第一太陽能 (FSLR) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the First Solar second-quarter 2009 earnings conference call.

The call is being webcast live on the Investors section of First Solar's website at www.FirstSolar.com. At this time, all participants are in a listen-only mode. As a reminder, today's call is being recorded.

I'd now like to turn the call over to Mr. Larry Polizzotto, Vice President of Investor Relations for First Solar. Mr. Larry Polizzotto, you may begin.

Thank you, Tricia. Good afternoon, everyone, and thank you for joining us for First Solar's fiscal second-quarter 2009 conference call.

Today after the market closed, the Company issued a press release announcing its second-quarter 2009 financial results. If you did not receive a copy of the press release, you can obtain one from the Investors section of First Solar's website at firstsolar.com. In addition, First Solar has posted the second-quarter presentation for this call, key quarterly statistics and historical data and financial operating performance on our website -- on the IR website.

We will be discussing the second-quarter presentation during this call and webcast. An audio replay of the conference call will also be available approximately two hours after the conclusion of this call. The audio replay will remain available until Tuesday, August 4, 2009 at 11:59 PM Eastern daylight Time, and can be accessed by dialing 888-203-1112 if you are calling from the United States or 719-457-0820 if you are calling from outside the United States, and then by entering conference ID 6443641. A replay of the webcast will be available approximately two hours after the conclusion of this call and remain available for 90 calendar days. Investors may access the webcast on the Investors section of the Company's website at FirstSolar.com. If you are a subscriber of FactSet or Thomson One, you can obtain a written transcript within two hours.

With me today are Mike Ahern, Chief Executive Officer; Jens Meyerhoff, Chief Financial Officer; and Bruce Sohn, President of First Solar. Mike will begin with an overview of the Company's second-quarter achievements, followed by a market and business update. Jens will then provide you with the second-quarter 2009 operational and financial results, and provide an update to our 2009 guidance. We will then open up the call for your questions.

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. The Company has allocated approximately one hour for today's call.

I want to remind you that all financial numbers reported and discussed on today's call are based on US Generally Accepted Accounting Principles.

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 laws. The forward-looking statements in this call are based on current information and expectations and are subject to uncertainties and challenges -- 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, form 10-K, and other filings with the Securities and Exchange Commission. First Solar assumes no obligation to update any forward-looking information contained in this call, or with respect to announcements that we describe herein.

Before I turn the call over to Mike Ahern, I would like to mention that, during the third calendar quarter of 2009, the Company will be attending the following conferences -- Pacific Crest Technology Conference in Vail, Colorado on August 11; Cowen's Clean Energy Conference in New York City on September 10; Citigroup's Alternative Energy Conference in New York City on September 15; and finally, ThinkEquity's Growth Conference in San Francisco on September 17.

It's now my pleasure to introduce Mike Ahern, CEO of First Solar. Mike?

Thank you, Larry, and thank you for joining our Q2 2009 earnings call.

We had another strong quarter in Q2. Revenues were $525.9 million. That drove that income of $180.6 million, in turn driving diluted earnings per share of $2.11.

Operationally, production was 290 MW; that is up 32% quarter-over-quarter. Malaysia Plants 1 and 2 operated at full production for the full quarter, and plants 3 and 4, by the end of the quarter, were operating at full production as well.

Efficiency was 10.9% on average. That's up slightly over the prior quarter.

Our annualized capacity per line increased to 51.7 MW. That is up 5% quarter over quarter, driven by the small efficiency increase I mentioned and also improvements in our line throughput.

Our manufacturing costs came in at $0.87 per watt for the quarter. That is down 6.5% quarter-over-quarter, driven primarily by the Malaysian ramp and also building material cost reductions.

In terms of the market, we previously announced a new manufacturing facility with EDF EN to develop the French market, and I'll talk some more about that here in a few minutes. And then our pipeline execution in California has continued on plan.

So let me turn from that now to the market update. I will just start by making some general comments.

If you think back to the end of 2008/early '09, we saw the market constraints really in the project finance side where things pretty much came to a standstill. I'm sure everybody remembers that pretty well. That, combined with seasonality, essentially dried up throughput and allowed for very limited visibility.

Across Q2, we see the liquidity constraint migrating to some extent into the customer base, and so by that I mean, on one hand, you have extended cash realization cycles because debt financing on projects, to the extent it's available, is approved and extended on a much longer cycle time. You still have some delayed installation rates in Q2. As inventories build, balance sheets obviously are weaker and working capital becomes constrained because existing lines are drawn but also difficulty in expanding lines to accommodate higher volumes. So that's a snapshot of what we see generally in system integrators and project developers across Europe over Q2.

In terms of project finance, the -- call it a volatile pricing environment -- let's say reductions in pricing on the crystalline silicon side has impacted project equity to some extent, because we are seeing evidence that some project equity investors are deferring decisions to wait and see how these price reductions continue to play out.

Project finance on the debt side outside of Germany is still somewhat constrained. There is some evidence of thawing in some markets like Italy, but in general we don't have a lot of robust visibility into debt financing outside of Germany. Then in the US, utilities generally continue to be in a capital preservation mode.

Thinking about the second half of '09, as some project finance conditions start to alleviate and whether we will see a big surge in installations and sales that will counter to some extent the soft conditions of the first half, there's some reason to think that could happen. There are also some issues, though, that could represent constraints. One is installation capacity, just the ability, as we start to work into the second half, for the value chain to organize and surge to a capacity that actually demonstrates the kind of recovery you might expect. I think that could be a challenge.

Working capital and construction financing to finance a higher level of activity could well continue to be a challenge. We are also seeing some continuation in the long lead times with respect to debt financing, credit underwriting, and the processing of those applications.

So there are some generalized concerns here. I mean, if we compare where we sit today to where we were last quarter or the quarter before, we would say generally it is more favorable. On the other hand, we expect to drive a lot of higher volumes during the second half; that will be a test.

So, turning from the general maybe to more specifics, we want to talk about Germany, France, California and Ontario. These are all areas where we were active in the second quarter and expect to be active the second half of this year.

I will start with Germany, because we have made some decisions about -- specifically about pricing in Germany that we want to talk about. So I want to set the stage here by talking -- just recapping what our market approach has been in Germany; what we saw in that market in terms of the environment and the changes across the second quarter; what our objectives are for the balance of the year as we think about the German market; and then specifically what injections we're making to try to drive the desired results.

So I will just start then with the market approach. This maybe would be a refresher for some. But we entered Germany with a very specific focus on large free-field markets and commercial rooftop applications -- to the larger rooftop type structures versus residential or small commercial. That continues to be our focus. We consider those core markets for First Solar.

As we thought about Germany, we took a number of measurements of projected demand and matched supply to demand in these core markets. But we've never intentionally put ourselves in a position where we sold volumes into the market that we didn't think had a home in the core markets and would be scattered about. This has always been a pretty careful process.

As we thought about building factory and capacity, we have always tried to match production capacity to anticipated demand. As you know, we have taken steps to go a little bit beyond that by locking up a good percentage of that with some of the long-term contracts. So, we've not been a speculative builder of capacity.

We've priced under those framework agreements to drive sell-through economics, to allow systems to get built and financed at rates that would compensate the value chain at reasonable levels. That has pretty much been the rationale up until today. We will continue to be subject to some things we will talk about.

So then, across Q2, what we observed is summarized on the next slide -- of course the crystalline silicon module oversupply as feedstock became more available, and then some aggressive pricing behavior on the part of some manufacturers in order to drive sales into the German market. We saw some price reductions in Q4 and Q1, but in Q2, it obviously became more pronounced.

As we look at not only our customer base but integrators and project developers generally across Q2, installations remained slow, slower than normal, resulting in a buildup of inventory through the channel. So the question we have been studying pretty deeply is what drove -- what constrained the installation? What drove the lower installation rates?

There are several factors. One was certainly project and channel competition with the aggressive crystalline silicon pricing coming into the market. There is no question that had some impact.

The deferred project equity investment that I alluded to earlier where people began to sit on the sidelines and wait to see how the price reductions played out is another factor.

Ongoing project debt constraints, or at least delays, continue to play a factor. Construction financing has become tight and least caused some projects to be deferred or slowed. So all of these things come into play at various levels.

It's very difficult to assign specific causes or to attribute them across the board. It is pretty clear to us that price is not a constraint in all cases, so we have to do some parsing of these various factors.

The other thing that's unclear is the duration of these conditions really across the board, including the aggressive pricing. It's not clear to us, for example, that these things will continue, pricing will continue on a downward trajectory or even at a current plateau. So, we basically have an uncertain picture that emerged across Q2 that we mapped against our 2009 objectives for the market.

So what we intend to accomplish in '09 is to enable the planned level of installation volumes to occur in Germany and our core markets. We are willing to reduce price -- and I will talk about how we do that in a minute -- in situations where price rather than these other factors is the constraint to installations. We are willing to reduce price for so long as but not beyond the period that it is necessary in light of market conditions. So what we are trying to think about how is how you take a rifle shot at addressing issues to drive high throughput in the market.

So the injections, if you will -- on the next slide -- what we're going to do is initiate a rebate program that is focused exclusively on our core markets in Germany, on the free field and commercial rooftop markets. So essentially, as modules are installed in these core markets, a rebate will be made available that effectively improves the module economics.

The way we calculate it, in general, we make a determination on what we consider the best in class crystalline silicon module benchmark price for the quarter or for the period. We apply a discount to that benchmark price that, in our view, makes our offering at the system-level attractive. That rebate is earned when the project is installed, so the project financing has to be in place and completed. Then we review the situation periodically to determine whether we need to steepen the rebate level, reduce it, or eliminate it altogether.

We are keeping our framework agreements in place. We are not altering anything else. This is a pretty specific injection.

The timing, the duration of this, is flexible. We are going to try to ride this through and continue to look at it as situations develop.

The net effect of this -- I mean, we had to take some assumptions about the overall impact on it. The net guidance, or the guidance in total for 2009 remains unchanged, and Jens will discuss that further with you.

So just to summarize this, a combination of silicon price reductions and financing constraints has slowed the pace of the module installations. We expect some recovery in the second half. There are some potential constraints I alluded to earlier that could come into play.

The rebate program is intended to deal with price constraints. We will discount as necessary to defend our position here in these core markets. But the conditions could be temporary, and we just don't know either way. So we would run the scope and the duration and it retains a lot of flexibility to react evolving market conditions.

That's Germany.

France I can cover pretty quickly. You know, France we think is a very attractive solar market. There's a high demand potential for solar because of the fact that there's a lot of electricity load in France; there is good irradiation. We see a lot of good sites, both ground-mounted and rooftop, for PB deployment. The resource mix in France suggests that solar can play a large part of their overall mix in meeting their aggressive renewable energy goals.

So you combine that with strong political leadership in France. There's been a very inclusive stakeholder process that dates back to 2007, driven by President Sarkozy and the current administration that has resulted in a fairly deep and broad commitment to renewables and specifically solar. There is a 5.4 GW target in place currently with room, we think, over time for improvement. They've expressed specifically a goal to develop into a globally leading solar market. They made also explicit commitments to 23% renewable energy levels that will drive some underlying momentum here.

We also like the fact that a feeding tariff program is in place that is structured in a way that will drive, we think, a cost-effective and rapid uptake in the market.

That was a lot behind the transaction we announced with EDF EN. I think everybody is generally familiar with it. We can answer questions here in a few minutes if there are some ongoing issues.

The rationale? It positions us for a larger share of this market as it evolves over time. It solidifies our position with EDF EN who we regard as a key customer. The local investment job creation we think can actually reinforce the market and help, from a policy point of view, things move along. The economics meet our threshold. Again, we are matching -- this is incremental demand and we are matching demand to capacity, which is something we have always tried to be careful to do.

In terms of California and the Southwest, nothing specific to report. This slide summarizes what we've announced to date in terms of PPAs. We've got a lot of things we're working on now. They are moving along to our expectations. We just generally don't talk about them until they are signed.

We feel pretty good about our position right now in California, but there is a lot of work to do. We are not taking anything for granted either. I think it's moving more or less (inaudible - background noise)

Ontario -- Ontario has had something in place called the RESOP program that awards in some ways like a feed-in tariff. There is now formally a feed-in tariff program that replaces it. The big issue from a practical point of view is a price of about CAD0.02 per kilowatt hour.

We assumed a 220 MW AC project pipeline as part of the Opti transaction. We are now beginning, or have begun, I should say, construction on a 20 MW AC portion of that pipeline in Sarnia. The intent here is to build this and sell it to an investor. We expect to have the sale completed by the end of the year, something we are still working on. Construction is underway.

So, to summarize, we saw continued strong operational execution across the Company for Q2. We've taken the steps I described to address a dynamic market situation in Germany. We think it will be successful but it is subject to the uncertainties, environmentally, that I mentioned.

Our market position in France we think has been significantly strengthened. We are continuing to build project pipelines in California, along the lines of our expectation. We started project construction in Ontario.

With that, I turn it over to Jens Meyerhoff who will take you through the Q2 financial results and (technical difficulty)

Thank you, Mike, and good afternoon.

Moving to the next slide, net sales for the second quarter were $525.9 million, an increase of 26% over the first quarter of 2009. The increase was driven by greater volumes, as Malaysia substantially completed its production ramp, line throughput improved, and by recognition of $26.6 million of deferred Q1 revenues related to the Lieberose project discussed on our Q1 earnings call. These factors were partially offset by the previously announced Q1 price reduction. The blended euro exchange rate was $1.39, flat quarter-over-quarter.

Let me provide you with some additional comments on the Lieberose project. Revenue recognition was triggered by the closing of the project's third-party debt financing in the second quarter. First solar [only holding] subordinated debt in the capital structure as of today, and the expiration of any rights to the project equity. year-to-date, we have recognized $84 million of revenues, representing approximately 80% of the total project revenue. The project is currently being marketed by our customer (inaudible).

We produced 290 MW during the second quarter, as seen on the following slide, resulting in an annual run rate of 51.7 MW, up 5% over the first quarter as line throughput improved and Malaysia plants one, two, three and four were at full production by the end of the second quarter. This brings our existing total capacity to 1.2 GW per year.

On the next slide, you see our cost per watt. Cost per watt produced for the second quarter was $0.87, down $0.6 or 6.5% sequentially as we continue to realize the benefits from increased production in low-cost locations, higher line throughput and lower material costs. Cost per watt produced is expected to decline at a more moderate pace in the second half of 2009 as the ramp of our Malaysia factories is substantially completed. However, we expect continued throughput, efficiency and material cost improvements, partially offset by ramp costs associated with the Perrysburg expansion, in line with her long-term cost-reduction roadmap.

On the next slide, you see the gross margin for the second quarter was 56.7%, up 0.4 percentage points over the prior quarter, mostly due to the lower manufacturing costs, which were partially offset by the lower ASPs.

Our operating expenses rose by $26.9 million sequentially and were impacted by $9.1 million of one-time items, predominantly driven by reserves taken against the outstanding accounts receivable balance of one of our customers. The remaining increase of $17.8 million is attributable to $6.9 million of R&D expenses, driven by the continued execution of our technology roadmap and $14.6 million of SG&A expenses due to higher personnel-related costs and the integration of the OptiSolar business. Operating expenses were favorably impacted by a decline in plant startup costs of $3.7 million as all plants in Malaysia were in production and we began to incur plant startup costs for our Perrysburg expansion.

On the following slide, you see it income for the second quarter was $204 million, or 38.8% of net sales, compared to $168.1 million or 40.2% during the prior quarter, and included $17.7 million of stock-based compensation costs.

Net income for the first quarter was $180.6 million or $2.11 per share on a fully diluted basis. Earnings per share were $2.11, compared to $1.99, which benefited from nonoperating income and expenses of approximately $0.13 per share when compared to the second quarter of 2009. This was primarily driven by the one-time tax benefit of $11.5 million recorded in the first quarter, partially offset by a one-time tax benefit booked in the second quarter. The effective tax rate for the second quarter was 10.3%.

Accounts Receivable increased by $166 million over the first quarter, primarily due to the full-quarter impact of our revised payment terms discussed on our last call. Increased shipment volumes and, to a lesser extent, was the linearity in a second-quarter shipments.

Current inventory rose by $31 million sequentially due to a $34 million increase of finished goods, increasing days of inventory from 9 to 15 days. The finished goods build was driven by the announced restructuring and subsequent sale of one of our customers and by the requirement of our utility scale project in North America for the second half of 2009.

Free cash flow was negative by $37 million in the second quarter, primarily due to the increase in working capital just described and by scheduled tax payments in Germany. We spent $59.6 million for capital equipment during the second quarter against depreciation of $28.5 million.

Cash and all other marketable securities decreased by $35 million quarter-over-quarter to $777 million in the second quarter, principally due to the revised payment terms. This includes $49 million of restricted cash to pay off the IKB debt for our Frankfurt/Oder manufacturing facility after the second quarter close. Our debt to equity ratio remains low at 10%.

Rolling fourth-quarter return on assets was 29.4%, up from 27.4% in the prior quarter. We substantially completed the OptiSolar purchase consideration during the second quarter. The total purchase price consideration is $400.8 million. Project assets were stepped up by $104 million, based on the present value of the future project cash flows. Please note that these cash flows are market participant-based, meaning that the assumed module cost is based on the module market price and not based on First Solar's module production cost. The expected cash flows and margins generated by the module throughput of these projects is accounted for as goodwill after the purchase price consideration.

This brings me to our guidance for 2009, which remains unchanged. We have made several key assumptions underlying our guidance. First, for the remainder of 2009, 60% of our expected net sales are hedged at an average rate of EUR1.33 -- US cents. In addition, our natural hedge brings the net income hedge ratio to 72% for 2009. Since we layer our hedges, net income for Q3 of 2009 is hedged at 80% compared to 63% for the fourth quarter of 2009.

We assume an average exchange rate of $1.15 per euro for the unhedged portion of our 2009 guidance, bringing the average euro exchange rate to $1.26. For the remainder of 2009, the EUR0.01 fluctuation impacts our revenue approximately $3 million and our operating income by approximately $2 million.

We expect our gross margins to decline from Q2 levels in the second half of 2009 as a result of the rebate program discussed by Mike, higher North American systems revenue mix, and the lower foreign exchange rate assumptions when compared to the first half of 2009.

Now, to the specific parameters of our guidance, we are maintaining our previous net sales guidance range of $1.9 billion to $2 billion. We expect plant startup costs of $10 million. Stock-based compensation is estimated at $75 million to $80 million with approximately 20% to 25% allocated to cost of goods sold. GAAP operating margin is expected between 31% and 33%. We expect our 2009 tax rate to be between 9% and 11%. Year end 2009 fully diluted share count guidance is an estimated 86 million to 87 million shares. CapEx for the year is expected to be $270 million to $300 million, for investment of the completion of the Malaysia plants 3 and 4 and Perrysburg expansion and other infrastructure-related investments.

On a personal note, due to a back injury, my ability to travel during the third quarter will be limited, which could impact my participation in certain conferences and industry events. So please don't interpret my absence at some of these events as anything but that.

With that, I think we can open the call for questions. Operator?

Thank you, gentlemen. (Operator Instructions). Steve Milunovich, Merrill Lynch.

Jens, could you talk a bit more about the receivable situation? You've gone from obviously very low receivable days to something much higher but pretty normal for most companies. Does this reflect the extended cash realization cycle that Mike alluded to? Could you maybe talk a bit more about the write-off you took. What do you see in the second half with the economy perhaps bottoming? Do you think your receivable days go up much from here? What are your expectations?

So (inaudible) I would say number one is the balance obviously we presented to you is a Q2 balance. We collected subsequently over $100 million against that balance, just to give you an indication of the continued cash flows.

The core driver obviously for the AR balances I related to in my discussions is the change of our payment terms from 10 to 45 days, so that now is fully reflected in our AR balance. So we would not necessarily foresee any significant further increase other than continued growth in revenue to drive the AR balance up.

As it relates to the specific AR reserve we booked, we booked the reserve based on our judgment that a collectibility of that amount is unlikely at this point in time. Obviously, we do not discuss to which customer that relates specifically where we felt it was prudent to take that provision based on the data presented to us.

So I think the cash realization cycle that Mike talked about generally, I think do put an overall liquidity constraint into the overall market system and channel. I think, at the same point in time, I think Mike alluded to that generally the banking system and the lending environment is gradually improving, and that's not only true for Germany but also we started to see first evidence of more projects financed for example in other parts of Europe was extended ten years, and also some first signs even of the US market gradually improving.

So I think, generally, I think, as the overall liquidity situation, the market will be a function of continued improvement of the lending situation, and the ability of the channel to turn inventory and drive installations. I think Mike gave a good overview with respect to how we are trying to support and aid those cash realization cycles.

Satya Kumar, Credit Suisse.

A question on the pricing -- it seems like better margin guidance, operating margin guidance we have in the second half was about 45%. It seems like you are keeping an option to lower the prices to somewhere between EUR115 to EUR130, depending on the exchange rate. At least at the low end, that should be very competitive with silicon. Is that the right way to think about it?

How do you define or determine what is the best-in-class crystalline silicon module pricing? Thanks.

Okay, so I mean obviously we have our own data at hand. We spend obviously a lot of time with respect to talking to our customers, understand the situation and the channel. Based on these parameters, we try to effectively triangulate. We are participating in some of the project realization more closely. I think the [trauma] project is a good example where we have quite a degree of transparency of the overall economics.

All of these factors drive essentially into the rebate program that Mike described and allow us I think to set the pricing levels that we believe drive sell-through and drive competitive position for our customers.

Timothy Arcuri, Citi.

Two things -- first of all, if you kind of look at the guidance for the back half of the year, it's obviously building at a fairly significant compression in your margins. I'm wondering. Is there any reason to believe why that sort of margin level would not kind of be superimposed into 2010, i.e., if the market conditions don't improve and if pricing doesn't get better, since you are not really expanding capacity much, would you really be able to cut your costs meaningfully such that margin would go back up entering 2010?

Then also, Jens, I wanted to see how -- you know, you've previously said that, if you offer one customer a pricing discount, that it's very tough to not offer everybody that discount. So I'm wondering how you plan on keeping that discounting program localized within Germany.

So I mean, I would say, so first of all, I think, as Mike alluded, there is not enough transparency right now in the market I think to project any kind of current pricing levels beyond multiple quarters, particularly probably not in 2010. So, I think we probably need to essentially assess this on a quarter-by-quarter basis. That's probably the main reason why we start to move over towards the rebate program.

If we felt that pricing levels would be depressed on a long-term basis, then that could possibly result in just adjusting contract prices period. So now does that essentially mean that margins as a result of the 2009 (inaudible) margin guidance essentially flows straight into 2010? Now, that is completely a function, A, of our ability to lower costs. B, what pricing levels will we find? What is the mix with respect to market segments that we are operating in? How much systems business will we be driving, and how will foreign-exchange rate behave? So as we all know, those are essentially the key parameters.

I think it will be probably a little bit premature just to assume your capacity expansions are at a lesser pace in 2010, therefore your costs-reduction roadmap stalls. That's certainly not how we are thinking about it.

With respect to the rebate program, every customer is eligible for the rebate program provided they are selling the modules into the German market and driving modular installation in the German market. So that may be more applicable to some than others.

Stephen O'Rourke, Deutsche Bank.

Thank you. Good afternoon, and my apologies for kind of beating a dead horse here, though. When you think about crystalline silicon module prices and what you've seen, how they've changed, how they continue to change, do you have a benchmark now that you can use to drive sellthrough?

I think we have established a benchmark. I think how we are thinking about the rebate in the near term, the rebate is structured in a way that it gets revisited on a quarterly basis. But we have established a benchmark, so now how scientific and how exactly precise that benchmark is, Steve, I think we will get feedback out of the market against this. But we believe it will be very competitive.

Vishal Shah, Barclays Capital.

Mike, can you talk about what your expectations are for the size of the German market this year and in some of the other markets out there? You know, where do you think growth is going to come from in the second half?

Yes, I think it's a tough -- I think the visibility there is kind of limited for us. What we're focusing on is our core markets, so like if you think about the free field and at the German rooftop in Germany, basically our expectations are that we will fill our plant volumes. We just kind of wrapped our heads around what are those issues and where do we impact them, how do we execute this rebate program?

I mean, broader than that? I don't know. 2 GW has been kind of the thinking range for some time now, plus or minus. If the market recovers in the second half like it could, that doesn't seem out of line at all. I just think there's a lot of variables out there, obviously.

So this other part of your question was what? Beyond Germany? Some of the other markets? I can't remember the rest of that, Vishal.

What are your expectations for shipments to the systems business in the second half? Are you still looking at 5% to 10% of your volumes going to the (multiple speakers)?

Yes, that hasn't really changed, Vishal. It's about in that range.

Rob Stone, Cowen & Co.

I had a related question on systems, which is how much did that contribute to the second-quarter revenue? Was there something besides the Lieberose deferred revenue?

No, there were really no -- nothing of material mention here with respect to systems revenues in the second quarter.

Mark Bachman, Pacific Crest Securities.

Nice results here today. Jens and Mike, talk to us more about this rebate program and I think in a little bit in more detail. It seems like, when we talk to your customers, they are openly talking about wanting price reductions, and clearly you are willing to deal here. But it sounds like that your rebate program, at least from the comments I got, is only payable when the modules were installed.

So two parts here. One, did I interpret your comments correctly, that the rebate is only applicable here if the modules are installed? Then two, Jens, you are really meticulous with your calculations. Can you help us here frame the magnitude of the gross margin decline in the second half of the year?

Well, number one is I think that you heard right -- installation, proof of installations through our end-of-life registration process is a prerequisite to drive rebate eligibility. Obviously, one thought process behind this is that we like to have utmost transparency with respect to not only our inventory situation but the inventory situation in the channel. We want to see that those rebates effectively drive sellthrough, right. So this is not about just what happens between First Solar and its customer. It also is does it help to sellthrough for our customer? Does it drive inventory turns, right? So far though we maintain overall, we would consider a healthy, healthy channel inventory level and don't overbuild channel inventories as we move through the year.

So now I think you're going to see I think disclosure in our 10-Q that roughly quantifies an estimated $40 million to $60 million impact out of this rebate program, so that's roughly a current assessment you'll see in that disclosure

Stephen Chin, UBS.

Thanks. Jens, how should we think about the ending of this rebate program? It sounds like the only way to prevent new pricing from these rebates from becoming permanent is to assume that crystalline panel prices will actually increase then. A modeling question -- how should we think about modeling gross margin in the second half of the year? Should we model the third quarter as having the bigger impact, or should it be the fourth quarter?

I mean, I would say I mean essentially you've probably got to carry -- again it's completely a function, right, of how pricing of polycrystalline modules developed is very much a function. So if we assume (inaudible) that pricing remains on a declining slope and those prices, right, will be driven forward into perpetuity, yes, then I think over time there could be a likelihood where those rebate prices will become ultimately permanent prices.

Right now, the program in itself has a limit to itself with respect to overall time duration, but at the same point, the end goal here, right, is to drive throughput, sellthrough, installation, provide project economics and provide competitiveness of our customers.

I think every analyst apparently I think has this quite detailed model on crystalline silicon prices. I think most of the parameters out there would help you to model, I think, these types of price declines for the respective quarters, based on your assumption of what is happening to polycrystalline product.

Jesse Pichel, Piper Jaffray.

Congratulations on the strong results. For the purposes of determining the magnitude of the rebate, can you give us an idea for Q2 of the percentage of revenues for ground versus roof, and the percentages to sales in the various markets around the world, in particular Germany? Thank you.

Generally, I think the mix on our rooftop versus free field has been anywhere from 40/60 -- 40 rooftop, 60 free field -- to 50/50 in this ballpark. Recently I think we see more, especially right now with the Lieberose project, leaning more towards the higher free field -- free field content.

I mean, I think, if you look at the geographical breakout -- and we talked about 5% or 10% of our sales going into the North American systems business. I think, with respect to Europe versus the rest of the world, I think we are probably somewhere in the -- in the like -- for Germany in the like 60%, 60% to 70% range of our volumes.

Chris Blansett, JP Morgan.

Two questions (inaudible) simple question here.

There's a lot of expectations this year that we are going to get quite a lot of installation in Germany. I wasn't sure what your thoughts are more recently on the political environment and what your thoughts are for subsidies there next year, since Germany will be the primary factor for pricing.

Yes, I think the German government has been committed to the EEG and to the continuation of the (inaudible) program, so we don't assume any change in that, regardless of the outcome on the elections. The anticipated -- or the range of insulation volumes in Germany this year don't seem to us out of the range of political expectations where issues would be created. So we are assuming, at least at this point, that program continues to operate on a multiyear basis and Germany will continue to be a very important and strong market.

Kelly Dougherty, Macquarie.

Thanks. I just want to switch gears here. Should we assume that the mini-factory concept that you recently announced in France is something that we could see more of? I mean, have you been able to (inaudible) copy smart so that you can have attractive economics at about 100 MW?

Well, I wouldn't read that much -- I wouldn't read so far into it.

I think what you could assume is that we are interested in building more capacity to meet incremental growth in demand. There are markets we're investing -- it could be a factory or it could be at some other level -- can serve as a catalyst to the formation and the implementation of these markets' programs. It is particularly where we think the long-term fundamental nature of the market is attractive. We would try to do what we can, subject to our own operating model and financial constraints, to catalyze the market.

So in France, it worked out that that was the injection. We've gotten very comfortable with the two line factories as an initial step there, and the economics worked to our standard. So we will just have to see going forward. I think we are pretty flexible as we look at these issues.

Gordon Johnson, Hapoalim Securities.

Thanks for taking my questions. The first question is how are you guys going to execute on the OptiSolar deal with so little cash left? Are you guys looking to raise money?

Then looking at I guess this rebate program and what people expect with respect to some of the I guess Asian module prices, the expectation is that they could move an additional 30% lower by the end of this year from today's prices. How can you be confident in the guidance, given that rebate program is open-ended? Thank you.

Well, let me just say guidance is just that; it's guidance. I mean, it is our best view as we sit today.

Our intent is to defend our position in these core markets and we will do what we have to do to drive throughput at the plant level. So, we are the cost leader in the industry by a wide margin, and we're going to do what we have to do.

Conversely, we are trying not to overreact here. So, I think we are at the right balance to do what we need to do in Germany.

I don't quite understand the question on Opti. I mean, we are sitting on a net cash position that is very strong at this point. The projects, as they are built, are not going to be on our balance sheet. That has never been the intent. Those are financed through an increasingly improving project finance market that has still been riddled with short-term issues and uncertainties. So, it is right that we have to go work the project finance aspects of this, but other than that, I think we are where we expected and wanted to be with respect to Opti.

Yes, I mean I would say, if you look at the current pipeline that's in front of us that drives near-term execution and capital requirement, we (inaudible) in the market with respect to marketing the projects to investors. Some of these investors are investors that straight-out buy and will finance off their balance sheet. For other projects, we have been talking to more the traditional tax equity financial investors segment. At this point in time, I think we see good traction and we see a healthy amount of activity in the financing of the projects as they are outlined in front of us.

Daniel Ries, Collins Stewart.

Looking at the CapEx Year-to-date of something like $145 million, you would have a -- to reach the guidance, you would have to E125 million to $175 million more to go. If Perrysburg is only a one-line facility, do you have ongoing CapEx for Malaysia 3 and 4, or are those complete? Are there other projects out there that require CapEx?

No, I don't think -- I mean even for Malaysia, not all CapEx has yet gone out in the numbers. Then we've got the Perrysburg expansion, which can expand slightly further than I would say just the one production line is that infrastructure investment that happening there, too.

There is R&D-related investment. There is IT-related investments as well that make up the total sum, Dan.

Colin Rusch, ThinkEquity.

Mike, I want to follow up on your questions about the investor day and today, about buyers being able [ or a bit slow] to pull the trigger. Can you talk in a little bit more detail about what concerns are besides pricing and return? Is there any risk to moving volumes in the second half?

Yes. I mean, I think it is fair to say that project equity investors in some of these European markets have been delaying commitments to see if the price reductions that were exhibited in Q2 are a trend and whether they can enter at more attractive IRR points. I don't think there is a -- I think that's true in isolated cases. I think there are other cases where equity investors have and will invest early. But I just think, anytime you have turmoil and uncertainty, it's going to cause people to defer decisions.

I think, on the credit side, I think you just have a slower, more deliberate, careful process in terms of underwriting and processing (inaudible) of these loans. Those are mainly the factors that slow throughput.

I think price, you know, where does price become an issue for us or a constraint? Our customers could lose projects, new projects or suffer reduced channel sales into the rooftop market because crystalline silicon pricing is available at more attractive rates at the system level. So that's another factor.

It's just difficult -- it's very difficult to separate all of those out and start assigning volumes or percentages to them. But that's in general the mix.

Yes, and I think there's a natural balance here with respect to you can't wade out in the feed and [tariff-based] market so long because the feed and tariff itself, right, will readjust, which is resetting the economics. So, there is, to some degree, I think we are reaching this point now where the project realization was us waiting out a better price, it starts to become I think a little bit of a conflict.

I think, with respect to the risk of moving volumes in the second half, I would say, yes there are risks. I think we outlined them. I think some of them deal with -- there's a fairly significant amount of volumes. You think about how the overall market [size] expectation lays out between the first half and the second half volume, which requires a lot of execution capabilities throughout the distribution channel in order to drive that amount of installation.

We laid out the liquidity in the overall system -- is the liquidity adequate, our financial financing cycle is occurring fast enough in order to drive the throughput I think. Those are probably the risks I think we should be all cognizant of.

Sam Dubinsky, Oppenheimer.

I'm just wondering. Given recent price cuts at the rebates, could you just discuss what the Project IRRs are in different geographic regions, levered and unlevered?

I would say, I mean, I think the IRRs I think remain in all markets -- I think quite attractive I would say in the German market.

I mean generally some of this waiting is that we just discussed, and it has probably started to put some outward pressure with respect to the return that equity investors are expecting I think. Some of this depends also, I think, on the size of the project, the location and the quality of the project. I would say generally probably equity return expectations have moved upwards, I think I would say at least in the 100, 150 basis point range in some of the European markets that we see.

So now Europe obviously still produces -- Germany I think is talking high single-digit type return requirements. I think, if you go outside of Germany, Italy, France, I think you're talking return requirements that are double digits, that are in the low to mid teens.

Thank you. Ladies and gentlemen, this will conclude today's conference call. We thank you for your participation.