第一太陽能 (FSLR) 2008 Q3 法說會逐字稿

Good day, everyone. Welcome to the First Solar third quarter 2008 earnings conference call. This call is being webcast live on the investor relations section of First Solar's website at www.FirstSolar.com. At this time all participants are in listen only mode. As a reminder today's conference call is being recorded. I would now like to turn the call over to Mr. Larry Polizzotto, Vice President Investor Relations for First Solar Incorporated. Mr. Polizzotto, you may begin.

(technical issues) Market close the company issued a press release announcing its fiscal third quarter 2008 fiscal financial results. If you did not receive a copy of this press release you can obtain one from the investor section of First Solar's website at www.FirstSolar.com. In addition we are posting to the IR website for the first time key quarter statistics and historical data and financial and operating performance. This will allow us to discuss in more detail some of the analytics in this call.

An audio replay of the conference call will also be available approximately two hours after the conclusion of the call. The audio replay will remain available until Friday, October 31, 2008, at 8:59 p.m. mountain standard time or 11:59 p.m. Eastern Daylight Time and can be accessed by dialing 888-266-2081, if you are calling from the United States or 703-925-2533, if you're calling from outside the United States, and entering ID access number 1288925. A replay of the webcast will be available for 90 calendar days, approximately two hours after the conclusion of this call. If you are a shareholder of subscriber to Fact Set you can obtain a written transcript within two hours.

With me today are Mike Ahearn, Chief Executive Officer, Jens Meyerhoff, Chief Financial Officer, Bruce Sohn, President of First Solar. Today, Mike will begin with an overview of the company's third quarter achievements, and then provide a market update and an assessment of the economy and current credit crisis impact on our business. Jens will provide you with the third quarter 2008 financial results, update guidance for 2008, and provide guidance for 2009. We will then open up the call for questions.

I'll remind you that all financial numbers reported and discussed in today's call will be based on Generally Accepted Accounting Principles. The Company has allocated approximately one hour for today's call. During the Q & A period as a courtesy to those individuals seeking to ask questions, we ask that all participants limit themselves to one question and one follow-up question. 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 Law. The forward-looking statements in this call are based on current information and expectations 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 risk as described in the companies recent report on Form 10-K and other filings with the Securities 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.

Before I turn the call over to Michael Ahearn, I'd like to mention that we've decided to limit our participation at conferences during the fourth quarter and postpone our Analyst Day to future date to remain highly focused on our business. It's now my pleasure to introduce Michael Ahearn, CEO of First Solar. Mike?

Thank you, Larry, and thank you for participating in our third quarter 2008 earnings call. We continue to perform at high levels throughout the third quarter. Third quarter production was 137 megawatts, up 20% quarter-over-quarter and 97% year-over-year. This represents an annualized capacity of 49.3 megawatts per line. Net sales for the third quarter were $348.7 million, up 30.6% quarter-over-quarter resulting in net income of $99.3 million or $1.20 per diluted share. Cost per watt in the third quarter was $1.08, including $0.04 of KLM rent cost representing a 9% decline quarter-over-quarter. We continue to solidify our position as the lowest cost manufacturer in the industry.

The start up of our Malaysia manufacturing center continued to progress on plan. Plant 1 is operating at steady state and performing well. Plant 2 product qualification tests were completed successfully and product shipments have commenced, and we expect to reach full capacity for Plant 2 by the end of this year, ahead of our original schedule. We generated $41.6 million of free cash flow in the third quarter while continuing to fund high levels of growth. Our cash and investments grew to $729 million. And today we announced a total of 625 megawatts of contract volumes, including contracts with European customers totaling 525 megawatts and contracts with a US customer totaling 100 megawatts. This represents a total of $1 billion of revenue at an assumed exchange rate of $1.15 per Euro.

We've been diligently assessing now the negative economic events unfolding worldwide could impact our markets and our business going forward. I'd like to share our findings to date with the understanding that this is an interim report and our findings and conclusions could change as the dynamic financial and economic conditions continue to evolve and their impact on the solar industry becomes clearer. Let me start with the status of the subsidy programs that drive the vast majority of the industry demand. During the past three weeks we have met or spoken with officials at each of the major feed-in tariff programs in Europe including Germany, Italy, France, Spain, the Czech Republic and Greece, and in addition, we've talked to officials in the other markets served by our European customers including South Korea, Ontario, Canada, California, and New Jersey, regarding their programs.

Although subsidy programs are political in nature, and therefore inherently unpredictable, discussions with these political and Regulatory Authorities have confirmed that there are no plans to cut programs in any of these markets and that material near term subsidy reductions across these markets are unlikely. There are several reasons for this. First, any significant reduction in these programs could result in job loss and reduced economic activity at a time when local economies cannot afford it and in fact seek stimulus. Second, the cost of the solar programs is generally modest in relation to other programs and largely factored into existing electricity rates. And third, those countries that have the need to moderate growth, namely Germany and Spain, have already modified their programs while the remaining countries are still in the ramp stage. We believe these subsidized markets offer opportunities for further growth and we plan to continue diversifying into them from our strong market base in Germany. At the same time, we continue to drive to open new markets that do not depend on traditional PV subsidies and can offer significant long term growth such as the California RPS market for utility scale generation.

We've also reviewed the adequacy of capital availability in Germany to finance solar PV projects that use our modules in light of the current credit market conditions. Approximately 70% of our 2008 module volumes will be deployed in Germany and we estimate that at least 60% of our 2009 module volumes will be deployed in Germany. We have seven customers based in Germany. Over the past three weeks, we've met with the German ministry of the environment, KFW, which is the German reconstruction bank, and a number of German banks that we believe represent the leading lenders to solar projects in Germany. We have also spoken to a variety of European banks that have been active in financing solar projects across the rest of Europe.

In Germany, solar project loans typically have been made on terms that include interest rates of approximately 5%, leverage ratios of 70 to 80%, and loan maturities of 12 years or more. These favorable loan terms have been facilitated by an indirect subsidy provided by KFW. Under this program, KFW provides funding for solar project loans that are originated by banks to finance projects owned by German equity investors. The KFW program applies to projects located throughout the EU, not just in Germany. Effective January 1, 2009 and a modification unrelated to the current economic issues, KFW intends to consolidate and simplify its programs and will provide project financing up to $10 million Euro per project, which is generally sufficient to fund projects up to 4 megawatts approximately in size. Prior to this modification, the KFW programs had a combined 10 million Euro per project limitation but also had an exception process to enable approval for larger funding and it's our understanding that this exception process will be removed as of January 1, 2009.

Based on our customers' 2009 projected market and application mix, we estimate that approximately 85% of our Germany volumes in 2009 will continue to be fully eligible under the revised KFW program. And the remainder will need to be financed outside of the KFW program. So, turning to the credit market outside of KFW, although German bank lending has slowed, some regional and national banks continue to lend to established developers and integrators, among active lenders we believe interest rates are currently ranging from 7-8% with most projects requiring syndication. We are also seeing evidence that State government backed financial institutions are becoming involved in providing solar project loans and that small local banks not negatively impacted by the credit crisis are making relationship based loans for local projects in some areas. In total, the credit situation in Germany, aided by the liquidity provided by the KFW program, appears adequate as of today, to support our plan to 2009 sales into the German market even though constraints and inefficiencies could cause some of our customers operating outside of KFW program to experience near term delays.

The availability of project equity in Germany is more difficult to assess. Historically, the equity market has been a fragmented market, dominated by individual and high net worth investors and small pools of fund investors, with institutional investors providing financing to some of the larger projects. Fully levered pre-tax returns in Germany have traditionally ranged from 6.5 to 8%. As part of that effort, we consolidated our headquarters into one facility in Coeur d'Alene, Idaho and closed facilities in Dallas and Ann Arbor. As a base case, we're assuming that any increase inequity returns would not impair the sale of our modules at current price levels and we base this in part on the resiliency built into our module prices today and also on our expectation for moderate equity return adjustments based on the low risk nature of solar project revenues and cash flows, based on the cash flows resulting from highly predictable long term solar generation and national laws that assure the sale of 100% of the solar generation at attractive prices over an extended period of time. However, because of the uncertainty over how the capital costs and availability will evolve in 2009 we also believe that it's sensible to model a contingency scenario in which First Solar provides financial support to enable higher project returns if needed to support the market. The effects of our contingency plans are Incorporated into our guidance that Jens will be sharing with you in a few minutes.

We've also reviewed the adequacy of project financing in the rest of Europe. Approximately 25% of our 2008 project volumes will be deployed in European markets outside of Germany in 2008, and we estimate that up to 40% of our 2009 project volumes may be deployed in these markets. We have nine customers based outside of Germany serving the European market. Most of our volumes sold into Germany are deployed by customers who typically develop projects and sell into third party investors. By contrast most of our volumes sold in the non-German European Markets are deployed by customers who about as independent power producers. Under their business model independent power producers generally own and operate solar generation projects for the long term and finance them with a combination of debt and their own equity. Our review indicates that solar project lending outside of Germany has essentially stopped for the time being; however we believe most of our IPP customers have adequate funding to bridge lending delays into 2009 and we assume that neither these delays nor higher debt costs will impair project economics for our customers at First Solar's current module prices. We base this assumption in part on the resiliency provided by First Solar's module pricing, the current contracts, and also on the relatively high equity returns that can be achieved in European Markets outside of Germany due to favorable combinations of the radiance and SEDEN tariff rates.

As part of our review we also set the financial and execution capabilities of our customers. It's been our practice to partner with customers based on their abilities to develop and execute upon multi-year pipelines of business and diversified geographic Markets. We work closely with our customers and allocate additional module volumes to them over time based on the visibility of their pipelines, our understanding of their execution capabilities, and other strategic considerations. Although no business is immune from pressure under the current financial conditions and we do observe some variability in the financial health of some of our customers, we believe our customer base on the whole is sound and able to execute the planned volumes in 2009. To date, we've identified potential financial risks in our customer base that represent approximately 15 to 20% of our planned sales into Europe in 2009 and we've identified the demand to reallocate such volumes if the need arises.

We've also considered the potential effects of module oversupply on our business in Europe and specifically the possibility as some analysts have recently suggested that module oversupplies may force unplanned reductions in the prices charged by First Solar. To put this issue in perspective, First Solar's long term contract price in 2009 as a Euro 54 per watt, which is substantially below the current market level of crystalline silicon module prices and likely below most suppliers estimated cash costs. We do not envision a realistic scenario in which crystalline silicon modules would be able to achieve cost levels that enable competitive pricing with First Solar's existing contract prices and we therefore assume that any price competition is unlikely to have a sustained impact on First Solar.

In fact, strong customer demand continues for our modules at current price levels as evidenced by agreements we announced today with European customers. I'll just summarize these briefly. We amended our existing framework agreement with Echostream to add 370 megawatts under pricing and terms consistent with our existing framework agreement. Echostream is a subsidiary of EcoCern, a Netherlands based Company that provides sustained energy and energy conservation products and services. Echostream operates in multiple solar Markets and has captive sources of equity finance as well as significant debt financing capability. We amended our existing framework agreement with EDFEN to at 75 megawatts under pricing and terms consistent with our framework agreement. EDFEN is a publicly traded affiliate of EDF, one of the largest utilities in Europe. We entered into a 25 megawatt agreement with Sargenium, the fourth largest utility in Italy, to deploy ground managed systems. The Sargenium agreement adds to our existing agreement with NL to form a strong utility customer base to support future growth in utility scale projects in Italy. We entered a 40 megawatt agreement with UB to support planned project development with a specific financial sponsor, and finally we expanded our contract with Phoenix Solar by 15 megawatts to serve specific identified opportunities in Italy in 2009. Turning to the US, the recent extension of the 30% ITC through 2016 removes a major market uncertainty, and combined with a number of State RPS programs, positions the US utility segment for strong long term growth prospects. In the short-term, our review indicates that the traditional investors and tax equity, financial institutions have largely stopped participating. We assume some of these investors will return to the market in 2009 but the timing and future cost of this funding is difficult to predict. The possibility of more expensive tax equity and its impact on solar electricity prices for both new and sending projects remains a major uncertainty going into 2009. The recent ITC extension broadened the potential investor base for US solar projects in two ways. First, the ITC has been extended to regulated utilities. Second, the alternative minimum tax treatment has been eliminated, making the ITC available to corporate investors. We believe opportunities exist to tap both of these new sources in order to make solar project equity more robust and less costly in the US over time.

And entering into the US utility market, First Solar has taken a diversified approach that includes working directly with utilities and utility affiliates as well as pursuing PPA structures with financial investors. We are continuing to make good progress in entering the US utility markets. We have executed a frame work agreement with Edison and Mission Energy, the non-regulated developer subsidiary of Edison International. The framework agreement creates a strategic relationship between First Solar and Mission under which Mission and First Solar will work together to develop large solar utility projects within the United States for identified customers. Under the agreement,First Solar will provide, design, I should say we'll agree to provide design engineering, procurement, and construction services for such projects, subject to the satisfaction of certain contingencies and entering into Definitive Agreements for these services for each project. By combining Missions extensive track record of power project development with First Solar's low cost systems and construction capability, we believe we've created a powerful engine for future growth in the US utility segment.

The 2.4 megawatt DC rooftop project we previously announced with Southern California Edison has been completed. We are on plan to completing the 12 megawatt DC project that we're currently constructing for Sempra by end of year providing important validation of our EPC capability. We also remain involved in a number of discussions to expand our relationships to consider the utility market. In addition to expanding our presence in the utility market we also announced an important expansion of our business model. Our entry into the US residential market through a strategic alliance with Solar City. First Solar and Solar City entered into a five year, 100 megawatt purchase supply agreement and in addition, First Solar invested $25 million in Solar City in exchange for a minority equity interest in order to help fund Solar City's expansion into new geographic territories and market segments.

Solar City is a market leader in the residential system integration business in the US. It operates in California, Arizona, and Oregon, and has plans to expand to additional geographic markets in 2009. The Company operates a business model that drives continuous cost reduction and strong economies of scale. Solar City and First Solar share a common goal of making solar electricity an affordable option for homeowners and businesses.

So to sum up our market view for 2009, we expect that approximately 85% of our contract volume in Germany can be fully financed through KFW, under attractive loan terms. We assume solar projects will remain an attractive equity investment in Europe due to predictable low risk revenue and cash flow streams, to hedge the risk of higher than expected equity return requirements we're developing plans to provide financial support to enable the market if necessary and including the impact of these plans in our 2009 guidance. We believe most of our European customers outside of Germany have sufficient balance sheet strength to bridge any near term project delays and to comply with their obligations under our take or pay contracts. We assume they will continue to earn attractive returns on solar projects even if debt costs increase. We have identified potential financial concerns within our customer base that impact 15 to 20% of 2009 volumes and we've identified demand that could provide a reallocation of these modules to other customers if the need arises. As the industry cost leader, we are already priced well below competing products, and continue to experience demand for our modules at current price levels. We view the US utility market as an attractive market over the next several years and we're establishing the foundation for this next phase of growth. Finally, we're expanding into distributed generation markets in the US and have formed a key alliance with Solar City to begin implementing our strategy.

In times as uncertain as these, our assessment of the risks and opportunities and our strategies and plans could change quickly and dramatically. Our business philosophies, however, will remain constant and are worth repeating briefly. First, we favor long term visible pipelines of demand backed by take or pay contracts, framework agreements or other structures that establish long term business relationships. We have been willing to trade off short term opportunistic profits for the visibility and market positioning provided by our long term approach. Second, we match production capacity to bottoms up visibility into demand for our modules. Our strategy has always been to expand production incrementally to match attractive market demand. By matching capacity to demand rather than building production capacity on speculation, we avoided taking excessive risk with expansion capital, or knowingly putting ourselves in a position that requires us to deviate from our preferred Markets and customers simply to fill the new factory with orders.

Third, we manage our finances prudently, with a rapidly growing technology oriented business, it is not always easy to balance the demands for growth in development with the need for financial discipline and soundness. At First Solar, striking this balance has always been part of our culture. We achieved profitability in 2006 at an annual production rate of 75 megawatts, one of the lowest breakeven points in the history of the industry. We've consistently avoided taking on excessive leverage and we've maximized our net working capital position with rapid payment terms under long term agreements. We have focused on achieving positive free cash flow, as soon as prudently possible.

And finally, we are grounded in reality and we take a pragmatic approach to risk. We do not knowingly ignore uncertain events that could meaningful it impact our business, but rather attempt to identify them, convert them to opportunities, where possible, and mitigate them where appropriate. We've always tried to be transparent with our key stakeholders with regard to our views and approach to the business and its risk.

So with that I would now like to turn the discussion over to Jens Meyerhoff, who will discuss our third quarter 2008 financial results, update the financial guidance for 2008 and provide First Solar's 2009 financial guidance.

Thank you, Mike, and good afternoon. Net sales for the third quarter of 2008 were $348.7 million, an increase of 30.6% over the second quarter of 2008. The increase was primarily driven by continued strong demand supported by the ramp of plant 1 in Malaysia and higher line throughput slightly offset by currency fluctuations as the Euro declined sequentially from $1.56 in Q2 to $1.51 in Q3. Manufacturing costs per watt for the third quarter was $1.08, down 9% quarter-over-quarter and included $0.04 of Malaysia ramp up and $0.03 of stock based compensation expenses. Excluding these expenses, core manufacturing costs per watt are now at $1.01 and I expect it to continue to decline with the ramp up of our plant in Malaysia. Cost per watt also benefited by $0.02 from the declining Euro.

Gross margin for the third quarter was 56.1% and benefited from the significantly lower production cost offsetting the unfavorable impact of the Euro decline and the ramp from our plant in Malaysia. Gross margin is expected to decline sequentially due to the further decline of the Euro exchange rate and continued ramp penalties from bringing up production capacity in Malaysia in the fourth quarter. Operating expense growth slowed in the third quarter, a trend we expect to continue through the remainder of 2008 and into '09 as we are reaching infrastructure scale in most areas. Operating expenses, excluding plant start up costs were 16.9% of net sales in the third quarter. Plant start up costs increased by $1.7 million sequentially to $6.3 million in the third quarter, as Plant 2 in Malaysia commenced production and we continued to incur start up expenses for Plant 3 & 4. Operating income for the third quarter was $130.2 million or 37.3% of net sales, and included 17.3 million of stock based compensation expenses.

The third quarter continued to strong underline operating leverage in our business model, with variable margins remaining above 70% and an incremental operating margin up over 50%. Net income for the third quarter of 2008 was $99.3 million or $1.20 per share on a fully diluted basis and included $5.3 million of interest income at a tax rate of 25.4%. Cash and all other marketable securities increased by $68.2 million to $729.4 million in the third quarter. We generated $41.6 million of free cash flow and expect to be free cash flow positive in 2009. Cash flow from operations during the third quarter of 2008 was $137.3 million and was impacted unfavorably by an increase in working capital of $30.8 million driven by both revenue growth and the actual impending start ups of our various plants in Malaysia. We spent $95.7 million on capital expenditures during the third quarter against the depreciation of 16.9 million.

Before I get to the specific guidance for the fourth quarter of 2008 and the year of 2009, I would like to explain the underlying assumptions and potential risk we're trying to address with this guidance. Starting with foreign exchange rates, for the fourth quarter, 62% of our expected net sales are hedged in an exchange rate of $1.46 per Euro. In addition our natural hedge brings a hedge ratio to 77% for the fourth quarter. We assume an average exchange rate of $1.20 to the Euro for the unhedged portion of our Q4 guidance. For 2009, 26% of our expected net sales are hedged at an average rate of $1.42 per Euro. In addition, our natural hedge brings the net income hedge ratio to 33% for 2009. Since we layer our hedges, the net income for the first and second quarter of 2009 are hedged at 52%, compared to the second half of 2009 at 12%. We assume an average exchange rate of $1.15 per Euro for the unhedged portion of our 2009 guidance, bringing the overall assumed average Euro exchange rate to $1.22 per Euro for 2009.

For 2009, a $0.01 fluctuation in the Euro impacts our revenues by approximately $11 million and our operating income by approximately $10 million. Risk number two addressed in our guidance is the cost of capital to finance projects. While near term liquidity shortages could impact certain markets, our guidance assumes the general availability of capital for reasons outlined by Mike earlier but we expect the cost of such capital to be as much as 200 basis points above 2008 levels. We have evaluated project economies in different market segments, based on these assumptions, and were proven to have incorporated contingencies; however we do not expect these contingencies to reduce the economics of our long term contracts but these contingencies could have an impact on our financial statements due to certain accounting requirements.

With that, let me go to our guidance. For 2008, 2008 net sales are expected to range from $1.220 billion to $1.240 billion subject to customer mix, foreign exchange fluctuations and the ramp of our second plant in Malaysia. We expect annual plant start up cost of approximately 34 million unchanged from our prior guidance. Stock based compensation is estimated at 61 to $62 million for 2008 with approximately 20% allocated to cost of goods sold, consistent with our prior guidance. GAAP operating margin for 2008 is expected between 34 and 35%, subject to the net sales and foreign exchange rate assumptions. Our tax rate for 2008 is expected not to exceed 26%, down from the 28% in our prior guidance.

Year-end 2008 fully diluted share count guidance remains unchanged at an estimated 83 to 84 million shares. Capital expenditures for the year remains essentially unchanged at approximately $540 million. This concludes the guidance for 2008, and let me with that address our guidance for the fiscal year 2009. We expect net sales of 2.0 to $2.1 billion for 2009 subject to customer mix, foreign exchange rate fluctuations, credit market conditions, and the ramp of Plants 3 & 4 in Malaysia. We expect plant start up costs of 13 to $18 million and stock based compensation at a range of 80 to $85 million with approximately 20% allocated to cost of goods sold. Our expected GAAP operating margin for 2009 is between 33 and 34%, subject to net sales. Our tax rate for 2009 is expected not to exceed 11% as we benefit from our long term Malaysian tax holiday. Year-end 2009 fully diluted share count guidance is an estimated 84 million shares. CapEx for the year is expected to be approximately $325 million for the investment in the completion of our plants 3 and 4 Malaysia and our Paris Burke expansion and various infrastructure needs.

This concludes our prepared remarks, and we will open the call now for questions. Operator?

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes to us from Mark Heller of Merrill Lynch.

Thanks. Jens, I was wondering if you could update us on the company's current total current backlog both in megawatts and sales at this point.

For 2008 or for 2009?

Going forward in total.

I think in total, I think the total backlog for the Company right now on the long term contract is at approximately $6.3 billion.

That assumes what exchange rate?

That assumes an exchange rate of $1.15 consistent with the guidance we gave.

And your outlook for the utility market in the US, do you think it's an '09 opportunity for you guys or is it more looking out 2010 and beyond?

It's always been planned 2010 and beyond just because of the timeliness involved in getting through permitting and approval processes, the RFP processes and so fourth so there's small volumes planned as we continue to do these pilot projects and do the formative work but we're thinking second half of 2010 is when the larger volumes would start.

And just sort of a housekeeping question. It seems like production was 136.5 megawatts but how much were sales in megawatts?

So I think you get all of the statistics I think on our website there, Mark. With respect to ASPs and production volumes sold, we will not guide to that or share that information going forward as it ties into pricing and pricing is becoming a much more competitive discussion going forward and we're probably going to like to keep that to ourselves.

Thank you. Our next question comes from Vishal Shah from Barclays Capital.

Thanks for taking my question. Jens, I wanted to ask you about your guidance for 2009 of operating margins. It looks like your cost structure is going to improve significantly as you ramp Malaysia and as you demonstrated that, but looks like your operating margin guidance is flat to maybe slightly down for next year. Can you maybe help us understand what some of the thoughts are there?

Yes, so I would say generally, a big driver of that is obviously the decline in the Euro that we factored into the 2009 guidance, right? By applying $1.15 exchange rate for the unhedged portion, that obviously puts a sequential decline into both revenues on a one for one basis but then also gross margin and operating margin. I'd like to remind people that on many calls prior to this one, we've always highlighted the benefit that the Euro provided an exchange rate of $1.50 to $1.60 so here we've taken a conservative stance. We're not experts in predicting foreign exchange rates. I don't know who is, but that's essentially the underlying assumption there.

Thank you. Our next question comes from Rob Stone of Cowen & Co.

Hi guys. Jens, the 2009 tax rate is a lot lower than we were assuming. I think the Street was too. Can you comment on what the sustainable tax rate might be so out in 2010 and the next couple years?

So the tax rate, so if you look at the tax rate, it essentially takes into account the full benefit of the tax holiday and obviously was having our capacity up and running in Malaysia, right? That on a pro rata basis becomes very meaningful, so now as we move into these outer years, Rob, you could assume that if we never were to repatriate any cash which in the near term we don't believe will be the fact, that we would remain in these low teens; however if we were to decide to repatriate cash back into the United States, then such repatriation would be taxed at a US tax rate in the effective rate, we would obviously advise you of such plans on a going forward basis.

So for the next couple of years probably stays in the low teens?

Yes, we assess a need with respect to the global liquidity requirement, right, and where the cash is needed on an ongoing basis. I think through '09 right now that assessment has resulted in an answer where we do not believe the repatriation is required.

And a question if I may, I'm a little bit puzzled by the contrast between your comments about contract extensions where you say that they've essentially been extended on to the same terms that we were all aware of before and yet you have elected not to provide details regarding ASP in the future, so since your annual 6.5% decline in Euro pricing was already well known, unless you're changing that, which it didn't sound like you were intending to say, where are you know longer going to disclose?

Well I would say I think pricing, I mean, I believe we're probably one of the very few companies across various industries that have been given this size of level of detail and generally, I would say that that disclosure has not surfaced too well in negotiations as we move into new markets and open up new customers and therefore, we want to be slightly more guarded. You shouldn't imply anything around the long term contract out of that change.

Thank you. Our next question comes to us from Steve O'Rourke of Deutsche Bank.

Thank you, good afternoon. Jens, you gave capital spending number in 09 that would include the buildout of Malaysia 3 & 4 and the Perrysburg facility. In this environment how are you thinking about further expansion and for a decision that you make in 09 what would be the lead time from that decision to bringing a factory into production?

So since I have Bruce here with me, I'll probably tackle the first part of your question and then have Bruce talk to the timing. So I would say, I mean, generally we're obviously as we mentioned before, on a consistent basis, try to map demand and supply and that has resulted in historically in decisions to build more capacity out primarily against long term commitments coming from our customers as Mike mentioned. I don't think we have changed that profile has not changed. That is an ongoing process so now I would say given where we're standing today, this may not be today the right time to build out massive capacity even though I think we always maintain a stage of readiness and optionality to do so but I think the next few weeks by themselves will give us more clarity around the situation in the market and especially the liquidity situation around the credit market. And from there on, I think we can resume the process under lead times that Bruce will explain to you.

Yes, typical lead times, Rob, would be about 5-6 quarters between the time that we actually break ground and the time that we begin shipping in this environment probably limited predominantly by our ability to actually construct and depending on the exact location where we choose to site the facility.

Thank you. Our next question comes from Timothy Arcuri of Citigroup.

Hi. Two things. I guess first of all, has your concept of grid parity and really how you price, has it changed given that we seen natural gas prices get cut in half during the last few months? Does that make you when you're signing these contracts, does it make you have to get any more aggressive with your ASP profiles into the out years and then I had a follow-up question. Thanks.

No, it doesn't have any impact on these kind of price discussions at all, Tim. In Europe, in the European markets, the market demand is really driven by the SEDEN tariff rates which are fixed by law and don't respond or modify in relation to changes in gas prices or anything else, and so our customers and that whole channel for that matter is really gauging economics off the feed in tariffs and the plan integration rates in the tariffs so there's some variables there I think would have more to do with the cost of capital. In the US, I don't think it really has worked that way either. I mean, the RPS programs are in place. The targets are there. The pipelines and the whole process of securing business works on a long term basis and California they set a market price reference periodically that will update for changes in forward gas prices but it's not, this isn't a very immediate reactive market in that fashion so we don't see that, have not seen that as an issue.

For the same tone, we really didn't see a benefit out of the rise, a temporary rise to certain dollar gas prices either.

Okay, right. And then Jens, last thing for you. So it looks like the CapEx next year is a lot less than I actually thought it would be. I guess that seems to imply there's not going to be any spending on anything beyond Malaysia next year, so if that's the case, then what's the earliest that we could expect to have production out of the next fab? It would seem even the first half of 2010 if you aren't spending anything in 2009 you probably wouldn't get any production out of a new fab in the first half of 2010.

I wouldn't imply, what we're implying right now in the CapEx guidance is to cover both the Perrysburg expansion and completion of Malaysia. I would not imply out of this guidance that we have decided not to build another plant in 2009. We just haven't announced one and at the time, when the right time to announce it, we would obviously update that guidance. The comment around being a free cash flow positive in 2009 will tolerate a significantly higher CapEx number than the one underlying our 0 9 guidance.

Thank you. Our next question is from Nick Allen of Morgan Stanley.

Hi. Can you talk a little bit more about the contingency plans regarding your other customers that may affect accounting in 2009?

Well, I would say probably at this point in time we will not talk about this in too much detail, Nick, honestly. I mean, fundamentally right now as we assess our pipeline, we believe that the economics are robust under the current long term contracts, so this is essentially more or less a contingent scenario around either unique customer specific scenarios and circumstances or will provide contingency against maybe unlikely but possible significant further deterioration of the cost of capital.

Thank you. Our next question is from Satya Kumar of Credit Suisse.

Yes, hi, thanks. Jens, can you talk a little bit about the cost reduction? The efficiency seems to have plateaued around 10.6% plus/minus. Can you talk a little bit about where your balance of system costs are now for large projects in Germany, and how much progress you're making towards creating that pound to the dollar for the target and how we should think about the efficiencies improving over the next few quarters.

All right, I would say, so essentially, obviously, the dollar target does not necessarily apply to Germany because the balance of plant cost in the German and European Markets are predominantly managed for our customers there as them being the integrator, so long term target to get to $1 per watt on the balance of plant side essentially applies to our own efforts of designing our own solution of optimizing the construction process, right? And gaining economies of scale and that obviously is combined to the ability of the module to have a higher watt, and higher conversion efficiency so I would say based on what we've learned out of our pilot projects, we've not only seen I think in some cases that we out performed our initial estimates but also that we learned a lot that indicates to us that there's a significant opportunity to further lower the balance of plant costs.

Thank you. Next we will hear from Kelly Dougherty of Macquarie Capital.

Hi, thanks for taking my question. Previously you have been talking about focusing just on the US utility, so I'm wondering if you can give us a little bit more insight into your decision to enter the residential market. Obviously credit is tough and the housing market specifically in California is a little bit difficult so I'm wondering what do you find so compelling about the market or perhaps it was the opportunity to invest with Solar City itself?

Yes, Kelly, we've actually been talking to Solar City following them and talking to them for about 18 months and thinking about our strategy for entering the distributer generation side of the market in the US and we started with utility scale because that plays very well to our core business and our strengths and we saw opportunity hit a price point on these large projects but the distributer side of the market in the US we think is going to be very significant. The problem is it's highly fragmented and until that 30% ITC was extended, you just had no visibility into whether there would be a market over the next several years that would warrant investing the resources and time. So as the ITC was extended, we started to refine our thinking a little bit and we believe Solar City provides a way through a partnering relationship for us to drive some pretty significant growth into the distributed side. We think there's price elasticity in some of these Markets that hasn't been tapped with higher cost modules and we think that Solar City's very good at things that we don't want to do which is aggregate demand and do the hand to hand work with the end-user in the trenches, so it's an alignment that will allow our business model to work and we think we can expand market and move away from subsidy dependence, just like we're doing on the utility side.

Thank you. We have time for two more questions from the phone. This one from Jesse Pichal of Piper Jaffrey.

Thank you for taking my question. Can you talk a little bit about efficiency improvements on the horizon and what significant milestones should we look for?

Hi, Jesse. This is Bruce. Yes, so efficiency, internally we maintain a road map that really looks at the gamut of opportunities to improve the performance of the modules ranging from transmission of the light into the module, the conversion of the light into current and then taking it outside of the module through the back contact, and we continue to have a range of engineering solutions that should allow us to continue to improve the performance of the module over time. As we stated many times before, these improvements tend to be event driven. They don't occur in individual quarters, particularly nor do they come outlines yearly as perhaps a growth rate or something like that might look at. Nevertheless, we believe we're still on track for our long term plan to achieve our long term financials given the road map that we have laid out for ourselves and the rate at which the engineers are able to deploy and qualify new improvements.

Thank you. Our final question comes from Michael Molnar of Goldman Sachs.

Good afternoon. Thanks for taking my question. Just a quick one as most of my questions have been answered. The longer term goal of $0.70 a watt production cost from 2010 to 2012 I think, first can you tell us given that we're getting very close to 2009 any color on if that's likely to happen more towards the beginning or end of that goal and second, if you can remind me if that includes or excludes stock based comp costs.

Yes, it includes SBC and no, we don't give anything that granular, Michael. I mean, I can state that we're continuing to track to all of the milestones that would get us to that level within that time frame, so in that respect, we continue to feel confident, but we wouldn't provide that kind of guidance or visibility right now.

And maybe giving some more visibility into this, we have multiple plans that are producing at this point in time at a sub $1 level.

Thank you. Ladies and gentlemen, thank you for your questions and for your participation in today's conference. This does conclude our program, and you may now disconnect.