First Solar, Inc. (FSLR) Q1 2015 Earnings Report, Transcript and Summary

Good afternoon, everyone, and welcome to First Solar’s First Quarter 2015 Earnings Call. This call is being webcast live on the Investor section of First Solar’s Web site at firstsolar.com. At this time, all participants are in a listen-only mode. As a reminder, today’s call is being recorded. I’d like to turn the call over to Steve Haymore, Investor Relations Manager for First Solar, Incorporated. Mr. Haymore, you may begin.

Thank you. Good afternoon, everyone, and thank you for joining us. Today, the company issued a press release announcing its financial results for the first quarter of 2015. A copy of the press release and the presentation are available on the Investors section of First Solar’s Web site at firstsolar.com. With me today are Jim Hughes, Chief Executive Officer; and Mark Widmar, Chief Financial Officer. Jim will provide a business and technology update, then Mark will discuss our first quarter financial results in detail and provide guidance for the second quarter of 2015. We will then open up the call for questions. Most of the financial numbers reported and discussed on today’s call are based on U.S. generally accepted accounting principles. Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management’s current expectations. We encourage you to review the Safe Harbor statements contained in the press release and the slides published today for a more complete description. It’s now my pleasure to introduce Jim Hughes, Chief Executive Officer. Jim?

Thanks Steve. Good afternoon and thank you for joining us for our first quarter 2015 earnings call. Let me begin by providing a brief update on our prior announcement regarding our intent to form a joint YieldCo vehicle with SunPower. Since our last earnings call the two parties have filed a public S-1 registration statement with the SEC for the initial public offering of 8point3 Energy Partners. Completion of the IPO is still subject to market factors and regulatory approval but we continue to move forward through the process. Again we cannot say any more about the transaction at this time outside of what is the public S-1 documents. Any questions on the subject in our Q&A session will be directed to the public S-1 filing for answers. Now for an update on technology and manufacturing, our module conversion efficiency continued to improve in the first quarter with our full fleet averaging 14.7% efficiency, an improvement of 30 basis points from Q4. Our lead line efficiency averaged 15.6% for the quarter and 80 basis points improvement quarter-over-quarter and a 140 basis point improvement versus Q1 of ‘14. This improvement is the largest sequential and year-over-year increase in our lead line efficiency in the history of the company. Even more impressive is the recent performance of our lead line which has reached a new milestone for module efficiency of 16.3%. This is truly a remarkable achievement which demonstrates the ability of our research and manufacturing organizations to execute to our roadmap. By the late Q3 we will have rolled out these latest improvement programs across the majority of our fleet. Slide 4 provides an update to our energy density road map, which we first showed at our Analyst Day last year and puts into context the advances in our efficiency. As we've discussed in the past conversion efficiency is a narrow measure of overall end modular performance, while energy yield produced is a more comprehensive and superior metric. Energy density which is energy yield per meter square and corporate several other factors beyond efficiency alone. These other factors include temperature, humidity and shade tolerance. Capital technology has advantages in each of these areas overall multi crystalline competitors. As shown in the metrics our Q1 end of quarter lead line efficiency achieved clarity with multi crystalline silicon on an energy density basis. In the space of only a month our lead line has now achieved an energy density advantage to multi crystalline silicon. To put these achievement in perspective when we first introduced this metric a year ago at our Analyst Day we had a significant disadvantage but in the space of a little over a year we have now erased that deficit. During the remainder of 2015 while our lead line will improve only modestly our overall fleet average efficiency will increase significantly as the improvements are rolled out across the fleet. In coming years we expect to further increase our relative advantage based on the strength of our technology road map compared to our prior energy density road map our expectations of relative advantage in future years has been updated. The updates to the road map are primarily due to revised timing of our new technology implementations which has been adjusted to minimize downtime from technology upgrades in order to maximize output particularly in 2016. Most importantly the metric highlights the favorable competitive position we anticipate as we execute on our technology road map. Given that all of new modular efficiency announcements are not created equal, let me make a few points related to our 16.3% product lead lines efficiency as it relates to recent crystalline silicon record modules. First crystalline silicon competitors typically calculate record efficiencies using the aperture area of the module. We calculate efficiency on a full area basis. Our 16.3% efficiency announced today would equate to a 16.9% aperture area efficiency, likewise our 17% record module which we announced last year would be 17.5% on a similar aperture area basis. It's also important to understand that our 16.9% aperture efficiency is in high volume commercial production and not in a laboratory. This new record also reflects materials and processes that are cost competitive and allow us to continue to lower our cost per watt. It is important to keep these facts in mind and based on our technology achievements we feel that we are well positioned to compete with any commercial crystalline silicon technology available. Turning to Slide 5, let me discuss our capacity and demand outlook for 2015. This slide besides illustrating our production capacity for 2015 more importantly highlights the profound impact efficiency improvements have on output. Since 2013 the year our production levels where at a low point, efficiency and throughput improvement have contributed to over 450 megawatts of capacity or the equivalent of five new lines. This is a key point to understand that our investment in efficiency improvements not only improves our competitiveness but also results in significant incremental capacity without building new factories. As a result of the improving competitiveness of our module and a continues demand we see ahead of the potential ITC step down after 2016, we are ramping our factories to full utilization. Also as we indicated previously we are adding two additional lines at out Ohio location. We are virtually sold out for 2015 and were increasing our contracted volumes for next year. We expect to shift between 2.6 to 2.8 giga watts for the year including shipments to self-developed projects in the first quarter we have ship 690 megawatts, a new record for a single quarter. We are encouraged by the continuing bookings momentum as highlighted on Slide 6. Total bookings for the first quarter of 2015 were 422 megawatts DC against shipments of 690 megawatts DC. In the month of April we have booked an additional 483 megawatts, as a result our [in need] outstanding bookings are now at 3.9 giga watt DC and increase of 200 megawatts from where we ended 2014. Achieving a book to bill ratio of at least 1:1 remains our objective for the year, but it will be more challenging in 2015 as some inventory was carried over from the prior year due to minor delays and shipments to projects. This single largest bookings since are last earnings call was a modular plus agreement that we signed with Strata Solar for 300 megawatts DC of deliveries in 2016. Through this deal we've continued to strengthen our relationship with Strata is well as extend our leadership in the southeast in United States. Also in the south we signed an EPC agreement to construct the 100 megawatts IFC solar project and in a separate transaction signed a module plus agreement with Silicon Ranch to supply a 17 megawatts DC onsite commercial and industrial solar power installation. This later project highlights the value that's First Solar technology provides to the growing number of commercial and industrial customers seeking clean and affordable power. Internationally, we continue to make strides in India where we booked another 75 megawatt AC of self-developed projects. This brings our capital project total in total in India to 200 megawatts AC and demonstrates the progress we are making in this rapidly growing market. Finally, our utility scale solar development activities in Japan continue to progress as demonstrated by our first booking to this month. We expect commence construction on our first round of projects under the mega solar program in Q3 this year. While the cumulative volume of these initial projects is relatively small. It represents an important evolution from supplying modules to third parties in Japan to now successfully developing and realizing our own pipeline. It also demonstrates that our [indiscernible] technology has achieved adoption and acceptance in this important market. Turning to Slide 7, our bookings in terms of expected revenue now stands at 7.6 billion, an increase of approximately 300 million compared to the beginning of the year. The balance increases primarily due to lower revenue recognized in the first quarter resulting from constructing more projects on balance sheet. We don’t provide details related to the gross margin on our bookings we are seeing improving trends as we continue to lower our cost and see some stability in pricing. Turning to Slide 8, I will now cover our potential bookings opportunities, which has grown to 14 giga watts DC, an increase of approximately 500 megawatts from the prior quarter. Note also that the total potential booking increased despite the strong year-to-date bookings. We are also pleased that the size of our mid to late stage opportunities has nearly doubled from the prior period to 3 giga watts. This increases our confidence in our ability to hit our 1:1 book-to-bill ratio for the year. Slide 9 shows the breakdown of demand by geography. Our opportunity set outside the North America stands at 8.3 giga watts or 59% of the total. Our transition to sustainable markets outside the U.S. is gaining traction as we are increasingly seeing the results of our investments and developing regions. More than half of our mid and late stage opportunities are now in international markets. Finally, as announced earlier today we have entered into a strategic alliance with Caterpillar to provide integrated turnkey photovoltaic solutions for distributed generation in microgrids applications. As part of this announcement First Solar will provide a pre-engineered solutions package including our advance module technology which will be sold under the Cat brand and through Cat’s dealer network. First Solar technology which will be combined with Caterpillar’s generator sets and energy storage offerings will initially be marketed in the Asia Pacific, Africa and Latin America regions beginning in the second half of 2015. Microgrids provide value to prime power diesel and gas customers by integrating renewable energy, such as solar power, with generator sets. The targeted opportunity includes Microgrids in the 1 to 2 megawatt range in locations such as mines in remote towns and villages. This alliance further highlights the ongoing global energy transition where Solar’s cost competitiveness allows it to compliment conventional generation and is an existing opportunity to continue First Solar’s growth outside of our core utility scale business. Now, I’ll turn it over to Mark who will provide detail on our first quarter financial results and discuss guidance for the second quarter.

Thanks Jim and good afternoon. Turning to Slide 12, I’ll begin by discussing the first quarter operational performance. Production in the quarter was 540 megawatt DC, an increase of 6% from the prior quarter due to higher module efficiency and improved factory utilization. Production was 22% higher year-over-year due to the upper mentioned factors and the restart of four manufacturing lines in Malaysia. Our package fast utilization was 87%, up 3 percentage points from the fourth quarter. Higher factory utilization Q1 was primarily due to less down time related to upgrades. In the first quarter the average conversion efficiency of our models was 14.7% which is up 30 basis points quarter-over-quarter and a 120 basis points higher year-over-year. Our best line averaged 15.6% efficiency during the quarter an impressive increase of 80 basis points from the prior quarter and a 140 basis points year-over-year. Also as Jim indicated our lead line continues to make remarkable progress as we are now running at 16.3% efficiency. To put this in perspective, a module produce that are on the facility had 16.3% efficiency has a cost-per-watt a low $0.40 excluding sales related cost. Turning to Slide 13, I’ll discuss the P&L. Net sales for the first quarter were 469 million compared to sales of 1 billion last quarter. The lower net sale is due to constructing more projects on balance sheet following our decision to pursue a YieldCo. In addition, the sale of SolarGen in the prior quarter, a higher mix of module only sales in Q1 and delays on several projects in the current quarter resulted in the sequential revenue decline. Relative to our expectations for the quarter net sales were lower due to several factors. First the sale of partial interest in our [indiscernible] project did not close in the first quarter as anticipated due to delays in coordinating with utilities to complete the required commissioning test. The sale will close in early April and will be reflected in our Q2 results. In addition, revenue on several system projects was impacted by a combination of permitting delays in the West Coast port strike. It's important to note that while these try to get you resulted in a delivery of revenue recognition in Q1 we anticipate recovering the revenue and earnings in the balance of the year. As we've communicated previously our systems business can be lumpy from one quarter to the next. Therefore it's important to look at the business through a lens that spans multiple quarters. As a percentage of total net sales our systems revenue which includes both our EPS revenue and solar modules used in the systems projects was 78%, a decrease of 14 percentage points from the prior quarter. The higher mix of third party module sales was primarily related to shipments to India and the upper mention project delays. Gross margin in the first quarter was 8.3% compared to 30.6% in the fourth quarter. The loan gross margin is due to constructing more projects on balance sheet in the preparation for YieldCo, unfavorable absorption of fixed cost against the lower sales volume, higher mix of module only sales and higher mix of lower margin systems project. In addition, the sales of SolarGen in the prior quarter contributed to the sequential decline. First quarter operating expenses were approximately flat at a 190 million, SG&A expenses were lower but are offset by an increase in startup expense associated with the restarting capacity. Also note Q1 operating expenses includes approximately 4 million of expenses associated with the launch of 8point3 Energy Partners. The first quarter operating loss of 70 million compared to an operating income of 199 million in Q4, the decrease was due to sequentially lower sales and gross margin. The net loss in the first quarter was $62 million or $0.62 per fully diluted share compared to net income of $1.89 per fully diluted share in the fourth quarter. Turning to Slide 14, I will now discuss the balance sheet impact and cash flow summary. Cash and marketable securities [decreased] by $506 million to $1.5 billion. Our net cash position now outstands at 1.2 billion a decrease from 1.8 billion in the prior quarter. As indicated on last year’s quarter earnings call decrease in cash was expected as we are constructing several large projects on balance sheet and in conjunction with our YieldCo strategy. Increasing structural activities and holding interest and assets on balance sheet ahead of our plan YieldCo IPO will continue to through the second quarter of the year and place additional requirements on liquidity. Our net working capital including the change in non-current project assets and excluding cash and marketable securities increased by 516 million from the prior quarter. The increase was primarily due to an increase in project assets and related activities and an increase in account receivable. [Long-term] debt increased from the prior quarter by 26 million to 243 million the increase is related to additional draw downs on the project level debt associated with Luz del Norte in Chile, partially offset by schedule payments on our Malaysian modules. Cash flow used in operations was 418 million compared to cash flows from operations of 920 million in Q4 free cash flow was a negative 466 million compared to positive free cash flow of 858 million in the prior quarter. Capital expenditures totaled 55 million a decrease of 18 million from the prior quarter, depreciation in the quarter was 62 million, was unchanged from the prior quarter. Turning to Slide 15, I'll now discuss our guidance for the second quarter of 2015. As indicated on last quarter's earning call given the announcement regarding the proposed YieldCo formation we are holding off of providing full year guidance until after 8point3 Energy Partner’s IPO. Similar to the first quarter our expected financial results for Q2 will be influenced by constructing projects of balance sheet, a mix of lower margin if you see projects and third party modular sales. In the near term this will continue to contribute to lower earnings that's can be seen in our future guidance, in the second half of the year we anticipate a stronger financial results than the first half as we return to a more normal course of business. Our BBA to financial guidance for the second quarter is as follows, net sales in the range of 750 million to 850 million, earnings of $0.45 to $0.55 per fully diluted share. Cashed used in operations is expected to be between 250 million to 350 million. Note that our earnings per share estimate include a non-recurring tax benefit of approximately $0.40. This week we received a favorable ruling to Malaysian Cash Tax authorities which resulted in discreet [QT] tax benefit. Finally, one last point related to guidance, the Q2 earnings guidance does not reflect any potential impact to our financial results from the IPO of 8point3 Energy Partner should that occur in Q2. Turning to the next slide, I'll summarize our progress during the past quarter. First we continue to demonstrate impressive improvements in our technology. Our lead line average efficiency improved to 15.6% in the first quarter and is currently running at 16.3%, which creates a 3% energy density advantage relative to multi crystalline silicon. Our improved competitiveness continuously to manifest in our new bookings; we have booked 905 megawatts DC so far to date and with over 3 giga watts of mid to late phase opportunities we are seeing continued strong momentum in our business. Finally, with the filing of the S1 for 8point3 Energy Partners our plan for joint YieldCo with SunPower remains on track. With these we've concluded our prepared remarks and open the call for questions. Operator?

Thank you very much. And ladies and gentlemen [Operator Instructions] We will take our first question from Patrick Jobin. Mr. Jobin, please go ahead.

Few questions here, first on gross margins 8.3%, just trying to better understand kind of the mix impacts of the module business versus the system business; I would have thought cost incurred for projects you’re holding wouldn’t be flowing through P&L at this stage. So I’m just trying to understand that in context with the efficiency improvements, then I have a follow up. Thanks.

The margin, for the project -- our self-developed projects that will be contributed to 8.3, correct, those are held on balance sheet and the cost associated with that are on balance sheet, but still does flow through into the systems businesses -- our third-party EPS business. So it’s generally has been lower margin then we self-developed at anticipated, again we’re stepping in EPC contractor versus the actual developer of project. So the margin utilization will be lower on that and then the other balance of it, obviously the margin that we realize today on our module-only sales are lower than obviously the future bookings will represent given the improved competitiveness for technology.

2 megawatts of bookings, how many were systems versus modules? And then any update on TetraSun and ramping that? Thanks.

Yes. We don’t have a breakout of module versus third-party but you can tell that the start of booking we envision is mainly a module-only so that was a big chunk of it. So if you approximate something [indiscernible] of the total is probably reasonable assumption, is module-only the balance will be EPC, I’ll let Jim talk about TetraSun.

TetraSun, we continue to ramp production and complete the qualification and certification of the product and we’ll start to have a product available in the market place over the next several quarters. So it’s for the most part we’re seeing exactly as we anticipated and we’re very happy with the results of the product that’s coming off the production line.

And we’ll take our next question from Ben Kallo with Robert W. Baird.

Good progress on the technology, I guess the question that comes up quite a bit is there is a thought out there is a solar panel is a solar panel and it’s all the commodity. So how do you guys look at your technology improvement in differentiating yourself and how is that show through to the financials and to valuation for Solar?

So, there is certain aspects of the business that are clearly commoditized and you can say sort of a panel is a panel, but in reality what it comes down to is your customer is buying the energy that the panel generates and that’s why we’ve focused in this call and in general we focus in our R&D and in our sales efforts, to focus people on the superior energy generation that you’re going to get out of the product. The standard face value wattage of the panel actually tells you very little about what the panels are actually going to do in the field and the amount of energy that you’re actually going to get from the panel. So in the real world of day-to-day, hand-to-hand that back in sales it’s all about the energy generation of your panel and the cost effectiveness of our product as compared with our competitors is very, very strong. So not only do we now have a product that has greater energy densities than our competition but we have a lower cost structure than our competition so that allows us to be profitable and competitive in the marketplace and that’s how we think about and that’s what we focused on in terms of our research and development and that’s how we -- what we focus on when talking to and selling to customers.

And we’ll take our next question from Vishal Shah of Deutsche Bank.

Jim, I think you guys have mentioned your cost has come down to below [447] per watt, at least for the lead efficiency panels. Can you maybe talk about how that allowing to when business especially with some of the utilities in the U.S. what kind of forward pricing you see in the market place today and how competitive you are versus some of the other players out there, maybe some of the other technologies as well such as wind and coal.

So, let’s talk about solar-on-solar competition first, so quite simply having the lowest cost structure allows you to compete for business, capture that business at a more attractive margin than your competitors. It’s fairly straight forward analysis and formula. It also gives us pricing power to breakup in new markets. It also gives us pricing power to trigger new demand. The overwhelming impact on continuing reduction of prices on a global basis is increasingly utilities and commercial and industrial customers are seeing so with our as an attractive value preposition simply on its own. In the U.S. you had utilities that are increasingly moving towards natural gas as a large portion of the generation fleet and as they due to a forward resource planning fuel diversity generation diversity is an important part of the formula when you look at the prevailing prices in the market today which dependent upon what region of the country can be from anywhere as low as 0.4 or just under that to as high as $0.06 per kilowatt hour, when they look at that on a flat basis for 20 years and compared that to additional natural gas exposure even at today's low gas prices the general view is that makes sense as a portion of our total generation mix. So what you've seen in terms of this fairly large explosion of demand in the Southeastern United States is a result of that calculus, is a result of the market place understanding where pricing has gotten to and recognizing the value that it represents. We’re seeing the same thing internationally, just as one example Dubai originally had plan to carry out a 1 giga watt program over three year to four year time frame the first phase of that program they were so enamored up the pricing that they received that they doubled the size of that ramp and have accelerated the remaining 1 giga watt to this year. So we clearly both in the U.S. and elsewhere we reached a price points where as compared with other sources of generation above just on absolute cost basis on an absence of commodity price risk basis and on a generation diversity basis it’s a very attractive offering.

And will go next to Julien Dumoulin Smith of UBS.

Great. Excellent I wanted ask very briefly here when you think about the contracting cycle to get utility skill deals done in time for the ITC in U.S. what's kind of the last day if you will to get to the contract inked? Is it the second, third or fourth quarter 2015 and as you think about trying to get that full cycle to completion here and get those and work back from that.

I think it's pretty hard to generalize because it's going to depend upon the size of the facility; it's going to depend upon the jurisdiction in what's the facility is located, that set the sort of the permitting and code requirements that you are going to have to meet. So I fully expect that on small utility scale plants; let say it's sub 20 megawatts in size we’re likely to see opportunities to contract volume well into 2016 on the very large multi hundred megawatt projects I would think that we are over the course of the second and third quarter of 2015 we’re probably seeing the end of the opportunities to contract those asset and it will be a pretty linear relationship in between those two extremes. So it all depends -- obviously permitting a facility in one of the counties close to population centers in California is a more daunting task than permitting a facility in [rural] West Texas. So there is a whole host of variables that are going to impact when that cut off starts hitting in terms of the last opportunities that contract and complete the construction within the ITC deadline.

Will go next to Krish Shankar with Bank of America Merrill Lynch.

Thanks for taking my question. I have two of them first one Jim can you talk a little bit about how you seek the PPA prices for utility commercial kind of trend either in Q1 or over the last 6 months how has the trend being? And if you can give some color base in the different geographies that will be very helpful.

So the trends has continued to be down the -- it depend a lot on installation so if you are talking about contracts in the western region in the United States with high levels of installation we have seen prices between let's say $0.04 or just under up to $0.05 and the Southeastern United States are little bit higher due to the installation levels but broadly you are seeing overall power prices below 60 megawatt hour for a new generation of reasonable scale and everybody in the value chain is still making reasonable money at those price levels it just reflects that we all continued to drive cost out of the integrated plant on the module side, on the fixed balance of system side, on the variable balance of system side and on the capital cost side. So that we continued to see those prices come down.

We will go next to Brian Lee of Goldman Sachs.

Hi, guys. Thanks for taking the questions. I have two of them; I’ll try to squeeze both of them in here quickly. First on the conversion efficiency what’s the expected timeline for the lead line to be complete average, is it something to expect to materialize within the 12 months window and then maybe related to that, any reason why the lead line is test to moderate per your comments Jim of decreasing levels. And then the second question I had was on Caterpillar, the announcement there, will the economics on those sales resemble module-only margins and is there any potential recurring from those sales and then any potential quantification of what this could represent in terms of additional volume opportunity for you guys in 2016 and its first full year? Thanks.

Sure. I’ll let Mark tackle your first question.

Yes, so the conversion efficiency, what we basically said this is the vast majority of the lead line improvements will be rolled out over the next couple of quarters. So you will see that happening here over the next quarter which is consistent with how we saw the announcement we made last quarter on our [58%] lead line efficiency, as you can see that starting to impact the current fleet average pretty well. As it relate to the next step function change in the lead line efficiency that there will be a step function by the end of the year but as most of these initiatives are, we generally roll out a change we’ve been trying to stabilize across the fleet and then we look to the next step along the road map. So we’ll see a little bit of movement in the lead line that will be towards Q4 end of the year before we’ll see a dramatic shift moving by.

And then on the Caterpillar transaction, I think you can expect that on this particular transaction the margin certainly initially will look like module-only sales. It’s possible that as we get into the partnership in the business that can morph overtime and we can have a greater scope of participation. But to keep it simple and get the transaction paper the forces has been more along those lines. In terms of the size, the potential market is huge and the Caterpillar dealer network is vast. And I think for us to provide any sort of prediction or guidance as to what the volume could look like I just don’t think we have enough visibility yet. We’ve got to get out in the field and provide training and materials to the network of dealers and then once they begin to engage with their customers I think we’ll have much greater visibility, but I don’t think we have it at this point but the potential addressable market that it represents is vast.

We’ll go next to Sven Eenmaa with Stifel, Nicolaus.

First I want to ask in terms of your 3 giga watts mid to late stage project pipeline, how much of that is for COD days beyond 2016?

I don’t think we have -- we’ve broken that out and provided that information. There is some of it that is beyond 2016 a fair bit of it is, not the majority but I don’t think we can provide any greater specificity in that.

We’ll go next to Edwin Mok of Needham.

First is on the cut incremental point 9 mega -- giga watt of project that you guys spoke -- or shipment that you just booked, since last quarter on your presentation, how much of that is planned to go into your balance sheet as project versus things that you’ve assigned to yourself self. And then my follow-up question is on expense side, with planned joint YieldCo and [fiscal] you’ve mentioned should we expect expense to go up as those projects get -- gone away?

I don’t think I understand your first question correctly is how much of the year-to-date bookings would actually be associated with projects that we’ll construct and then drop down in the YieldCo. So, the only thing I can say right now is that in our public filing is that we’ve identified the initial portfolios of assets and we’ve identified a potential growth of portfolio. We can’t comment anything beyond that, but the current period bookings are not reflective of either the initial portfolio or the [indiscernible] portfolio. So we have yet to determined based off of the opportunities set that we have in the bookings for the first quarter. What the ultimate monetization will be and we will value with that overtime and make the appropriate decision like us. The expense question is, we’ve incurred more transaction expenses in Q1 as you can imagine legal tax accounting other one-offs has the transaction, we’ll continue to incur those cost up until the IPO. Once the IPO launches you shouldn’t think of any incremental expenses being incurred by First Solar and there will be expenses in mandatory service agreements that will be provided to 8point3 Energy Partners, but those will be compensate properly by 8point3 Energy Partners.

We’ll go next to Paul Coster of JPMorgan.

Just quick question, as we move forward I’m expecting the pipeline to shift towards maybe emerging markets little bit more, as that happens and you build a pipeline with projects outside of North America in particular, outside of OECD countries. Are you going to start to hold back projects there as well or are those all build to sell for the time being.

If you look at the filling we did the F1 filing, there are definitions of qualified assets primarily relate to OECD type of countries that could be evaluated and we’ll make those decisions over time if the economics of that look attractive and it's compelling to include into 8point3, we’ll do that; if we think we can capture better economics by monetizing them with local cost of capital available than we potentially will take that path. At this point in time we have the optionality we’ll continue to do that as which makes the most sense to pursue.

Yes. Thank you very much. A question on gross margin, I think you have implied guidance so just like mid or slightly below that the gross margin. I just had a general question on gross margin going forward. I think industry wide we see something that 15% to 20% goal gross margin on the projects and you probably have some headwind from the module, so a low to mid double digit is that a good place to model and also if you can comment on where are you targeting gross margin on the drop downs?

So on gross margin, first up as the gross margin is up sequentially we don't provide the actual gross margin, but if you back into it you’ll show that relative to Q1 will see a sequential increase in gross margin. If you go back and what we said historically is that we anticipate that's the normalize margins for the business overtime will be in that 15% to 20%. So that's not anything that is inconsistent with what we said, now as the module cost continues to improve we may see margins that are outside of that range, at the module only level. But I think it's probably safe to say that 15% to 20% is kind of how we’re currently envisioning the business to evolve overtime. And related to expectations around dropdown of assets into YieldCo and expected return on that, we know not made any comments in that regard nor will in this point in time.

The other comment I want to add is you have to bear in mind if you compare us to other industry participants they don't have an engineering procurement and construction business you’re not going to be able to do a direct comparison we could take a 100 megawatts of module and sell them module only at a very -- what looks like a very attractive gross margin. We can package those same modules into an engineering procurement and construction contract that's at a much lower gross margin percentage but at a much higher total gross margin dollars and so it's very hard to look at our results in the aggregate and make a direct comparison to the other participants that are largely module only sales as opposed to having the significant engineering procurement and construction component.

And will take our final question from Colin Rusch of Northland Capital Markets.

Thanks for squeezing me in guys. Can you talk a little bit about the opportunities to sell into the merchant marketing was a number of projects as you go forward this YieldCo, are you seeing significant opportunities in your pipeline and how should we think about that leaning into the percentage of business going forward?

When you say sell into the merchant market you talking about sell un-contracted power plan on an un-contracted basis, sell to power merchant or are you referring to something than else?

Pardon, me I said emerged.

Did you say emerging okay, sorry my mistake. Alright you address this.

So, there is lots of optionality as we continue to address the best 8point3 Energy Partners and we will look at emerging markets because we have a merchant plans in Chile right now and looking at the best path to monetize that asset that clearly could be a path that says that 8point3 is the best ultimate position of where we would want to monetize that asset. We've got assets in Japan that we’re developing; we’ll be looking at those as well in terms of what is the right answer to do that. So what I would say is it's given us significant optionality, it creates somewhat of a competitive tension so that other when we get them to a point of having to sell down an asset, there is a competitive tension and there is a fallback position and then negotiations concludes, obviously it’s advantageous to us because if we don't believe that market’s willing to pay the proper returns over the value that they are getting from that asset then we obviously have different path choose. So that optionality views are help on our negotiation. So I do see it will involve more time again, if you look at what we’ve included in the S1 it's mainly U.S. assets initially; how overtimes and I think you will start to see some diversification with international market.