net sales as we were significantly hedged, in line with our long-term strategy. Gross margin was 36.6%, down 9.2 percentage points from the prior quarter. The decline was the result of the ASP's decreases, a mix shift both geographically and to more system sales and an unfavorable FX impact. Module gross margin was 40.2%, down 9.5 percentage points from the prior quarter. Operating expenses were flat quarter-over-quarter. Slightly higher R&D expenses associated with efficiency improvements were offset by lower production startup costs as Frankfurt-Oder and Malaysia ramped. SG&A was flat quarter-over-quarter. We focused on managing our expense growth to help partially offset lower gross margins. Operating income was $65 million compared to $129 million in the first quarter. The decline was due to the decrease in total net sales and gross margins. Operating margin for the quarter was 12.1% compared to 22.8% in the prior quarter. As we progress through the year, our operating margin is levered to the timing of the systems revenue recognition. Second quarter net income was $61 million or $0.70 per fully diluted share. The effective tax rate rose 2.2 percentage points to 15% due to the mix shift of profits in the higher tax jurisdictions, which lowered EPS by $0.02 in the quarter. Turning to the balance sheet and cash flow summary. Cash and marketable securities were down quarter-over-quarter to $515 million. Accounts receivable trade balance rose quarter-over-quarter due to the non-linear shipments as policy changes in Europe pushed our customers' orders to the back half of the quarter. Accounts receivable non-billed increased because of growth in North America business and the timing of project billing cycles as specified in customer contracts. Inventories increased as we increased production from a KLM 6 and FFO2 and due to more module and balance systems materials in transit for EPC installations in the third quarter. Project assets rose as we continued to develop North America project sites. We continue to invest to increase our factory capacity, and we have the long-term bids [ph] To help finance Malaysia and Germany expansions. Operating cash flow was negative $203 million, and free cash flow was negative $408 million. We spent $221 million for capital expenditures, and depreciation was $54 million. Cash flow was impacted by accounts receivable linearity, growth in project assets and inventory and deferred revenue growth on more construction in progress in our systems business. Also, we invested about $52 million more on capital expenditures compared to the first quarter of 2011. As expected, we consumed cash in the first half of the year and plan to generate cash in the second half of 2011 as we complete the sales projects in our Systems business. Our balance sheet remains strong with a debt-to-equity ratio of 10%. This brings me to our updated guidance for 2011. We have made several key assumptions underlying our guidance. Our spot exchange rate assumption is $1.40 per euro. For the third quarter, about 69% of our net sales and all of our expected net income are hedged at an average rate of $1.34 per euro. For the balance of the year, about 72% of our net sales and all of our expected net income are hedged at an average rate of $1.35 per euro. As of today, a $0.01 change in the euro-dollar spot exchange rate would impact our revenue guidance for the year by about $1 million and will not change our net income guidance since we are fully hedged for 2011. Our module pricing reflects European FiT changes in 2011. It is intended to enable sell-through economics and is based on our estimate of the current competitive market. We plan to build approximately 450-megawatt DC of system projects in North America. We have the flexibility to increase this amount to 500 megawatt should the demand in other markets fall short of our current expectations. However, that flexibility has declined and will continue to decline as we progress through the year. We plan to minimize our expense growth in the second half of 2011. Malaysia Plants 5 and 6 are fully ramped, and we are ramping FFO2 in Q3. Our capital expenditures is primarily for capacity expansion in Vietnam and the U.S. Page 20 shows that based on these assumptions, we expect net sales to be in the range of $3.6 billion to $3.7 billion. The new factory ramp penalty and cost of goods sold will range from $8 million to $10 million. And the factory startup expenses will range from $35 million to $40 million. Stock-based compensation is expected to be $115 million to $125 million, with approximately 20% allocated to the cost of goods sold. GAAP operating income is expected in the range of $900 million to $960 million, which is slightly below our prior guidance at the high end of the range. Our revised effective tax rate will be 13% to 15% as more profit is recognized in higher tax locations. The 2% increase from prior guidance reduces EPS by about $0.20. Year-end 2011 fully diluted share count is expected to be 87 million to 88 million shares. Earnings per fully diluted share is expected to range from $9 to $9.50, $0.25 lower than prior guidance as we reflect a higher tax rate and a more aggressive pricing environment. We offset a portion of this by holding expenses flat. Capital expenditures for the year are expected to be $800 million to $900 million. Operating cash flow is projected in the range of $500 million to $600 million. Annual return on net assets will be 17% to 18%, in line with our goal to deliver returns exceeding our weighted average cost of capital by 5%. Finally, Slide 21 is an update of the expected quarterly profile of revenue and operating income dollars throughout 2011. Please note that as you read across horizontally from Q1 to Q4 on each chart, the sum of all quarters is 100%. Note that third quarter, we are expecting to recognize less than 28% of our full year revenue and approximately 30% of our operating income guidance. The profile was driven by the following assumptions: first, Agua Caliente revenue recognition starts in the third quarter and accelerates into the fourth quarter; second, Canadian projects under completed contract accounting show revenue recognition primarily in the fourth quarter; third, we have significant operating expense leverage in the second half. We are slowing the growth rate in expenses but will continue to focus on R&D and market development. Additionally, startup expenses declined to about $8 million per quarter for Mesa and Vietnam. Finally, we will continue to use our systems pipeline as a buffer against European demand fluctuations. With this, we conclude our prepared remarks and open up the call for questions. Operator?

[Operator Instructions] And our first question comes from Stephen Chin, UBS.

It looks like your upside flexibility to the North American region is now only about 50 megawatts, not the 150 megawatts. Is there a reason why you chose not to upsize North America more? And does this -- it just helps with the 2012 visibility and the 2012 profit margin?

Well, yes, I think originally we said between 4 and 6 when we entered the year. And so what we're trying to do, of course, is to meet our customer expectations and manage the business with the fluctuation from the external markets. So for us, we feel the 450 megawatts are appropriate and deliver on commitments and give us balance between 2011 and '12 in the external market that exists. So we feel pretty good about that, and we have enough demand in other locations to ship products. So the quarter was difficult in Q2, but we feel like 450 is the right number. And as Mark said, as we move closer to the end of the year, it just becomes a limiting factor as to how much you could put on the ground in total.

Next up, we'll take a question from Mark Wienkes, Goldman Sachs.

Some of the crystalline silicon companies over the years about higher efficiency cells and plans for high-efficiency modules. Why are or how are your new high-efficiency cells more credible, that they'll turn [ph] into panels? And then how are you thinking about the strategy and timing of rolling that out?

Yes. I would say this, they're more credible because firstly, they're actually done on manufacturing tooling, right? So it's not something that's done in the lab. As well, we also don't talk about a number of different things, and so as I said, we don't do our R&D work specifically targeting hero cells because hero cells aren't what we can replicate in our facilities. So we don't -- we've had a history of and we maintain a history of only talking about things that we think we can implement in our manufacturing process. So I think in general, we're very confident and made confident by the efforts of the team and the people that you saw there and we talked about there in the FiTs [ph]. So we've had a lot of record cells and as you know, efficiencies in the numbers we use, that 11 7 [ph] that I've stated is an average of all of our production lines. So even on our manufacturing lines today, there's places where we make higher efficiencies, and we make sure to report the average.

Up next, we'll take a question from Steve Milunovich, Bank of America Merrill Lynch.

I wonder if you could at least qualitatively discuss your visibility into 2012, both in the U.S. where I think you've said you're now looking at doing a gigawatt of systems business, plus you have the DOE sweeteners, I guess, that's always come through. And then also, outside the U.S. where nobody really knows what's going to happen, but if you have any thoughts about what next year might look like outside the U.S. Just kind of curious if you could talk qualitatively about your visibility into next year.

Yes. The gigawatt, we mentioned, we plan to build in our objective pipeline systems in 2012. So that number is correct. I think we feel good about the growth and expansion, and especially the support of India in terms of -- we started out with the 10 megawatts in '10, and now 200 megawatts this year and we kind of [ph] signed up to 250 between now and into 2012. So that's pretty exciting, I think. I think we'll see some stability in the markets, as we mentioned in Germany, as they've kind of stabilized somewhat. And we hope to see some policy direction that gives us some clarity on the future of France. So I think in Europe, we're still kind of all bouncing back from the changes that took place in the first half and the challenges over there. So we don't -- we're not obviously talking about 2012, but getting the large pipeline applications funded, and into production is definitely something we're excited about, and we'll be doing a lot of that between now and the end of the year.

Our next question today comes from Smitti Srethapramote, Morgan Stanley.

You mentioned that your module -- your guidance assumption depends on current competitive pricing environment. Can you go into more details regarding what polysilicon pricing or Tier 1 Chinese Module pricing that you're assuming in your guidance?

Well, we assume that we will still have a significant cost advantage regardless of what happens with the poly pricing in general. We still look at the other conversion costs in the $0.75 range. So we feel pretty good about our cost position, and we'll continue to execute on our cost roadmaps.

Next up, we'll hear from Vishal Shah, Deutsche Bank.

Question, you've mentioned India and U.S. have accounted for more than 50% of Q2 revenues, so am I correct in assuming that the rest of the markets accounted for less than 200 megawatts in Q2? And if that's the case, how do you see that run rate going into the second half and more into 2012?

Yes, I think, yes, approximately revenue-wise in mix you'd have to look at where we were doing EPC revenues well. So you can't -- it's not a straight map that way. But in general, we -- that's why we mentioned revenue, but -- the split difference. And I think for the balance of the year, we feel like we've worked with our customers to provide pricing and support to drive sell-through, and then we plan, as you know, to start executing on these major projects in Q3 and Q4. So I think as we said, 2011, the second half will be much better than the first.

Yes, our U.S. business will grow pretty substantially...

Next up, we'll hear from Sanjay Shrestha, Lazard Capital.

Great. Guys, quick question on your 17.3% efficiency that you guys achieved, right. What does that now mean in terms of your long term cost target which previously was kind of I think based on 14.5% efficiency numbers? So can we get significantly below $0.50 a watt because of this record efficiency that you guys were able to achieve?

Well, I think what it does is, and then the reason that we mentioned it is that we're proud of the success and the fact that it's our manufacturing tooling. So we don't, as you know, we don't talk about these things unless we feel that we are well-positioned to be able to apply them. And the significance of it is, is that in a manufacturing environment, that we even beat the record that stood since 2001, which is more the experimental side. So what it means for our roadmap, is we're committed to delivering on the roadmap as we planned and still have that same target range in 2014 to get to that $0.52 to $0.63 range. So but obviously, we're stretching and doing what we can. I think I mentioned during the pitch that we're going to continue to see what we can do to accelerate that roadmap further, and when we do roll out, let you know.

Next up, we'll take a question from Daniel Ries, Collins Stewart.

Operating expenses were flat sequentially. We had been expecting some impact from onetime items such as severance. Did those items occur and the run rate expense fall to offset them during this quarter? How should we think of operating expenses 3Q versus 2Q?

Yes, so the expenses within the quarter did include a severance item, which was slightly below, I think, what we indicated on the call. Last time, we thought it could be in the range of $6 million or so and it ended up being below that. But we did -- we were able to offset that onetime effect within the quarter. And so I would expect at this point in time, the expenses for the second half of the year should essentially be flat with our exit rate. We may be a little bit lower in Q3 and higher in Q4 but think of the second half essentially flat with the exit rate for Q2.

Your next question comes from Timothy Arcuri, Citi.

Actually, I had 2 questions on cost per watt. First of all, I believe it's sort of like comparing apples and oranges when you look at the Chinese, how they report cost per watt and how you report cost per watt. And I'm wondering, if you can give us cost per watt calculated the same way that the Chinese do, i.e. stripping out freight and overhead costs. And then secondly, I'm wondering if you look at cost per watt year-over-year, it hasn't really gone down even if you strip out stock-based comp and you strip out the ramp costs. It's down basically $0.01 even though the efficiency is up like 50 bps. And so I'm wondering why that is and why that's going to change going forward.

Okay. Well, yes, we -- usually we don't talk about it, but from what I know in our analysis, what the competitors do is they exclude things like shipping, warranty, recycling, obviously, SBC, capacity ramp, insurance and other production costs and things like that. So ballpark on a comparative basis if you looked at our cost per watt on the same basis, about $0.68 in that range would be the equivalent comparison. And one of the things that, I don't know, maybe didn't come out during the presentation as well is that we, this year, have changed somewhat how we implement some of the changes with the manufacturing team. And we made the decision based on megawatts produced on a full year basis on line to take lines down for more an extended period. So say a week at a time whereas before we would've done it piecemeal more to keep the lines up and running. And the reason we did that was twofold. So one is the market conditions and challenges in volume created an opportunity for it. And two, we feel like for the total year, off of the same lines, we'll able to produce more megawatts. So it's kind of back to where we were I think last year, about this time where we talked about with all these lines we have and the Copy Smart approach, how do we change and make the changes appropriately and continue to bring the cost down? So it will come in more of a stair-step type of approach versus the incremental change quarter-over-quarter, and that's really what we've been working on and part of what you've seen. So it's still down year-over-year, but it's something that takes more significant effort with all the lines that we have and some of the changes that we're making. So you'll see the benefits of the change and effort we've made in Q4 of this year, both in efficiencies and line run rate. So it'll be a little bit lumpier than our past.

Next up is Rob Stone, Cowen and Company.

I wonder if you could just comment on how you see current conditions in terms of linearity of Q3 versus Q2. And do you think with all the noise about European finance and banking, is access to credit a constraint for projects and module sales in Europe?

Yes. I would say, to take the last part of your questions first, access to credit has been an issue, especially if you look at Italy. Because of the uncertainty and all of the debate and discussion that took place, I mean, no one could get funding for some of the projects that were in Italy because of that uncertainty. So there has been pressure on rates as part of this equation. So I think that's kind of a big deal. And the first part of your question was, again?

The linearity of this quarter versus last quarter.

Yes. I think for us we would expect the linearity to be better in Q3 than in 2 and I think as we said, Mark mentioned, I think, and I did, part of the challenge was our customers trying to figure out what the feed-in tariffs and regulations would mean and how they could get things restarted. So as we said, we did a lot more of our shipments late in the quarter than we would normally do.

Up next, we'll hear from Jesse Pichel, Jefferies. Jesse Pichel - Jefferies & Company, Inc.: You're showing 2014 LCOE at $0.10 to $0.12, and that's an impressive number. What would that equate to in terms of a PPA price building in profits for you and profits for the project owner? Because we're hearing about $0.09 PPAs bid into the California RAM market. I just wanted your thoughts around that.

Yes, okay, I think that when we mention a range like that, as I think we've done, we mentioned before, we view that as pretty competitive with peaking -- other sources of fossil fuel peaking. I mean, you start to take to look at all of them, gas and others. So we think that's a competitive range and when -- probably when you're mentioning these single-digit numbers, that's pretty COD-type of numbers so when you get the time-of-day multipliers, they tend to be in the range that we're talking about. So I understand the question and most of them -- and the time-of-day multiplier in California is about 20%.

Satya Kumar of Credit Suisse has the next question. Satya Kumar - Crédit Suisse AG: I was wondering what portion of the 450-megawatts of systems this year you're thinking will get the loan guarantee in your guidance? And has that assumption changed from a quarter ago? In terms of discrete projects, are you assuming that there will be more than one project getting the loan guarantee that's revenueing [ph] this area?

Yes. Satya, this is Mark. For our guidance, we're still assuming the same assumptions as we had before in terms of dependency around DOE funding. And if we're able to achieve the funding for more projects than we previously had assumed, that could provide additional upside in future periods, probably not this year, but could provide some upside as we move forward.

The 2 projects that are to be built this year, Agua and AV, are the 2 that -- Desert Sunlight, for instance, is not one that we expect to build this year, for instance, or Topaz.

Our next question today comes from Brian Gamble, Simmons & Company. Brian Gamble - Simmons & Company International: Question on the potential for increases earlier on the efficiency side of things. And if you want to go options one by one, that's fine. I was just essentially wondering, with the option that you have, how much potential for additional early-term expenses are there within those options?

Yes. Well, I think we don't really talk about the individual incremental changes that we make. And I think that the team is -- we have what we call a go-fast plan internally. So we have the commitment we have to you as our shareholders and externally to the roadmap that we put in place, priced at [ph] $0.52 to $0.63 and the 8% to 10% improvement year-over-year. And that's kind of how we got there. We mentioned today the improvement, and we're looking at things more and more on an installed cost per watt basis. So we've made 30% improvement in the BoS cost, and if we make the 20% improvement or 19%, we talked about between now and then, we will -- we should be able to exceed the $0.91 to $0.98 range that we talked about in 2009. So we made great progress there. And that really is tradeoffs up between some inflation on raw materials, but then the great work would be EPC team and guys [ph] to continue to drive the cost down. And then anything that we do, of course, on a go-fast level in engineering with Dave and his team contributes to further BoS cost reductions. So at 13.5% to 14.5% range, we have internal plans to accelerate it as quickly as we can and hopefully you'll start to see that in our numbers. And that's why we adopted a little bit of a different approach as to how we upgrade the lines and make changes.

Next is John Hardy, Gleacher & Company. John Hardy - Gleacher & Company, Inc.: Obviously, this year, the working capital adjustments have been pretty severe based on the way the Agua financing came through and how that deal was structured. I was just curious if we could talk a little bit about what we know now, for 2012, whether the cash inflow will be a little bit more evenly distributed and what are some of the factors there?

Yes, I think it's a good question. And clearly, the first half of the year, there was a significant cash outflow associated with ramping some of those large projects like Agua. And we'll start to see the cash inflows start to flow in this year and then in Q3 and Q4, which will drive significant operating cash flows for the second half of the year. And then we would expect a more balanced performance into 2012. Essentially, once the annuity stream starts to flow and the gates open up on the progress payments, you largely are matching your inflows and your outflows pretty well. So we would expect 2012 to be dramatically different than what we've seen here in the first half of 2011.

Joe Osha of Bank of America Merrill Lynch is up next.

Further to my colleague Steve's question, you may have seen the national feed-in tariff announced for China just a couple of weeks ago. Wondering at the sort of utility-scale levels, what your thoughts are there and whether that could impact the APAC demand numbers that you're talking about.

Yes, we see this firstly as a very positive step. It's one that we've been really looking for, so the 1.15, 1.15 RMB per kilowatt hour kind of ties to USD $0.16, USD $0.17 [ph], which is a better scenario than we've seen before. What we need to be able to determine now with the officials there is how to get through the process and ensure that certain projects are included in that feed-in tariff. So that's right now what we are sorting through, but we see it as positive. And I think that you should start to see more volume in China and especially that the mention -- I've heard mention of increasing the targets for 2015, and you heard the mention of the range from 20 to 50 gigawatts by 2020. So they're obviously huge goals in the process and we've been awaiting further clarity on something that makes sense from a sustainable standpoint. And this tariff seems to, and now you've got to get through the process of approvals to make sure that your project gets in the pipeline. So that's what we're working on.

Moving to Ahmar Zaman, Piper Jaffray.

Just a follow-up on that. Now that the Chinese government has announced a national feed-in tariff, can you give us an update on your orders project and where you are on that or what are the next steps there?

Yes. We still have the MoU, sort of initial pilot plan of the 30-megawatt. And then we have an MoU for 2 gigawatts as well and for -- with Ordos. And again, it really is tied getting through the pre-approval process and having the site be selected and put into the feed-in tariff program. So that's what we're working on now. So we are hopeful that we can get that done and participate in what we think will be good growth there.

Next up is Colin Rusch, ThinkEquity.

Can you -- a 2-part question, can you talk about the drivers for the ground [ph], for assumed cost reduction, other than just scale purchasing? And then also comment on demand from South America and sub-Saharan Africa that you're seeing at this point.

Okay. Yes, I mean it comes in 3 ways for us, essentially on the BoS, so there's an element of design. So how do we engineer out [ph] materials and utilize the expertise of our guys from the experience that we've had in building plants to figure out smarter ways to do it. So there's the design element. There is the sourcing element that you mentioned. And then there is the productivity element, the speed with which we get the generation. And that's a big part of the economics and the equation. So that's really the 3 ways. And I think last quarter, we talked a little bit about some inflation pressures, which all you got to do is look at some of the commodities out there, whether it's your [ph] copper or other things, or all this [ph]. We get pressure there, but we work through it from the other 2 means, so design and productivity in terms of how we get things installed. So I think as we get smarter and continue to improve efficiency in our own cost per watt, plus the focus on BoS, that we can drive the installed cost per watt down and get us close to the parity levels that we are targeting for 2014.

And then can you comment on the demand in sub-Saharan Africa and South America?

Yes. I think we've done some initial work and there are some tenders in place. I would say that demand in total is something that's still evolving in those regions. There's a lot of interest. There are no formal policies in place to drive a lot of growth yet, but we're positive that both -- Southern Africa, Northern Africa. And in spots in South America will be a good marketplace, but it will take some time to develop, is what I would say. So probably end of 2012 and beyond before we would start to see any real life [ph].

Our next up is Mark Heller, CLSA. Mark Heller - Credit Agricole Securities (USA) Inc.: I actually have 2. One is just a clarification. Can you say what the EPC revenues were in the quarter? And then the second question is on pricing. I understand that you get better pricing in the U.S., but can you talk about pricing trends, I think for your third-party Module business in the second half of the year?

Yes. I'll take the pricing side of the question. We don't talk specifically about ASP because we try to manage our customers and position in the market by providing and driving sell-through. So we want our customers to develop captive projects in the pipeline, so they need to have some visibility out about a year or so to do that. So what happened in Q2 and really in the first half is that a lot of excess inventory in the system with the demand kind of stalling because of all the things we talked about earlier in the presentation. And when that happens, it puts a lot of pressure on the price side. And we work through a rebate system with our customers to fund them and support them so the price pressure in the external market is high from a third-party sales standpoint and that's part of what impacted our Q2 results. So we're continuing to manage and monitor that. We still feel confident in the concept and our approach to being able to buffer some of those fluctuations with our captive pipeline. And as we get nearer and nearer to having those things finalized and funded, especially here in the second half, as we said, Agua will start to recognize revenue on in Q3. That will become something that is very viable for us to do, is to balance those 2 things together. So we want to be competitive in the third-party market, and we want to work with our customers to ensure they develop markets around the world.

Yes, on the EPC revenue within the quarter, it was right around $60 million or about 11% of our total revenue. And you may remember for the first half -- first quarter, excuse me, was a little less than $50 million so we're about $100 million or so of EPC, and as we guided to, there's about $900 million or so of EPC revenue. So you get an indication of the amount of the ramp we'll see in the second half, and that's obviously reflected in our earnings guidance.

And Kelly Dougherty of Macquarie has the next question.

I just want to follow up on the ASP question. Obviously, we know what happened in the second quarter. So I'm just wondering if you think that taking that lump sum then really has gotten us to a level where prices are appropriate to move products in the second half or if you think that Module pricing is likely to move down further before the end of the year?

Well, I think that for much of our discussion, negotiation with our customers, I think the steps that we've taken should provide opportunity for them to sell through. We also work with them to make sure that certain projects are realized. So we'll get into discussions with them on specific projects of size if they want to execute on, especially in terms of developing new regions in the world. So we have a few processes and the rebate that we discuss with them. we have some special deal pricings that we work on with our customers. So I think from what we know, there was a lot of change in the first half. I think that there won't be as near as much change in the second half, but we'll use those 2 tools to enable to them to sell through.

Our next question will come from Chris Kettenmann, Miller Tabak. Chris Kettenmann - Miller Tabak + Co., LLC: You mentioned increasing project tenders in the Middle East. Just wondering if you could give us a sense of timing there and what you're seeing for contract pricing?

Yes. We still don't -- what we have seen that's around the world and especially in that region of the world, is you see prices kind of converging in terms of getting closer to each other. So remember, these are larger applications and prefilled in significant part. The economics are made easier from the total number of available hours of sunlight, so they -- in some places, it's 2,000-plus hours, so the economics are pretty significant. So I'd say in that way, a good opportunity for all. I think that -- the tenders that are out there are for construction to begin in mid- to late '12 and into '13 and '14. So that's kind of the time frame that we're looking at with some smaller ones, kind of prototype and demonstrators, happening a little bit faster.

Next we'll hear from Stephen Simko, Morningstar Securities Research.

What I wanted to ask about was just in the DOE press release that was issued at the end of June, some of the numbers were given out on the AV Solar Ranch project that implied a capacity factor that would be pretty impressive given the conversion efficiencies of your models. And I just wanted to talk or hear a little bit about what is really driving such strong electricity generation at that site, beyond the inverters that are mentioned in the press release.

Sure, specifically AV Solar? Steve, sorry, I missed -- can you repeat the question? You kind of broke up and I kind of lost you in it. But I asked is it specifically for AV Solar or...

Correct. In the press release, the electricity generated on an annual basis is only provided for the AV Solar project. So I was acting asking about in general, if it applied to other projects as well. I'd be fine to hear that, but it's just -- again, the implications of the capacity factor of that project would -- I think [ph] it would be pretty high given the conversion efficiencies of your models. But I just wanted to see if you had any color on what was driving such strong power generation.

So I think -- so this is Larry, I think -- you have to kind of look at each project by project but in some cases with customers, they'll look for maximizing energy yields, which means they may want more modules, installed DC modules, on a site in order to maximize the yield on the site. In some cases they'll want trackers, and we will be using the rate tracker acquisition that we got on some of the future sites. So it also helps to increase the energy yield. So I think it's going to vary based on the site in terms of the capacity factors that the customer wants on that site. So you're going to see that probably vary more than in the past because customers are getting more sophisticated on whether they want trackers or not or what they want the energy curve to look like or the yields to look like. So it's going to vary quite a bit in the future.

Up next, we'll take a question from Harry Shandra [ph] Ariga [ph].

Another [ph] question on pricing. Is there a point in time where you are comfortable enough to price versus the competition so that the disparity is wide enough that you do not have to resort to rebates as an ongoing feature? Or is the rebate a more like a tactical tool for you?

Yes. I think that we -- originally we had agreements in place with our customers in the form of the framework agreements that we had. And that -- we wanted those to remain in place and that's why we chose the rebate vehicle. So that's one. I think that we are working with customers to discuss how we would change our agreement so that we didn't have to go through the rebate process. And we have some ideas that we'll be working on in the second half of 2011. So yes, to answer your question, we will look out ways to simplify the approach and provide pricing in a different way to our customers so they can drive sell-through. But we originally did that because of the agreements we had in place.

Our last question today comes from Ramesh Misra, Brigantine Advisors.

In terms of your [indiscernible] cost of $0.99 per watt, is that on the Series 3 modules? And does that at also include trackers? If not, how would those 2 elements impact balance of the [indiscernible]

No, we do it the same way as we do with the modules, so it's an average number. So it would be across, whether it's Series 3 or 2. And most of our work, of course, now, is Series 3. We actually -- part of our efforts during Q2 were to convert completely to Series 3. So we're Series 3 across the entire product line now. So we want to make sure that we had positioned Series 2 inventory to address any customer issues. But we're Series 3 now. But we look at it, and when we give you a number, it's an average number. And as Larry said, for all kinds of reasons, the costs on a per-watt level for BoS from site to site will vary from land conditions to whether it has a tracker or what the installation is.

And ladies and gentlemen, that is all the time we have for questions today. That also does conclude our conference. We would like to thank you all for your participation, and have a great day.

Thank you.

Thank you.