第一太陽能 (FSLR) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to the First Solar first quarter 2009 earnings conference call. This call is being webcast live on the investor section of the First Solar website, at www.firstsolar.com. (Operator Instructions). I would now like to turn the call to Mr. Larry Polizzotto, Vice President of Investor Relations for First Solar, Incorporate. Mr. Polizzotto, you may begin.

Thank you. Good afternoon, everyone, and thank you for joining us for First Solar's first quarter 2009 conference call. Today after the market close, the Company issues a press release announcing its fiscal first quarter 2009 financial results. If you did not receive a copy of the press release, you can obtain one from the investor section of First Solar's website, at firstsolar.com. In addition, First Solar has posted the first quarter presentation for this call -- it's under "Supplemental Information" -- as well key quarter statistics and historical data on the financial and operating performance for the quarter. We will be discussing the first quarter presentation during this call, and it is being webcast as well. In addition, an audio replay of the conference call will also be available approximately two hours after the conclusion this call.

The audio replay will be available until Friday, May the 1st, 2009, 8:59 p.m. Mountain Standard Time, or 11:59 Eastern Daylight Time, and can be accessed by dialing 888-286-8010, if you are calling from within the United States, or 617-801-6888 if you're calling from the United States, and entering ID number -- outside the United States, that is -- and entering ID number 93319217. A replay of the webcast will be available for 90 days, approximately two hours after the conclusion of this call. If you're a subscriber to FaxSet, you can obtain a written transcript within two hours. With me today are Mike Ahearn, CEO; Jens Meyerhoff, CFO; and Bruce Sohn, President of First Solar. Mike will begin with an overview of the Company's first quarter 2009 achievements, followed by market and business update. Jens will provide you with the first quarter 2009 financial results and provide you an update for guidance for 2009. We'll again -- we will then open up the call for questions.

All financial numbers reported and discussed in today's call are based U.S. generally accounting principles -- 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 participants limit themselves to one 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 this 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, 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 10K 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 announcements described herein. Before I'd like to turn this call over to Mike Ahearn, I'd like to mention that during the second quarter of 2009, the Company will be attending or hosting the following conferences: Intersolar Munich on May the 28th through the 29th; First Solar's shareholder meeting in Phoenix on June the 4th; Deutsche Alternative Energy Conference in Washington, D.C. on June 11th; and the 2009 Analyst Investor meeting will be held in Las Vegas, and we'll also be taking investors and analysts to see our Eldorado installation in Boulder City, and that will be on June 24th. It's now my pleasure to introduce Mike Ahearn, CEO of First Solar.

Thanks, Larry. Thanks for joining us for the first quarter 2009 earnings call. I'm going to walk through some slides in the presentation, starting with slide five; so if you can follow along, I'll speak, I guess, mainly to these slides. The Company obviously continued to execute at a very high level over the first quarter, and if you look at the metrics -- the financial metrics on slide five, they're listed here briefly. Revenue at $418.2 million. That's down slightly over Q4. Jens will explain it, but it primarily results from the planned price reductions -- the annual price reductions we have at January 1 under our long-term contracts. That revenue drove net income of $164.6 million for earnings per share of $1.99. From an operational perspective, the operating metrics that drove the financial results included production at 219.5 megawatts. That's up 26% quarter-over-quarter.

Annual capacity per line was up to 49.4 megawatts, up 4% quarter-over-quarter, primarily driven by higher conversion efficiencies and blind throughput. Conversion efficiency averaged 10.9 % for the quarter. That's up .1% quarter over quarter. We operated KLM 1 and 2 at full capacity for the entire quarter. We also began shipping and ramping KLM 3. KLM 4 will begin shipping in Q2. And that will bring all four factories in KLM into production and full ramp on time -- actually, ahead of schedule. So an excellent job of executing a major factory expansion for us. Manufacturing costs declined to 93% -- I'm sorry, $0.93 per watt, a 5% reduction quarter over quarter and 18% year-over-year, driven primarily by lower Malaysia costs as we averaged in higher volumes into our consolidated results and improved throughput and efficiency, as I alluded to here earlier. From a market perspective, we were particularly pleased we were able to sign up 479 megawatts of new volumes in Q1, particularly under the conditions that the industry's been dealing with.

Those included 361 megawatts in Europe in increased contract module sales with existing customers, 23 megawatts contracted in Canada -- Ontario Canada -- and then 95 megawatts in the US under two projects that we announced earlier. The project with Sempra that we refer to as Copper Mountain in Nevada; and then the Tri-State project in New Mexico. These are DC numbers, in case you compare them to the press releases, which were reported in AC numbers, which that will explain the discrepancy. But all in all, this is a very strong result in our view. Particularly under the difficult financial and economic conditions that we've all been dealing with, we're very pleased with the quarter. I'd like to spend some time now talking about the market dynamics, which continue to drive uncertainty in the industry and occupy a great deal of our time and attention. So if we turn to slide six, this starts the discussion at a pretty high level, but the way we think about markets is to first classify them into two buckets: PV subsidized markets, which are primarily the European feed-in tariff markets; and then US utility markets. And the classification is made because of the -- the characteristics differ quite a bit between these two buckets in terms of risks and opportunities and offerings so forth. Geographically, Germany, Italy, France, Spain, and now Ontario, Canada, are our PV subsidized markets. Our offering in these markets is a sale of modules as opposed to a more expanded offering.

Customers we sell to consider us relative to other PV suppliers. So our competitors are obviously module -- PV module manufacturers. And the pricing trend that we would expect over time is one of declining prices in keeping with declining subsidies. It's really PV-specific subsidize that drive demand in these situations. Those subsidies have to come down over time -- we believe that's a political reality -- and so do prices, therefore. The US utility market, I mentioned, is somewhat different. Our focus has been in California. We've expanded our thinking, and with the announcement of Tri-State into the southwest US. But primarily we're focused in California. Our offering is around system level solutions, as we've discussed previously.

We think that's important to drive price points and to cost reduction trajectories in terms of solar electricity costs to serve this market, and we are competing here with the full range of utility scale renewables. So not just PV but obviously wind, geothermal, concentrated solar; and therefore, to enter this market, the price point has to be a lot lower than it would have to be in a PV subsidized market. So you're going to see a deeper pricing trend here as we get deeper into this market, where our prices -- including the embedded module prices -- start out at a lower price point to gain entry; but over time, we won't see, we don't believe, the same kind of continued downward trajectory. We think these price points end up leveling off, and actually stabilize as we get -- become competitive relative to traditional alternatives. So slide seven steps this down one more level with respect to PV subsidized markets, and demonstrates how we think about these kinds of markets.

Our primary concern is assuring that modules will sell through the entire market channel or system and ultimately convert to an installed system and cash from an end user that feeds this channel. And this slide really breaks down the market channel or system into the five components that we look at, starting from left to right. Modules and other components have to be adequate. We've had situations from time to time in the past where there were concerns about inverter supply, for example, to drive the kind of installed volumes we would be contemplating. So that's not a concern today, but this is an issue that has to be looked at. Next would be project pipeline. Whether it's rooftop or large ground-mounted systems, are there fermenting and approval services that are transparent and working? Are the opportunities in the queue with our customers that will accommodate the types of volumes that we plan to ship over the next rolling several quarters? Assuming that's the case, then you get to this project development system integration execution capability.

And customer financial and operational health and capability is critical if we're going to see these modules move efficiently through the channel. Then we get to project finance, of course, and are there adequate sources of equity and debt to finance these things? And then finally, project economics. Are we pricing the modules at levels that, given the feed-in tariff rates and the radiance in the financing costs, will allow all of the pieces of this channel to be adequately compensated to continue to drive a solution? So those are the areas, and there are obviously subcategories of this that we look at from a risk analysis and mitigation point of view. The bottom part of this slide indicates in red where we think the risks lie. And I'll talk about those in a minute on a follow-up slide. The two boxes -- two columns that aren't designated red, we actually feel good about. One of those is project pipeline.

With the seasonal situation in Germany -- the basically frozen ground and snow, on ground and rooftop, the visibility is a little bit limited. But from what we can tell with respect to our customers and other integrators and channel players, there's a pretty good pipeline of opportunities queued up or available over the coming several quarters, certainly in Germany. It's less visible in parts of Europe, because permitting and approval processes can tend to be delayed and opaque -- not as transparent and not as predictable as we have in Germany. But on balance, we think there's an adequate pipeline, both rooftop and ground (inaudible) to accommodate our planned flow of modules. And similarly on project economics, we're confident that our modules are priced at this point to enable a sell through, and for the channel, including our customers, to receive attractive compensation and drive economics that work for everybody. Now part of that is because we've priced the modules, as we mentioned on our last earnings call, to levels that drive sell-through economics, and we've made pricing adjustments over the course of 2009. The fact that that's working, I think, is evidenced by the 360 megawatts that we've been able to sign.

So let me turn to some of the risk factors here. If you go to slide eight, one risk which we've talked about on prior calls is that we'll see defaults under existing contracts with customers. We continue to see this impacting potentially 10 to 15% of our planned 2009 shipments. The situation really hasn't changed since last quarter. I suppose the passage of time could be marginally helpful, but this is an area we're watching very closely. The mitigation in our case has to do with monitoring and trying to create excess demand or options to reallocate those volumes should that become necessary. So we'll continue on the watch list in that respect. The other risk called out on slide eight has to do with project financing. In Germany, if you think about small systems, anything below a megawatt primarily mounted on rooftop, we're seeing evidence of pretty good financing flow.

The bank debt comes largely from small savings banks in Germany that are relatively unimpaired by some of the credit conditions affecting other banks. KFW support is available to the full extent of these projects. And so that looks reasonably robust at this point. It's -- the situation is less visible with respect to larger projects; but in Germany, we are seeing evidence of larger banks beginning to lend in some cases and actively underwrite and consider loans. So I think that that situation in Germany looks marginally better. In Europe, outside of Germany, we simply don't have any visibility beyond what we've talked about last time, which is very limited. The reason for caution here, I think, is that in general the banking industry is not healthy in Europe. I mean, that's widely reported and known.

There are additional writedowns to be taken in our view, and some of that's a consequence of investments and toxic assets in the US. Some of it's consequence of loans in Europe that are underperforming. So there's reason to be cautious, in our view, until you see credit actively flowing on these large projects. And we're not really seeing that at this point outside of Germany and some specific large projects that we can talk about. So one of the mitigating steps here, which we've talked about earlier, is for First Solar on a very selective basis to step in and provide some kind of support or credit enhancement. We've actually accomplished that on a large project in Eastern Germany with UV 53 megawatt Lieberose project In Brandenburg that was previously announced, which Jens will talk about a little bit more in his section. But I think it's a pretty good example of where we can use some capital, some balance sheet strength, to facility a flow of capital. Doesn't imply a massive change for our business model, but I think for right now, having that capability situationally is an important mitigator.

The other would be public sector support, and we do continue to have discussions, both at the European Union level and at various member states in Europe about facilitating credit. So let me go to slide 9. The third big risk here is, of course, oversupply in the marketplace. And that's been reported and talked about a lot. There are some potential issues here in terms of short-term price reductions in polycrystalline and silicon impacting First Solar. And if you look to the right column of the slide, you'll see our view on this continues to be that it is not impacting us in the near term. We've got long-term contracts with most of our customers that enable sell through economics. We're finding th at investors and especially banks prefer stronger customers with proven quality. Our customer base is oriented towards long-term, and so we're not a spot market vulnerable Company by design, and have not seen a real impact here to date from the sort of dumping low price trends that have been evident.

Longer term, the question arises, could polycrystalline silicon costs reduce to the point that your competitive cost advantage is eroded? And that's something we want to be very sensitive to and not have our heads in the sand on. Our approach on this is to compare a hypothetical best-case on polycrystalline silicon to our own cost reduction road map; and we have talked about our cost reduction road map previously, but basically it calls for a manufacturing cost in the area of $0.65 a watt by 2012. There are a number of things we have to execute to get to that point. There are also levers driving this that we think continue beyond 2012 in terms of technology-driven conversion efficiency improvements, scale driven by very low variable costs, and productivity that continues to drive throughput.

If we compare that -- and if you look to slide 10 here -- if we compare our 2012 target -- and this range represented by the gold bar has a midpoint of $65 a watt. If we compare that to what we model as sort of a hypothetical best-case on polycrystalline silicon -- which is represented by a green dotted line here -- and we look at where polycrystalline silicon costs could be at various silicon feedstock price points ranging from 150 down to $25 a kilogram, what it will demonstrate is that we've got a cost advantage -- let's just take from $75 to $25 a kilogram -- the cost advantage of somewhere from $0.73 to, call it $0.35 a watt, or 55 to 35% on a relative basis. If you look at slide 11, it's the same data adjusting for a balance of system penalty of $0.15 a watt, which is what you get assuming 12% conversion efficiency on First Solar modules versus 14% on polycrystalline silicon. And it demonstrates a range that, while tighter, is still fairly significant. So what this tells us from a -- sort of a mitigation point of view, is we have got to be focused on executing our cost reduction road map.

If we do what we've done in the past and we tend to our netting, we can continue to move down the path here, open new markets and potentially widen the gap relative to crystalline knitting, we can continue to move down the path here, open new markets and potentially widen the gap relative to crystalline silicon-type offerings. So that's in a nutshell what the PV subsidized markets in Europe look like to us today. Let me briefly talk about the US utility markets. And if we go to slide 12. This, I think, stacks it up pretty nicely, starting with our market entry in '07, the Turner acquisition. 2008, as you'll recall, for us was all about getting some pilot projects done and some formative relationships to begin to build a presence here. 2009 has really been around building pipeline, and I think we're not finished. This is ongoing work. We don't talk about things until we've got them done, but our hope would be to continue to build a pipeline, and that pipeline project begins to get deployed in significant volume, if everything works right, in the latter part of 2010 and beyond. So this slide, I think it summarizes our view that things are progressing fairly well.

Slide 13, the key market risks with respect to US utility -- well, one is just that this longevity or timing factor -- that the pipeline queues are long. The volumes we're talking about are 2010 and beyond. It's mainly driven by permitting and approval times. And those -- the visibility and the precision around those timing factors is not as good as we'd like. But I think the way to mitigate that is build big, big pipeline. Project financing today, if you had to finance in big volume, would be very difficult. We assume somehow this is going to resolve over the next 12 months. 18 months before it becomes critical, but we don't have a good bottoms up way of seeing that right now. This is more of a top-down hope as opposed to a plan. So we've got some things we need to work on there.

Low natural gas prices, I think, could have an impact in the short-term on expansion of state programs; although I will say we've got our hands full with California and a couple other markets. I think the policy issues everybody's pretty well familiar with. We don't really have anything new to add here. We continue to be very active in discussions and trying to influence things. I hope that the US will joining Europe in creating large viable markets, but I think Federal intervention is going to be critical. And we're very concerns about the short-term nature of the injections in the stimulus bill and the fact that in 2011 we'll revert back to an ITC structure, which in our view is not a workable way to attract big volumes of low cost project financing. So we're very active here from a lobbying front.

Slide 14, just to summarize. So we're seeing continued strong execution across the Company. The improved pricing terms in Europe to enable sell-through has resulted in signing of additional volumes, as we had hoped. The key areas of risk mitigation continue to be this contract default risk with respect to 10 to 15% of the volume, and the project finance issues that, of course, affect the entire industry. We assume and believe our continued cost reductions will offset any polysilicon module costs and price reductions that might result here from feedstock and excess supply, and penetration into the US utility market is continuing on plan. So before turning this over to Jens, I'd like to say a few words about an organizational announcement that we made just right before this call started. We announced that First Solar will begin a search for the next CEO.

And when we identify that person, I plan to remain as Executive Chairman in a full-time role and focus my efforts on working with our Government Affairs group to help create the policy and regulatory frameworks that we believe are needed for solar electricity markets to expand -- not only in the US and Europe, but in developing countries. I think this could be read at first blush to be some kind of sign of a pull back from me or half a step out of the business. That's not what's intended. This is really about expanding the leadership team and reallocating my time so I can focus on external issues that I really think are becoming critical to the continued growth of the Company and industry. There's three considerations, I think, about the timing of this move that the Board and executive staff and I have put a lot of thought into and ultimately concluded this was the right time.

First, I think that these public policies and programs are going become constraining for the industry relatively quickly if we and others continue to drive costs down as rapidly as we are. And we start thinking about what will it take to sell five gigawatts a year or ten gigawatts a year. At First Solar, we think it's going to take some fairly radical changes in the way these markets are structured from a regulatory point of view. And that includes some of the developing world that can be addressed by price points that I believe we're going to get to. So I've been spending more time in this area lately. I'd like to spend all of my time on it. It will take that and more, I think, by a number of companies to bring about some of the changes that we're going to need. So that's a significant consideration. The second thing would be, this is a natural evolution for me and the Company.

I've been in this role going on ten years. It's healthy for the Company to inject new talent at the leadership level, and this gives us an opportunity to broaden the team and take into account our growing size and geographic scope and complexity. So I think it actually works in a couple of different ways to expand the team at this point. The third aspect was we concluded that the timing's right from the standpoint of the organization. We have got an excellent staff at the executive level and senior management team. We're executing very well right now across the Company. The Board and I are very comfortable with the state of the organization as we begin to look for the right person here to be our next CEO. So we haven't set a definitive timeframe, and we'll take as long as we need to find the right person.

The Board is conducting a search, but it's in close coordination with me and the rest of the executive staff. We've announced it now because we're planning to take some active steps along these lines and we just felt it was appropriate to reach out to our stakeholders in keeping with the transparent way that we've done business. So with that, I'd like to turn the call now over to Jens Meyerhoff to take us through the next slides here.

Thank you, Mike, and good afternoon. On slide 15, you see our net sales for the first quarter were $418.2 million, a decrease of 3.6% over the fourth quarter of 2008. The decrease was primarily driven by price declines, customer mix, as well as by a sequential decline in the Euro exchange rate from a blended $1.41 per Euro in the fourth quarter to $1.39 per Euro in the first quarter of 2009. These decreases were partially offset by higher shipping volumes from the ramp of plan 2 and 3 in Malaysia and higher line throughput. Moving to slide 16, our cost per watt produced for the first quarter was $0.93, down 5.1% sequentially as we continued to realize the benefit from increased production and low cost locations, higher line throughput and lower material costs. Cost per watt included $0.02 of Malaysian ramp costs, and $0.01 of stock based compensation expense. Cost per watt is expected to continue to decline with the ramp of plan 3 and 4 in Malaysia, and continued throughput improvements.

Gross margin on slide 17 for the first quarter was 56.3%, up 2.4 percentage points over the prior quarter, primarily due to lower manufacturing costs and customer mix, partially offset by lower ASPs and the decline in the blend of Euro exchange rate underlying our net sales. Please note that our gross margin continued to benefit from foreign exchange hedges executed in the first half of 2008, which are phasing out as the year progresses. In addition, first quarter margins do not yet reflect the full impact of revised product pricing implemented during the first quarter. On slide 18, our operating expenses declined $5.4 million quarter-over-quarter due to a reduction in variable compensation expenses and a decrease in planned start-up costs of $2.6 million sequentially to $6.2 million as plan 2 and 3 in Malaysia commenced production and we continued to incur start-up costs for plan 4 in Malaysia. We expect our operating expenses to increase in the second and following quarters due to higher R&D spending, as well as increasing SG&A spending, primarily driven by the OptiSolar acquisition and the related ongoing project development expenses required to realize the full value of the acquired project pipeline.

Operating expenses net of planned start-up costs were essentially flat in the first quarter at 14.6% of the percentage of net sales. On slide 20, you'll see our operating income for the first quarter was $168.1 million, or 40.2%, of net sales, up from 161.3 million or 37.2% during the prior quarter, and included $15.2 million of stock-based compensation expense. Net income for the first quarter was $164.6 million, or $1.99 per share on a fully diluted basis. On slide 22, you see that our APS was favorable impacted by non-operating income and expense items of approximately $0.06 when compared to the fourth quarter of 2008. This is primarily driven by a one-time tax benefit of $11.5 million from the reversal of Malaysian tax expenses as a result of the pulling of our Malaysian tax holiday into 2008, partially offset by non-recurring foreign exchange and hedge gains during the fourth quarter of 2008 and a reduction in interest income.

The effective tax rate for the first quarter was 9.8% excluding one-time items. Our free cash flow on slide 23 was negative by $22.7 million in the first quarter, due to the one-time impact of changing our payment terms from 10 days to 45 days, and higher shipment rates in the second half of the first quarter. Cash flow from operations during the first quarter were $63.7 million, driven by continued revenue growth and offset by increased accounts receivable balance and inventories to support growth. We spent $86.4 million for capital equipment during the first quarter against depreciation of $25.8 million. Cash and all other marketable securities decreased by $10.2 million to $811.6 million in the first quarter, primarily due to the revised payment terms, while our debt to equity ratio remained low at 13%. Rolling four quarter return on net assets was 27.4%, up from 22.4% in the prior quarter.

Before I get to the guidance for 2009, I would like to provide an update on our activity of committing capital towards financing projects in Europe, as shown on slide 25. During the first quarter, we contributed 10.3 million Euros to support the financing of the world's second largest PV plant in Germany. With this commitment, we were able,, together with our customer UV to obtain favorable financing terms for over 80% of the project capital in a challenging product finance market. Due to the structure and timing of the financing, we deferred approximately $27 million of net sales during the first quarter. The intent, as you see on slide 26, is to sell this attractive project together with UV to a long-term equity investor, at which point we plan to represent less than 10 million Euros of the project capital structure. For more information about the project, please refer to the press releases issued by both companies. This brings me to our guidance for 2009, which remains largely unchanged. For the remainder of 2009, 50% of our expected net sales are hedged at an average rate of $1.35 per Euro.

In addition, our national hedge brings the net income hedge ratio to 59% for 2009. Since we layer our hedges, net income for Q 2of 2009 is hedged at 83% compared to 47% for the second half of 2009. Please note that the exchange rate underlying these hedges will continue to decline as the year progresses, but are not expected to drop below current spot rates. We assume an average exchange rate of $1.15 for the unhedged portion of our 2009 guidance, bringing the average Euro exchange rate to $1.28 per Euro for 2009. For the remainder of 2009, the $0.01 Euro fluctuation impacts our revenue approximately $5 million and our operating income by approximately $4 million. Our guidance reflects new pricing and contract terms designed throughput and to take advantage of our superior product cost structure. We closed the OptiSolar acquisition on April 3rd, and our current guidance incorporates the financial impact accrued as the additional expenses from the project development team. So Solar issued approximately 3 million shares of common stock, representing a dilution of about 3.5%. This is less than the approximate 5% dilution expected when the acquisition was announced. Our guidance does not yet include the impact of the final purchase price allocation, which we expect to finalize in the second quarter. As discussed by Mike, we're monitoring and mitigating certain business risks such as potential customer contract default risks due to either financial instability of customer, limited access to product financing or near term competitive forces. Such risks are as of today not incorporated into our guidance, due to our believe that our mitigation plants are sufficient. In addition, we may be able to reach the required milestones and trigger events that allow revenue recognition of some of the deferred revenues excluded from our guidance as a possible further risk mitigation pass.

Now to our guidance on slide 29. We maintain our previous net sales guidance range of 1.9 to $2 billion. We expect plan start-up costs of 12 to $13 million. Stock based compensation is estimated at 75 to $80 million, with approximately 20% allocated to cost of goods sold. GAAP operating margin is expected between 31 and 33%, reflecting additional expenses of the OptiSolar acquisition. We expect our tax rate to be between 9 and 11%. Year end 2009 fully diluted share count guidance is an estimated 86 to 87 million shares. CapEx for the year is expected to be 270 to $300 million. For investment and completing the Malaysia plant 3 and 4 in our Perrysburg expansion and other infrastructure requirements. This concludes our prepared remarks, and we open the call for questions. Operator?

(Operator Instructions). Your first question comes from the line of Steve Milunovich from Merrill Lynch. Please proceed.

Great, thank you very much. You commented that we haven't seen the full impact of the price declines that you implemented in the first quarter. Do you think those will be significantly noticeable going forward, or it could be offset by other factors?

I think, Steve, at the end, if you look at it, I mean, obviously these impacts are incorporated into the guidance that we gave to the full extent. Obviously as the fully fact becomes eminent, we're also reducing our costs further. So you have some offsetting trends out of lower cost reduction -- out of cost reduction efforts.

Thank you.

Your next question comes from the line of Steve O'Rourke with Deutsche Bank. Please proceed.

Thank you, good afternoon. How should we be thinking about your manufacturing cost basis in Malaysia compared to US or Germany?

So I think if you look at it, Steve, I think we always gave an indication that over time we would expect a roughly $0.20 benefit out of Malaysia when compared to the US plant, which was baseline. So I think generally, I think we're seeing, we're seeing that trend come through. Having said that, however, as you gain more efficiency and throughput advances, the overall compensation element in the manufacturing cost declines as a percentage. So I think today we're seeing a good mix of the overall throughput improvements. We're seeing efficiency improvements, and we're seeing the lower cost structure all benefiting the aggregate manufacturing costs.

Fair enough. And just one quick follow-up. Is the material balance of system costs -- or the material costs in cogs -- is that demonstrably lower also in Malaysia?

In Malaysia?

Yes. When you just think about the material inputs?

No,no, generally I don't think there's a material impact. I think -- as a matter of fact, I think in the beginning as we ramp some of these plans, we utilized traditional sources for materials or things in a transitional stage, so some of that could have actually been slightly higher due to transportation costs. So we're scaling into that.

Fair enough. Thank you.

Your next question comes from the line of Satva Kumar with Credit Suisse. Please proceed.

Yes, hi, thanks for taking my question. Jens, I was just wondering if you could give us a sense as to what price of polysilicon you'd be competitive as you exit the year? Looking at the run rate for your guidance, you're obviously assuming pricing is coming down fairly significantly through the year?

Yes, I mean, I think if you look at the slides that Mike walked through, which were essentially slides 10 and 11 in the deck, we give some sensitivity here with respect to different type of poly price assumptions. I think the large question, and you see the slides kind of leave it to your judgment to pick a point with respect to where and when we will be at certain poly prices. We believe, based on the pricing behavior that we see, that our current price is highly competitive and drives sell through. You can draw a scenario, obviously, on the slide here. If you draw a $0.93 current manufacturing costs, you freeze it, and you bring down poly costs to $25. Well, that could theoretically create some near term pressures. But the purpose of the slide is actually to show that those pressures will be temporary and that our cost reduction road map is more than adequate to allow us to compete over time very successfully, even with very, very low polycrystalline feedstock prices.

Thank you very much. And just as a follow-up, my understanding is that the Lieberose project was refinanced at extremely attractive refi rates. And by my map, this project is cash flow positive for you, just looking at the percentage funded and your costs. I'm assuming that you could generate very high returns on equity. You talk about pretty high return --

Your next question --

I didn't answer the question. Are you still there, Satva?

He has removed from the queue, sir.

Well, let me answer the question. I actually believe I understood his question. The underlying economics of the Lieberose project are quite compelling, especially since the financing essentially provided additional upside to the minimum 20% IRR that we described. Obviously, those 20% IRRs are billed based on our manufacturing costs. So the question really would be at what point would be the project clearing. We believe there are not economics in this project for it to be very attractive for certain equity investors that we would target together with our customer.

Next question, please?

Your next question comes from the line of Nick Allen with Morgan Stanley. Please proceed.

Hi. Thanks for taking my question. Can you talk about the break down for the quarter and your yearly guidance between module sales and then system sales?

I think so far we have not broken this down. I think what we said in the past I think was roughly that we expected about 10% of our volumes to essentially be placed in the US market. Some of that is obviously subject to the exact timing of some of the projects. I think Mike alluded to permitting times and so on are a critical aspect of project realization. We realize that, I think, our investor community is very eager to understand the differences in the business model between the module sales that we're having in the European feed-in tariffs, versus a more integrated model in the US. Essentially our analyst day in June, we'll essentially explain this in a lot of detail. So that's going to be our core focus there to lay out how we think about both aspects of our business.

As a quick follow-up then, is there a general volume that we could think about where that system business becomes operating break even?

So I mean, that would imply that it was losing money, which I don't think we've generally disclosed, that we were feeling or thinking about it this way. But I'd say generally we will give you an overview of the economics, which obviously would include the degrees of profitability that you could find in that business.

All right, great. Thank you.

Your next question comes from the line of Vishal Shah with Barclays Capital. Please proceed.

Yes, thanks for taken my question. Jens, two questions. First of all, what percentage of PR shipments in Q1 were the German market and facilitated the ground margin market in Germany? And were you able to attract new customers by lowering prices in Q1? And if so, what (inaudible) level of customers do you have as of today?

So I mean, I would say -- I mean, I'd say generally we remained in the first quarter very Euro-focused around our revenues. That's our, right, our core market still while the US is developing. I think I just laid it out for the year, Vishal, with respect to the percent of US business. We expect -- the volumes we signed up were primarily signed up with our existing customers, as Mike mentioned. Obviously, part of our sales and marketing efforts, right, is to broaden the customer base out further.

So were you able to successfully sign any additional customers in (inaudible)?

Well, we just said, I think the volumes we placed under these contracts were with our existing customers. As you know, our existing customers essentially represent the very large share of market, right, in the European markets.

Okay, great. Thank you very much.

Your next question comes from the line of Timothy Arcuri with Citi. Please proceed.

Hi, couple of things. First of all, Jens, can you tell us the megawatt shipment number and how many of those megawatts went into the systems business?

We actually -- you may recall -- I think Mike reported the megawatts produced. We do not generally report any longer the megawatt ship number due to sensitivity around pricing, but the production was 219.5 megawatt.

Okay, then I guess, secondly, if you kind of normalize for some of the balance of system costs, right now you have kind of a 60 to $0.70 advantage versus kind of branded crystalline. So I'm kind of wondering how you think longer term as to what the kind of cushion that you want to maintain for your pricing relative to branded crystal, and once you normalize for the balance of systems. So are you willing to come down to $0.25? Is that kind of where you want to keep the cushion? How do you kind of think about that?

I would say maybe Mike wants to chime in here. I mean, I don't think there's such a magic formula where you just lock those in. I think you gauge the end market, you gauge the sellthrough and essentially -- we like -- as you know, we're going to use our cost reduction road map. We're firm believers in passing these cost reductions to some degree through into the market for multiple reasons. Number one, it helps us to grow our business and to drive overall sellthrough. It strengthens the overall channel in our channel partners, and we're a firm believer in demonstrating, especially to the government that have enabled feed-in tariffs, that PV can scale, and there's a logical and plausible task towards (inaudible) for this industry.

Next question please.

Are we still on the call? Hello?

Operator? Hello, Operator?

I'm sorry, sir. We're still gathering the list now. One moment please.

So is there another call, please? Another question?

One moment, sir. I'm waiting for them to come into queue. Your next question comes from the line of Al Kaschalk with Wed Morgan. Please proceed.

Good afternoon. I just wanted to follow-up on the sold out position that you have in terms of production, and the next expansion project that we see from a capacity standpoint. And then the follow-up would be, could you comment a little bit further on the change in customer mix that you experienced in Q1?

Well, I would -- yes, Al, this is Mike Ahearn. I don't -- we didn't mean to imply that we were sold out in 2009. I mean, we are nearly sold out. I think our estimate is we have 90% of our volumes under contract at this point. So we're about where we want to be in terms of having some flexibility to seed some new relationships. The factory expansion -- we are thinking about that, I guess, the way we always have. When we can identify visible demand that will consume the output of incremental production over a time period that's sufficient to repay the investment, then we'll make an expansion decision to go ahead and commit the expansion.

One of the advantages we have in the US from these long project timelines is that we think we can commence and build a factory faster than we can get through the utility scale project timeline right now; which means we have the advantage of preserving some optionality here in terms of when and where we commit to factory expansion. So we're looking at a number of sites. We're talking to a lot of people around the world about factory expansion, and we're basically deferring a decision on that and allowing demand to continue to crystallize and kind of look at our timelines in terms of when we must commit to serve demand that's been secure. So we don't have anything new to report today, but obviously what we want to do is build more factories and expand, and we're eager to do it. So we're working to put all those pieces together. I think there was a question --

Yes, there was a question about customer mix. So obviously, I think as we mentioned, with respect to some of our revised pricing, the customers that committed to higher volumes benefit from different terms compared to customers that essentially maintain certain volumes. There's also a differentiation with respect to markets served between feed and tariff-based markets, and markets that have less incentive. So the US utility market would be one example, and just but also as an emerging market that are much closer towards grid clarity requirements.

Mike, on the follow-up on production, and specifically on policy for the US, are you -- can you give us a little update on tax incentives that the US government may be providing? Or how do you think about that? I realize there's probably nothing specific, but maybe you could just comment on that. Thank you.

Well, I think the big issue -- I know -- I think in general, at the Federal government level, there is a real interest in trying to stimulate more solar manufacturing and technology development in the US. I think that the key issue there is to create a market opportunity in the US that will consume incremental manufacturing production, because absent a strong US market, I believe that manufacturing will continue to go where the markets exist, and there are a number of other countries around the world that are working on market programs to try to stimulate manufacturing.

So the first thrust I think in the US, at least where we've urged, is you ought to get the policies and programs right to help stimulate a robust solar market, and you can't leave this all to the states, otherwise it's going to be fragmented and underfunded. It's just a fact of life. And so there's a number of things, I think, to be done there. There is, in the stimulus program, an enhanced tax incentive for manufacturing. And it's something that I think will be useful -- I don't believe it's been rolled out yet. I think they're working on the procedures and the logistics around it. That would be a useful sweetener, but I don't think it would substitute for creating a robust market in terms of really attracting manufacturing here, certainly from First Solar's perspective.

Your next question comes from the line of Colin Rusche with Bank Equity. Please proceed.

Thanks. Mike, can you talk a little bit more about the policy changes that you'd like to see. You mentioned a radical change. Can you just describe some of the -- what would you like to see? How long do you think it's going to take, and what sort of cooperative efforts across the industry do you see as necessary?

Yes, I mean, I think in the US, there are a few things that I think would need to happen to create a real solar market in the US. One is that the incentive from the Federal government, at least for large scale solar, needs to be higher than it is today. Because with natural gas prices being at cyclical lows, these states are not at a position to fill subsidy gap. It's -- I just don't believe that's going to happen in size. So I think the incentive or the subsidy has to be higher. Providing that subsidy through the tax code in the form of an investment tax credit is extremely inefficient. It doesn't allow for capital to form around project finance in any kind of a visible way or in a low cost way. It narrowly constricts the pool of available financier on these projects.

So I think once the -- once this grant program expires in 2011, we're kind of right back where we started. So that's a problem. The transmission constraint need to be addressed in terms of renewable transmission. There are opportunities to do smaller volumes at Solar around existing grids; but to get serious about this and really move at multi-gigawatt levels, there will need to be multi-state transmission that is basically moving power out of the areas where it's cheapest to make it, which is in the southwest and around the southwest and out of it. So you have the transmission issue to be dealt with. And I think basically facilitating some kind of low cost project financing to put solar projects on parity with conventional power projects is going to be needed as well, at least for a while. And we don't think think -- I don't think -- that the loan guarantee program as presently structured is going to be particularly useful because it's a subjective program. It's not available to the market in general.

The rules and the criteria aren't even developed, let alone published; and so when companies like us start thinking about how do you put project finance in place to facilitate a large project, due late 2010 or beyond, we can't rely on that program. There's no visibility around it, no assurance we'd even about entitled to participate. So I think there are a number of things here. I do think at the Federal level, people are asking questions and trying to figure it out, and I hope we can have some dialogue and get to the real issues. I think we speak for a number of companies on these points and would like to develop -- deploy big volumes here. We just need a few of these pieces to be in place.

Your next question comes from the line of Chris Blansett with JPMorgan. Please proceed.

Hi, guys. Thanks for taking my call. Question is kind of for Jens here related to the beneficial FX hedging you've had. How do you expect this to rolloff to the year, Jens, just to clarify?

Like I said, I mean, if you look right now how these hedges taper off, I think they're tapering towards the 130, 131 level. You may recall that the Euro essentially traded up in the second half of last year from a high of about $1.61down into the $1.20s. So you see, I think, comparing us favoring up now from the 1.40 to 1.30 level, that we essentially were quite successful in taking volatility out of the Euro with respect to our revenue recognition.

Operator, we'll take two more questions, please.

Your next question comes from the line of Jesse Pichel with Piper Jaffray. Please proceed.

Congratulations on the strong results. Of the 479 million of new volumes won in Q1, how much of that was a new win versus getting higher volumes in exchange for lower prices to your contract customers? And a follow-up to that would be, could you talk a little about glass, which I think is your largest cost? Some of the glass manufacturers indicated excess capacity, lowering prices. And what type of TCO glass cost reductions are you looking at over the next year or two? Thanks.

I'll give you the break down, Jesse, on these contracts real quick. So out of the 479 megawatts, you had 361 megawatts sold into existing customers in Europe; and then 23 megawatts is sold under contract into Ontario, Canada. So that's a new market situation for us. And then 95 megawatts in the US, that's new. Two projects, one with Sempra that will be installed in Copper Mountain, Nevada and the other with Tri-State in New Mexico. And then on the glass, maybe Bruce can --

Jesse ,this is Bruce. On the glass front, so we deal with a number of suppliers for glass, and we've had a long-term strategy that our our global supply chain team works on to drive down the costs overall. Certainly that has been a key component to our cost reduction road map, and is really required for us to address our bill of materials going forward for the next two to three years to get down to those $0.65 per watt range. This has been an ongoing project we had. Certainly the slow-up in the construction business and so forth has facilitated our access to glass; but of course, we've been growing into that market over the last couple of years.

One last question, operator.

Your next question comes from the line of Mark Bachman with Pacific Crest. Please proceed.

Yes, gentlemen, congratulations here on the solid execution, and also the inclusion of the slide deck here; and your thoughtful comments, I think, are extremely helpful to your clients or you investors. Jens, on page 25, you highlight the 53 megawatt project here. And I know that you had set aside roughly 100 megawatts for the modules for First Solar-owned projects; but today you've only identified this 53. So I have a two-part question. What is your appetite, then, for initiating projects for the remaining 47 so-called megawatts? And then, two, how do we think about the revenue deferral for Q2?

Okay, I think two questions. So again, as you see, our guidance remains unchanged (inaudible), right? So we're keeping a space aura that allows us to do that, I think. Slide 25 lays a little bit out why we're doing this, right? So we're not doing this to be an independent power producer, right? We're doing this to mitigate risk around financing, and drive sellthrough, right, with the goal ultimately to sell these projects. And so where I think -- where we identified projects, these projects should be of a certain size. You shouldn't think of doing this like for a one megawatt project -- that wouldn't make sense -- but for larger projects. I think we remain, I think, open to that and reserve some optionality within the guidance to do this where we believe it makes sense. With respect to the revenue recognition on this project, it's very specific to each project, Mark, with respect to how they're structured and financed. And so I think we'll give updates to this as we move through the quarter. Primarily, it deals with closing financing and also with respect to final equity ownership, are probably usually the triggers you want to look for.

Okay. Thank you, all, for joining us today on our first quarter conference call.

Thank you for your participation. This concludes the presentation today. You may all disconnect. Have a great day.