First Solar, Inc. (FSLR) Q3 2011 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the First Solar's Third 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] As a reminder, today's call is being recorded. I would now like to turn the call over to Mark Widmar, Chief Financial Officer for First Solar, Inc. Mr. Widmar, you may begin.

All right. Thank you, operator. And good afternoon, everyone, and thank you for joining us for First Solar's Third Quarter 2011 Conference Call. If you did not receive a copy of the third quarter's earnings press release issued on October 26, you can obtain one from the Investors section at First Solar's website at www.firstsolar.com. In addition, we have posted a presentation for this call, as well as key quarterly statistics and historical data on financial and operating performance on our IR website. An audio replay of the conference call will be available approximately 2 hours after the conclusion of the call. The audio replay will remain available until Thursday, November 10, 2011, at 11:59 p.m. Eastern Standard 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 enter the replay passcode of 9081154. A replay of the webcast will be available on the Investors section of the company's website approximately 2 hours after the conclusion of the call and will remain available for approximately 90 calendar days. If you're a subscriber of FactSet or Thomson One, you can obtain a written transcript. With me today is Mike Ahearn, Chairman of the Board and Interim Chief Executive Officer. Mike will provide background on his return and where First Solar is going as a company, and I will discuss market conditions in detail and review our operating and financial results, including an update on our 2011 guidance. We will then open the call for questions. During the Q&A period, as a courtesy to those individuals seeking to ask questions, we will ask the participants to limit themselves to one question. First Solar will allocate approximately one hour to today's call. All financial numbers reported and discussed on today's call are based on U.S. GAAP except for free cash flow which is a non-GAAP measure, which is reconciled to operating cash flow in the back of our presentation. Now I'd like to make a brief statement regarding forward-looking remarks 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 expectation and 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. It is my pleasure to announce Mike Ahearn, Chairman of the Board and Interim Chief Executive Officer of First Solar. Mike?

Thanks, Mark. I'd like to start by briefly addressing the CEO transition we announced last week. The board felt a leadership change was necessary in order for the company to navigate through the current market conditions and achieve its full potential. When hiring decisions do not work out, it's usually the result of the fit between the employee and the position not being right as opposed to some particular shortcoming in the employee. And in this case, it was the fit that wasn't right, that's ultimately determined by the board and as the person who strongly influenced the hiring decision, I take responsibility for the choice we made. I know there's been a lot of speculation about whether it was some type of fraud or legal action, or government investigation or major operational problem behind the move, and I can tell you none of these things were part of the board deliberations. This was simply a question of fit. Now I'd like to move on and talk about the business. The team and I are working to our annual planning process now. In early December, we plan to discuss our 2012 annual operating plan and our updated strategy, we'll have specifics at that time. But in the meantime, let me provide you with an overview of how we're generally viewing the business. When we started First Solar in 1999, our mission was to make solar electricity a meaningful part of the electricity supply worldwide and to lead a whole new industry that would be self-sustaining both economically and environmentally. To accomplish that, we felt we must, as a midterm goal, establish a platform for success and we defined that platform to include: First, the ability to profitably deliver solar electricity at a price as low as $100 a megawatt hour, which we believe would make solar economical almost everywhere in the world; second, a global supply chain capable of operating at multi-gigawatt scale in order to deliver meaningful quantities of solar to mass markets; and third, a close engagement with policymakers, regulators and customers worldwide to identify needs we could solve with solar power and drive a robust flow of innovative solutions to meet their needs. Today, much of this platform has been built. We have reduced module manufacturing cost per watt from $1.59 in 2005, which is our first full year of production, to $0.74 this past quarter. We're executing a plan to further reduce cost per watt to $0.52 to $0.63 a watt and increase conversion efficiencies from 13.5% to 14.5% by the end of 2014. We've also built a superior EPC capability where innovative designs and practices combined with scale has enabled us to reduce standard Balance of System cost from $1.56 per watt in 2008 to below $1 per watt today. And it's provided us with unique insights into the optimization of large power plant performance and reliability. Over the past year alone, we've reduced our time to build a representative 50 megawatts solar generation plant from 10 months to 7 months, and we're continuing to execute plans to reduce Balance of System cost and cycle times to defined targets through 2014. Now these cost reduction and conversion efficiency improvement plans are not without risk, but the plans are reasonable and the targets are feasible. And achieving these goals would enable us to price solar electricity for as low as $100 to $120 a megawatt hour, which makes solar electricity affordable in many parts of the world. We're also on -- we're well on our way to building the second plank of the platform with global supply chain capable of operating at multi-gigawatt scale. Our module production capacity in North America, Europe and Asia enables us to produce and install multi-gigawatt of solar every year. We're continuing to localize our supply chain and to expand it beyond modules to balance the system components in order to continuously improve economics, speed and flexibility. And finally, we've innovated beyond the solar module to develop a diverse toolbox of solutions for our customers, including engineered systems, constructed systems, O&M services, project financing and end-of-life recycling. And we are developing additional solutions that will enable us to meet customer needs and open in new markets. Underlying these accomplishments are a superior process technology and a strong culture of operational excellence and continuous improvement, which will allow us to continue the strong trajectory of innovation improvement that have been demonstrated in the past. In summary, the platform we set out to build when we started First Solar in 1999 largely exists today. We’re uniquely positioned to move into the next phase from mid-subsidy markets where we've operated in the past to becoming part of the mainstream electricity markets worldwide, which has always been our goal and the reason we formed this company. As we look to the future, we see significant opportunities to meet global energy needs with solar power. In the U.S. alone, the 300 gigawatt plus coal generation fleet is aging, over 2/3 of that fleet is more than 30 years old and much of it lacks meaningful environmental controls. We do not believe this generation will be replaced by new coal generation, nor do we think most utilities, regulators or project financiers believe this will occur. Instead, the U.S. electricity generation mix will likely shift toward lower carbon solutions which will include some combinations of natural gas, renewable energy, and possibly, nuclear power in some communities. The opportunities to integrate affordable, reliable solar power solutions into this new energy infrastructure will be significant. In Europe, the mandate in Germany to shut all nuclear plants by 2022 and the EU objective of 20% renewables by 2020 will continue to drive demand for renewable energy including solar power. And we believe these programs will expand well beyond 2020. We also believe solar power has an integral role to play in addressing India's massive energy needs. Peak electricity generation capacity in India currently lag demand and demand continues to grow robustly. Roughly 35% to 40% of the population in India lacks access to electricity and much of the electrified population depends on expensive diesel generation. India's high annual irradiance can be harnessed to help meet a significant part of these energy needs. We believe China will satisfy a meaningful amount of its massive future electricity demand from renewable energy sources, trading large demand for solar power. And as we look out into the future, we also see a number of other geographic markets where solar power can play an important role including developing countries, where roughly 2 billion people currently operate without access to electricity. So in summary, our operating platform and the tremendous global need for solar power give us confidence that our mission to create enduring value by enabling a world powered by clean, affordable solar electricity is not only vital but more attainable today than it has ever been. So in spite of these future prospects, the fact is that today, we operate in subsidized markets where the short-term prospects are not as attractive. The European countries that subsidize demand to enable the solar industry to scale to present level have been reducing their subsidies. In the U.S., there have been no significant new state-level solar programs in several years. And with solar industries feeding mostly off of legacy subsidies in California. At the same time, supply chain entry barriers for silicon have evaporated, leading to massive capacity buildup. Excess supply relative to demand has led to pricing and margin reduction because demand in the short-term is inelastic, and by that, I mean lower prices might enable a company to take more share with declining subsidy pool, but they won't increase aggregate demand. Because of that, returns on capital have also declined. So for First Solar the central task is to transition from these less attractive markets towards the market that will drive the future, and to do so in a manner that will allow for operational and financial stability. Now specifically, we must do the following things: First, go where we can solve pressing problems, that means places like India, the Middle East, North Africa and China. It also means building teams on the ground and engaging deeply with local customers and communities to identify and address their needs; second, develop innovative solutions anchored by our module, but extended beyond that to new technologies, system applications and offerings that are needed to solve real customer needs in ways that are both unique and compelling; third, form deep working relationships with the policymakers and regulators in these key geographic markets in order to develop market frameworks that will enable large-scale solar deployment. And fourth, price to levels that are required to drive demand without the need for significant solar subsidies. It's easy to talk about these things, executing them with a sense of urgency will be more difficult. These actions will cost money, they will take time and they will not yield massive results overnight. But this is the time for First Solar to move to the future and we're uniquely positioned to do this now. We have an extremely capable executive team, talented and committed associates and a highly supportive board and we're ready to move. As I think about why haven't we made more progress to date in expanding beyond traditional subsidized markets, I believe there are 3 things principally that have been holding us back. The first is inertia. The normal operating rhythm and comfort level of the organization has caused us to continue to allocate most of our resources to the legacy markets fed by a declining subsidy pool. So now we need to make hard shifts to the future and develop new markets. The second is short-term fixation with earnings per share. Operating to maximize GAAP EPS in the short term despite declining subsidy pools and massive oversupply is not a good strategy when it leads to suboptimizing investment in the future. Our decision-making needs to be guided by creation of long-term fundamental economic value rather than short-term financial metrics that depend on shrinking subsidy programs. The third is confusing factory expansion with growth. And we grow by identifying customers with pressing needs and serving them in ways that are compelling and unique. Building more factories absent this type of demand creation does not lead to growth. It prevents us from focusing on the right things to do. Our emphasis needs right now to be on creating new markets. So we'll provide more detail in December as we complete our 2012 strategic and operating plan. But directionally, you can expect these things. An emphasis on identifying and serving new customers in new geographic markets; deeper global engagement with policy makers, regulators and utilities to develop market frameworks that enable large-scale solar power; resource allocation that enables us to fund important growth programs, while maintaining financial soundness despite declining price levels; and finally, a slowdown in new factory expansion until new sustainable market demand develops. And in that regard, we've decided to postpone commissioning of Vietnam and we continue to study the rest of our capacity planning to ensure that it is in line with our demand. So with that, I'd like to turn the call over to Mark to review our operational and financial results, and then update guidance for 2011. Mark?

Thanks, Mike. Good afternoon, and I'm going to start with Slide 6 on the current market conditions. Overall in 2011, we believe demand in the major European solar markets is continuing to improve after a very weak first half. However, pricing in Europe remains aggressive as module supply exceeds demand. During the third quarter, we worked with our customers to enable them to realize these great projects and adjusted our pricing to best position distributors to sell through in a challenging demand environment. In Q4, we are revising our framework contract pricing approach to eliminate the complexities of rebates and help enhance our customers' liquidity. Digging deeper into specific countries and geographies. First, Germany. The German market has seen a slowdown in demand, well into the third quarter and appears to be trending towards around 4 to 5 gigawatts in 2011. The recent EEG decision provides good long-term visibility and we are well positioned as the German manufacturer. In Italy, the market is adjusting to the new CE4 published in May and recovering from a policy interruption in the first half. Demand has been improving and is expected to be about 4 to 5 gigawatts by the end of the year. Second half demand is impacted by monthly digressions in feed-in tariffs and the upcoming restrictions on land use. In addition, we are seeing project financing constraining the sales channel. France has published details on tender mechanisms for large systems and the future incentive schemes for small installations, which provides sufficient long-term opportunity. In the short term, due to building grandfather projects, the French market should range from 1 to 1.4 gigawatts in 2011. As a reminder, as previously announced, our 2-line factory facility planned in France remains on indefinite hold. In Spain, the regulatory environment is very stable and provides good visibility. We expect that market will remain at about 500 megawatts in 2011. The North America market should double to more than 2 gigawatts this year. In California, over 1 gigawatts of RFOs were issued in it for the 2011 cycle to comply with the 33% RPS requirement. And our vertical integrated model continues to position us well in North America. In China, growth in the market is driven by the national feed-in tariff of RMB 1.15 per kilowatt for projects completed before the end of the year, and RMB 1 per kilowatt hour for projects completed after. We are focused on executing demonstration projects and building out diverse commercial relationships with the leading generation companies. In Australia, solar growth will be strongly supported in the future by the recently announced National Carbon legislation, which is committed to invest $10 billion in non-wind, large-scale renewables and the implementation of state solar programs targeting utility scale projects. We had signed an agreement with Verve Energy and GE Energy Financial Services to provide First Solar EPC capabilities to build Australia's first utility scale project PV. Mike highlighted our optimism on the market in India. The optimism is supported by our recently announced 100-megawatt module supply agreement with Reliance, one of India's leading independent producers. In Southeast Asia, we are seeing encouraging signs of early-stage developments in Thailand, Indonesia, Malaysia and the Philippines. Finally, we have seen great potential in the Middle East. We have submitted some bids for early tenders for utility scale projects and we expect to see more robust renewable policies that could drive a sizable market in a few years. Now moving on to operations on Slide 7. In Q3, our production was 551 megawatts, up 58% versus the prior year, and up 14% quarter-over-quarter. The sequential increase was driven by a full production from our new KLM 6 in Frankfurt-Oder 2 factories. A portion of this incremental production went to systems project construction, for which revenue had not yet been recognized. Annual capacity per line increased by 1 megawatt quarter-over-quarter to 63.1 megawatt. Our throughput increased as downtime was less than last quarter and we've begun to benefit from planned efficiency increases. Our average module efficiency was 11.8%, which is up 0.5 percentage point year-over-year and 0.1% quarter-over-quarter. Our best lines were operating at 12.4% efficiency in Q3, which was up 0.4% quarter-over-quarter. So far, for the fourth quarter, our platform is averaging 12%, which is 0.2% greater than last quarter. This gives us strong confidence we can continue to increase our efficiency over the short and long term. We also recently introduced 87 watt module into the market. Module manufacturing costs per watt was $0.74, which is down $0.01 quarter-over-quarter as a result of higher conversion efficiency. Core cost which excludes the ramp penalty and stock -based compensation was $0.73 per watt. We expect to drive our module costs down to the mid- '60s by the end of 2012, as we accelerate our efficiency roadmap by implementing the technology from the record 17.3% sale highlighted in our Q2 earnings call. Now we're moving to Slide 8. As we improve our operational capabilities, we have also strengthened our Systems business. Year-to-date, we have added 654-megawatt AC of contracts to our pipeline, including 222 megawatts AC in the third quarter. Recent additions were 130-megawatt AC, EPC agreement with Tenaska, a 66-megawatt EPC agreement with NRG and a 16-megawatt agreement with Constellation Energy, and 10-megawatt for our first utility scale project in Australia with Verve Energy and GE Energy Financial Services. As our pipeline additions exceeded our megawatts installed, we have grown our pipeline to 2.7 gigawatts. In addition to adding to our pipeline, we are making progress in moving forward with existing projects in our pipeline. At Agua Caliente, we closed the sale to NRG early in the third quarter in conjunction with finalizing a DOE loan guarantee. We have now completed over 35% of the BoS and had installed over 1.4 million modules in Agua Caliente. Desert Sunlight as you know received a DOE loan guarantee and was sold to repeat customers, GE and NextEra. AVSR1 also received a DOE loan guarantee and was sold to a new customer, Exelon Energy. As you know we ran out of time on Topaz to complete the DOE negotiations but we're in advanced negotiations with a buyer and expect to complete the sale over the next few months. These past few slides have shown that we are doing well and improving metrics we can control: increasing efficiency, reducing costs, increasing throughput and growing our systems pipeline. However, these improvements do not fully offset the sluggish demand and aggressive pricing environment. Therefore, we have decided to slowdown factory expansions, which we'll discuss on Slide 9. Looking at Slide 9. You have seen this slide -- a version of this slide in the past. There are 2 differences between this slide and the one presented last quarter. One, the new slide no longer includes Vietnam as we have postponed commissioning until new sustainable market development -- market demand develops. Two, we have increased throughput estimates for 2012 in response to module efficiency increases and other manufacturing improvements. We anticipate achieving capacity per line of 70 megawatts by the end of 2012. Regarding Mesa, we currently are on schedule for initial shipments in the third quarter of 2012. As you would anticipate, we will continue to study our 2012 demand need to ensure it aligns -- excuse me, 2012 capacity needs to ensure it aligns with our demand. Moving on to the financial portion of the presentation on Slide 10. Net sales for the second quarter were just over $1 billion, up $533 million from last quarter. The increase is primarily due to a higher level of North American systems business, which was highlighted by significant construction progress at Agua Caliente. Our EPC revenue mix increased from 11% of total net sales in the second quarter to 39% of net sales in the third quarter. Our solar power systems revenue, which includes both our EPC revenue and solar modules used in the systems business increased from 20% in the second quarter to 65% in the third quarter. Overall, ASPs increased 17% quarter-over-quarter due to a mix shift to more modules for systems, which were more than offset by an ASP decline of 8% quarter-over-quarter for third-party modules sales. Gross margin was 37.7%, up 1.1 percentage points from the prior quarter. The increase was primarily due to higher ASPs, partially offset by increased manufacturing excursion accruals. During the quarter we incurred $22.1 million of additional cost related to the manufacturing excursion that occurred from June 2008 to June 2009. We have substantially concluded the remediation programs associated with this manufacturing excursion. In addition, we accrued $16.2 million of expenses for module replacement and related efforts, primarily for modules that have been subject to certain installation and maintenance procedures by our customers outside of our recommended procedures. Module gross margin was 41.4%, up from Q2 2011 module gross margin of 40.2%. Operating expenses were $26.1 million quarter-over-quarter. R&D was up $5.1 million quarter-over-quarter, representing a 15% growth as we increased investment efficiency improvements. SG&A was up $25.8 million quarter-over-quarter, mainly due to 2 charges. One was a $10.5 million allowance for doubtful accounts due to recent developments concerning the collectibility of past-due accounts receivables for a certain customer. The other one was an $8.6 million for estimated post-sales expenses related to the previously mentioned manufacturing excursion. It is important to note that we did not take these charges because our estimate of the percentage of modules with defects from the manufacturing excursion has changed. There remains still less than 4% of the models produced from June 2008 to June 2009. Rather these charges represent a higher than originally anticipated remediation costs and to support our value proposition and to increase customer satisfaction. The final component of operating expenses is production startup, which declined by $4.8 million quarter-over-quarter mainly because Frankfurt-Oder 2 has completed startup. Operating income was $223 million, up $65 million from the second quarter. Driven by an increase in module sales into the Systems business. Operating margin for the quarter was 22.1% compared to 12.1% in the second quarter. Third quarter net income was $197 million or $2.25 per share on a fully diluted basis. This includes the $57.4 million of charges or $0.58 per share in the quarter. The effective tax rate was 11.8%. Now turning to Slide 11, I'll review the balance sheet and cash flow. Cash and marketable securities were $795 million, up from $515 million at the end of the last quarter, as we received payments for several systems projects. Accounts receivable trade balance declined quarter-over-quarter as shipments were more linear this quarter than last. Our unbilled receivable increased primarily due to significant growth in the North American Systems business and the timing of the project billing cycle as specified in those customer contracts. We attempt to structure contracts and execute construction to align billing cycles, revenue recognition and cash flow. However, there may, at times be nonalignment in these metrics primarily due to the application of various accounting rules, which govern revenue recognition on system projects as DOTL [ph] in the public filings. Inventories increased for 3 main reasons. One, our increased EPC activity led to a higher level of modules and Balance of System materials on site. Two, finished goods inventory not associated with the Systems business increased as we did not completely sell through our production during the quarter. And 3, our capacity expansion led to a higher level of raw materials and working process inventories. Project assets declined as we sold some of our project pipeline. As a reminder, when we sell a project, the project assets turn into either revenue or deferred project costs, depending on whether the applicable revenue recognition criteria has been met. Our debt levels increased to fund our plant expansions in Malaysia, in Germany and working capital for our Systems business. Operating cash flow was $203 million and free cash flow was positive $42 million. We spent $224 million for capital expenditures, up $47 million from last quarter. [Audio Gap] was $51 million, up slightly from last quarter. While cash flow was impacted by higher unbilled accounts receivable, an increase in the inventory and higher CapEx, free cash flow was still positive, thanks to progress payments in our Systems business. Our balance sheet remains strong with a debt to equity ratio of 15%. Moving to Slide 12. The Project business is and will continue to be a significant source of growth for First Solar. As the Project business typically involves real estate development, we thought it would be helpful to summarize briefly some of the key real estate accounting revenue recognition criteria under current U.S. GAAP. There are 4 primary criteria which must be met to recognize revenue when a sale of a project by First Solar includes the transfer of real estate. First, consummation of the sales; second sufficient initial cash receipts and assurance of ongoing cash receipts. Third, transfer of the usual risk and rewards of ownership; and finally, ability to estimate progress and costs to complete construction. As it relates to major projects we have recently sold, Agua has satisfied all of these criteria, therefore, we recognize revenue via percentage of completion accounting principles and received cash payments upon achieving contract milestones. For AVSR 1, the DOE has not yet funded the loan because not all of the funding conditions have been satisfied. This is described in more detail in our 8-K filed September 30 of this year. We expect to begin revenue recognition after the initial DOE funding has occurred. At Desert Sunlight, we do not expect revenue recognition until substantial completion, mainly because we have not completely transferred all of the risk and rewards of ownership to the buyer as defined under real estate accounting rules. We have received cash payments and we will continue to receive cash payments upon achieving contract milestones. Slide 13, this brings me to our updated guidance for 2011. We have made several assumptions underlying our guidance. First, the spot exchange rate assumption is $1.40 per euro. As of today, a $0.1 change in the dollar/euro spot rate would impact our revenue guidance for the year by about $1 million and our net income guidance by about $0.5 million. Our Module pricing is based in our estimate of the current competitive pricing environment. We plan to install approximately 450 megawatt DC of systems projects in North America for the year. AVSR1 is not included in our financial guidance as the DOE has not yet closed the loan. Our capital spending is primarily for capacity expansion in Vietnam and the U.S. while we've decided to postpone the commissioning in the Vietnam plant, we will still be spending capital at the plant in the fourth quarter to complete construction of the building. Slide 14 shows that based on these assumptions, we expect net sales to range from $3 billion to $3.3 billion. The new factory ramp penalty in cost of goods sold will range from $10 million to $12 million. The factory start-up expense will range from $35 million to $40 million. Stock-based compensation is expected to be between $110 million and $120 million, with approximately 20% allocated to cost of goods sold. GAAP operating income is expected in the range of $650 million to $760 million. We expect the revised effective tax rate to be between 13% and 14% and our year-end 2011 fully diluted share count to be 87 million to 88 million shares. Earnings per fully diluted share is expected to be in the range of $6.50 to $7.50. The midpoint of the annual EPS range has been reduced by $2.25 from prior guidance for several reasons. First, we no longer are including AVSR1 in our guidance. We expect modulated piece [ph] for third-party sales to be lower in Q4 than we anticipated 3 months ago. Third, some systems projects have slipped out of 2011 into the first quarter of 2012. And the new guidance includes the $57.4 million of charges that were incurred in the third quarter. Capital expenditures for the year are expected to be in the range of $800 million and $850 million. Operating cash flow is projected to be a use of $200 million to breakeven. The decrease from prior guidance is primarily due to expected delays at system project cash collections and the timing of project completions, which had moved out of the year into the first quarter of 2012. Also, lower Module price assumptions have reduced our operating cash flows. We are planning to hold our formal guidance for 2012 in December. While it's too early to provide much detail on 2012, we are basing our business plan on continued aggressive pricing by our competitors. That said, we are confident in our ability to achieve our goals for Module efficiency in cost improvements, which will enhance our competitive position in a very challenging market. Last slide now. To summarize, we continue to execute in the quarter despite a challenge in European market and we remain focused on achieving our long-term mission while managing through the near-term risk and challenges. We are well positioned to lead the future growth of the solar industry, we are improving Module efficiency and costs to increase competitive advantages, improving profitability and capital efficiency and developing new market opportunities. We are continuing to add to our Systems pipeline, cell projects and executing our 2.7 gigawatt AC pipeline. We are investing for growth in the U.S., India, Middle East, Australia, South America and China. We are reallocating overhead and reducing CapEx to fund increased investments in market development, sales, R&D and to improve operating margins. And our guidance reflects the more aggressive competitive environment, partially offset by a differentiated business model. With that said, we have completed our prepared remarks and I open the call for questions. Operator?

[Operator Instructions] We'll take our first question from Stephen Chin with UBS.

Mike and Mark, a clarification on the new revenue guidance, the lowered guidance, approximately what percentage of that was in the Systems? It sounds like the majority of the lower revenue market is from Systems. And then a quick follow-up question, what do you think maintenance CapEx spending levels could be going forward just to transfer these higher-efficiency cells into your lines?

On the revenue delta from previous guidance, the majority of -- more than half of it will have been related to the Systems projects. Again, some of it is -- with AVSR as we reference them, plus we have some other projects that have slipped out of the year for various reasons and we expect to complete now in the first quarter. The other question that you -- was on maintenance CapEx and what we should expect on an ongoing basis. We haven't given that information yet. We'll work through that and it's part of our guidance process for 2012 and we'll give you more insight into that. Clearly, though, it will significantly lower than the current level we're running at right now, which is between $800 million and $850 million, but we'll give you more information around that in December.

We'll go next to Vishal Shah with Deutsche Bank.

Can you talk about the risks around some of the projects? I think you mentioned that the revenue recognition was pushed out because of the risks associated with the transfer [indiscernible]. Can you just talk about some of those risks? And what are the -- what are some of the issues that you're dealing with as far as Topaz is concerned and can we expect some risks on that project? And then secondly, just on the Module pricing environment to be -- we're hearing Module price for $1 to 1. What are your customers asking you for pricing on kind of -- we were hearing over $0.10 to $0.15 premium in the past, is that kind of premium that's still expected in the marketplace?

Okay. I guess in terms of risks associated with the projects, we clearly -- we're still working through -- and let's talk about AVSR, first off, and we're working through AVSR and as we prove [ph] to describe in our 8-K is that there were certain conditions associated with the closing of that funding and we're working through this to have that completed. And as we previously announced in the 8-K, the window for that could take up to 4 months. And so largely, that's the timing of that and we're working through that right now just to make sure that we can complete that activity over the next few months here. In terms of Topaz as a project, we're moving forward and, as we highlighted in our call, that we anticipate into the next few months, we will have closed that deal as well. So that's moving quite well and we're encouraged with the signs that we're seeing at this point in time. On the pricing environment, it's competitive. You see some of the data as well as we do and you know what's happening in terms of how aggressively the competition is pricing in a market and largely the oversupply. So we're trying to assess that. We're trying to understand the competitive cost position and the pricing resiliency and incapability that the crystalline silicon guys have and we're trying to make sure that we're always in a price position to sell-through. So it's hard to say where it's going to go to and how it's trending. We clearly know that it continues to be aggressive and we'll manage accordingly.

And we'll take our next question from Rich Wolf with Capital World Investors.

Two questions. One is, given the revenue recognition issues that you guys raised, are you willing at some point to move to a cash EPS basis? And then the second question for Mike, given that you stepped a step back into the role, are you willing to make an open-market purchase or use cash from the balance sheet to buy stock at these levels to inspire confidence in holders?

Rich, on the cash EPS, we'll continue to assess that and that's one of the things that we'll go into more detail in December when we provide guidance. It really is not an event here really in 2011. It's more on how we would think about 2012 and moving forward, and that's something we'll assess and if we conclude on doing something different, we'll make sure that we incorporate that in our discussions in December.

Yes. I guess on the share buyback, we haven't made any decision to do that, Rich. I mean, I think we're focused on right now is how do you build the fundamental value in the business and we assume share price will correlate to underlying economic value over time. We really haven't spent any time on whether there are other ways to enhance share price in the short term. And I don't suspect we'll spend a lot of time on that the next couple of months. Personally, I haven't made any investment decisions either. I mean, I've -- I got -- I've been here for about a week now and we've been immersed, and our main focus right now is to get the strategy pulled together and explain through our operating plans and be back to you in early December to lay it out.

We'll take our next question from Rob Stone with Cowen and Company.

I wonder if you could just -- I know you're going to do the 2012 guidance in December, but if you could give a sense of rough order of magnitude of how you're thinking about the Project business for next year. And I know there's some issue of what you'll be able to recognize for revenue, but what I'm thinking about is sort of how many megawatts of projects you think you might install?

Rob, it's Mike. I think the answer on the number is it's premature. I mean, anything we give you would really run a risk of being -- it's fairly inaccurate at this point, so it's not that we are trying to put it off, I just would rather wait and give you the reasoned number. But look, directionally, I think, the way we're thinking about this in various markets is we've got a toolbox that ranges from selling a module to something more along the lines of the Project business, and as subsidy levels diminish in margins for us, we've got to be more opportunistic in terms of how we reach into that toolbox. So there's a broader role for a project-type offering to play, not just in the U.S. but across markets, and we're really going to try to harmonize our thinking. Basically, think about this a little more holistically, as opposed to we've got a Project business and then we're selling panels, we're going to think more about what does it take in a given market to drive growth trajectories and reasonable economics and then we'll back into the right offering and business model. So that's -- so that may give you a little insight into the thinking and why we need to get a better bottoms-up look at some of these markets and plan it before we can give you an accurate range.

Just to take one more swing at it, given the size of the pipeline, is it reasonable to think in terms of roughly a doubling in any case next year versus this year? 450 MW is relatively small versus your pipeline.

Yes. As Mike and I think, it's too early to call out that number. And I guess what I was look at, we're encouraged by the pipeline, that we feel good about it. We're obviously encouraged by the 220 megawatts that we added during the quarter and that's a good indicator as we move forward.

And we'll go next to Mark Wienkes with Goldman Sachs.

Just wondering, does reaching the 70 megawatts per line throughput involve taking any lines offline in '12? And if not, given the soft spot market right now, what other circumstances under which you would consider reducing capacity and maybe upgrade the lines faster?

Yes. So the 70 MW doesn't -- and really, to be honest with you, getting to 70 MW is really indifferent in terms of the number of lines that you have up and running, right? So it's more like the average for the platform, so the number of lines running doesn't necessarily impact the throughput rate. In terms of looking at the demand and understanding the capacity requirements, that's what we're going to continue to assess, and we do that on an ongoing basis to make sure that we're always aligning our capacity with the underlying demand that we have to serve our customers. So we will continue to assess that and depending on how the market evolves and the opportunities for 2012, we may make some decisions differently than what we currently have described but at this point in time, we're moving forward. We've decided to push out Vietnam, but we're moving forward with the balance of the platform.

And we'll go next to Jesse Pichel with Jefferies & Company. Jesse Pichel - Jefferies & Company, Inc., Research Division: Since you were unable to sell out your Module production and given the entry barrier is now around Projects, are you considering acquiring shovel-ready pipeline?

I think we're looking at the range of things, Jesse. I mean, that -- that's -- that wouldn't be off the table. I mean, I think it's fair to say, we're looking at each -- these markets, as you know, are local in nature. I mean, everyone has got different dynamics and I think you got to look bottoms-up sort of geographic market by market and consider all the options, and that would be one of them. Jesse Pichel - Jefferies & Company, Inc., Research Division: Can you give us some more color around why there's a difference in efficiency between the Malaysian plant and, say, the 12.4% efficient line? Like what exactly is the difference, and are you holding back technology from some of your plants that would create this efficiency gap?

No, we're not holding back technology. I mean, Jesse, I think you would probably anticipate that when we move forward with any changes, you essentially will pilot it on 1 or 2 lines, stabilize it and then you'll roll it out to the balance of the platform, right? So that's basically what we're doing at this point in time. And to some extent in terms of accelerating our moving forward, we're moving at the fastest rate possible and in some cases, we even have a constraint in the supply chain to upgrade some of the tooling and equipment that we need. But what we feel very confident in is our ability to achieve that level of efficiency on our best performing lines and we'll be able to roll that out across the platform which, as we indicated, we've already starting to see some additional benefit sequentially here as we start out Q4, and we would expect that momentum to carry us into a very solid 2012.

And we'll take our next question from Sanjay Shrestha with Lazard Capital Markets.

Two quick questions, guys. So just one point of clarification, so if we were to think about the spot pricing for the Tier 1 crystalline flares and use $0.10 or $0.15 discount as your third-party sale, is that the right way to think about it or is that number much lower now given you guys have been able to reduce the balance-of-system cost dramatically?

I think it's still fair to say there's some discount embedded on conversion efficiency if somebody were to really look hard at the system-level economics. I don't know that you can generalize in the market like that, Sanjay, because it really -- it -- I mean, it really does depend, as you know. I mean, the energy yield in different temperatures and environments is a factor, the contractual relationships with customers and so forth. So I think you could roughly benchmark it and say there's some discount, but I wouldn't -- it won't apply in 100% of the cases.

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

I'm just trying to make sense of some of the numbers. Mark, can you give us Module shipments because there were just so many moving parts? Can you give us Module shipments to maybe help us with our model? And I was also wondering whether you could just guide us on project megawatt shipments because there were so many moving parts this quarter?

Tim, let's follow-up with you on that one, right? Because I'm trying to remember exactly what level of detail that we've given historically on that. So I can't -- I don't want to provide that right now, Tim, because I'm not certain of what we've said before, okay? So let me follow-up with you on that one, okay?

We'll go next to Satya Kumar with Credit Suisse. Satya Kumar - Crédit Suisse AG, Research Division: If we assume that the Brazilian companies are where they are in terms of pricing, $0.90 to $1, do you think that you can sell all that you're going to be making in Q4, how roughly are you thinking about production utilization rates in Q4 and for the next few quarters? That's one. And on the coal cost per watt, that number has been flat for the last 4 quarters with $0.73 and even if I go back 7 quarters, it's down just a couple of pennies. Why should there be more conviction on the sharper trajectory of cost reductions you're talking about for 2012?

Yes, so I guess I'll just take the cost per watt discussion first and, Satya, what we said before, even last quarter, it's kind of the same thought process with -- we have a best line with best efficiency and we also have our best line with lowest cost, right? And then we communicated last quarter that our best line, I think, was actually sub $0.70, right? And so we know we have the ability within the platform. It's a matter of scaling the consistency across the platform, driving to the higher efficiency and the costs will come down, right? So when we do the math, and it's very predictable to do the math in understanding the improvement and the benefit of the efficiency gains have on the cost per watt, so we're very confident and, as we said in our release, we will exit 2012 with a cost per watt in the mid '60s, right? And we know we can get there with our efficiency. We've demonstrated our capability in our best line to getting the cost down to that level, so we're very comfortable with making that statement at this point in time. I think the other question you had was on Q4 and where crystalline silicon guys are pricing and how we're thinking about it. Yes, clearly, our ability to sell-through is always reflective of relative price position, and we will make sure that we are in price position to sell through. We will obviously have the advantage of our U.S. VG, our Systems pipeline. The activity in those projects is starting to ramp now, so we'll be able to absorb a significant amount of our Q4 production into our Systems business. So at this point in time, we will continue to run our operations at capacity because we have underlying demand. As we look forward, if we see any changes into that profile then we'll have to reassess but at this point in time, given the backlog we have with U.S. VG and demand we have on third-party Module sales, it requires a full capacity production.

And we'll take our next question from Smittipon Srethapramote with Morgan Stanley.

Mike, we are hearing that many downstream companies in Europe are having problems obtaining project financing in Europe at the moment. Can you compare and contrast feedback that you're hearing from your customers over there right now with what happened in 2008? What concerns you and what gives you hope that this cycle is different than the last cycle?

Well, I don't -- I'd -- there may be some cyclicality with respect to the project financing, but there is also a structural phenomenon going on, which is that -- I mean, this feed-in tariff rates are a lot lower today than they were in 2008. And so the pressure on the business model of a downstream customer is much more significant than it was. So I think that -- I think we need to really -- no, well, we're basically trying to understand sort of bottoms-up the economics to sell-through at a much lower subsidy level. And these latest fluctuations around project financing and availability at cost simply come on top of that and add to the volatility, so it's similar with respect to the financing cyclicality but there's structural down pressure on the economics.

We'll go next to Mark Heller with CLSA.

One, is how should we think about the company's RONA target over the next few quarters? That's been declining for the past -- over 2 years now sequentially, so how should we think about that? And then second, back on the Topaz project, I know you haven't sold it yet, but do you envision the same revenue recognition issue that you would have with -- that you're having with Desert Sunlight?

On the RONA, Mark, what I would just say is, we'll give more color around that in December as well as you think about the RONA model and the EVA co-ration and [indiscernible] how do we optimize that. So it has been declining. I mean, I would say the environment has been very competitive and the pricing pressure that we have under its head has its effect on our overall RONA performance, but we'll give more color around that and how we should think about that going forward in December. On Topaz and it relates to the revenue recognition, each one of these deals are unique in terms of their terms and conditions, and those terms and conditions have to be evaluated in light of the revenue recognition requirements. At this point in time, as we look at Topaz and the current structure of that agreement, we do not anticipate having the same type of revenue recognition issues that we had with Desert, but we have to complete the negotiations of the contract. Once it's complete and the terms and conditions are fully understood then we'll assess it, but we don't anticipate an issue at this point in time.

We'll take our next question from Brian Gamble with Simmons. Brian D. Gamble - Simmons & Company International, Research Division: Mike, you gave your estimates for what you thought the German and Italian markets would be this year. Obviously, you're still in preliminary works of your individual expectations for next year. But looking at the broader markets and given what the feed-in tariffs have done, given the downstream financing issues that we've talked about, what do you think those markets look like next year? Do we need to see a dramatic change in the way Asia is behaving from a demand standpoint to make up for the lack of demand that you anticipate in Europe or do you think Europe can hang in there to a certain degree and allow the market to kind of shuffle along?

Well, it's -- I think the more you move to near term, the more speculative this becomes. But if you just step back for a second and see directionally where are those markets going, Italy -- well, it started with Spain, the Czech Republic, France, I think Italy and then Germany sort of have been the shock absorber. They're moving downward in terms of subsidies and overall market size, not upward, and I don't see that changing. I mean, there's not -- not in the short term -- I mean, not in a -- not as long as the market's created by subsidy programs. That's not -- we wouldn't build our business on an expectation that that's going to reverse itself or even stay at steady. I think it's going to go down. If you said, well, is that in the first half of '12 or could push out to '13? I can't -- it's hard to handicap that from a timing point of view, but I just think what's -- what are the underlying forces that are driving change, they're pointing to downward pressure and subsidized markets. So what has to happen yet, part of it is new demand certainly has to be created. But if you're doing that without a feed-in tariff-type program, which subsidizes the economics and creates a built-in customer, if you think about it, there's no marketing required at all. I mean, it's work but it's not marketing. If you're going to replace that, then you’ve actually got to go find customers that have a need and you have to have a solution that's more full some than a panel or even a solar generating system. And it has to be priced at a level that will pull through wherever that might be. And so I think there's some heavy lifting to do here on new market creation. The second thing that has to happen is, at some point, market forces have to take effect and restrain supply. I mean, that's another one that's hard to handicap from a timing point of view, but I think we all believe it's economically not feasible to think this condition can last forever. And there will be a correction because there are debt and we just -- we need to be very vigilant about how to ride through that situation and then build these new markets.

We'll take our next question from Mehdi Hosseini with Susquehanna International.

Mike, you are the first to announce a 2-gigawatt pipeline in China and that happened a few years ago and as some of the local manufacturers there struggle with their own facility, do you see increased risk that, that pipeline may not materialize?

Well, in terms of our 2-gigawatt project in China, it's always been -- I think it was a major breakthrough to get to a 2-gigawatt memorandum of understanding and to begin engaging with our partners in China, but we always knew to execute that is going to be quite a task. That hasn't changed. I continue to believe to be optimistic about that and other projects in China based on the fact that there's a huge energy need there. They are -- the Chinese government is committed to building out a low carbon energy infrastructure. I really believe that, and there is also a desire to move upstream on the technology curve. And I believe deep down and understanding that polysilicon simply does not scale at a level that will be relevant as an energy solution in a place like China. So we have something that's very useful to solve -- to addressing needs in that market and those 2 things can be brought together. It just takes time and effort. And the short answer is, I'm still as optimistic now as I was when we started that work. We just need to really get after it.

And our final question today will come from Ahmar Zaman with Piper Jaffray.

Can you talk about your recent deal in Chile and what you're seeing in Latin America in terms of opportunities?

Yes. I mean, we have entered into an agreement with a partner down there. Obviously, we're looking at the market very early at this point in time. We believe we at least got an initial look at the market with the good relation with the strong partner, and we'll see how it evolves, and we are encouraged by the relationship that we've established.

And this does conclude today's First Solar's Third Quarter 2011 Earnings Conference Call. Thank you for your participation.