第一太陽能 (FSLR) 2009 Q3 法說會逐字稿

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

Thank you. Good afternoon, everyone, and thank you for joining First Solar's fiscal third quarter 2009 conference call. Today after the market closed, the Company issued a press release announcing its third 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 www.firstsolar.com. In addition, First Solar has posted the third quarter presentation for this call, key quarterly statistics and historical data and financial and operating performance on our IR website. We will be discussing the presentation during the call and the webcast. An audio replay of this conference call will also be available approximately two hours after the conclusion of this call. The audio replay will be available until Monday, November the 2nd, 2009, at 11:59 Eastern Daylight Time, and can be accessed by dialing 888-203-1112 if you are calling within the United States, or 719-457-0820 if you are calling outside the United States, and entering ID 1744958. A replay of this webcast will be available on the Investor section of the Company's website approximately two hours after the conclusion this call and remain available for 90 calendar days. Investors may access the webcast on the Investor section of the Company's website at firstsolar.com. If you're a subscriber of Faxset and Thomson One, you can also obtain a written transcript within two hours.

With me on the call today are Michael Ahearn, Executive Chairman; Rob Gillette, 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 third quarter achievements, followed by a market and business update. Jens will then provide you with the third quarter 2009 operational and financial results and provide an update to our guidance for 2009. We will then open up the call for questions. During the Q&A period, as a courtesy of those individuals seeking to ask questions, we ask that participants limit themselves to one question. The Company has allocated approximately one hour for today's call. I want to remind you that all numbers reported and discussed in today's call are based on U.S. Generally Accepted Accounting Principles unless otherwise noted.

Now I'd like to make a brief statement regarding the 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 and forward-looking statements within the meaning of 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 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 with respect to announcements described herein. Before I turn the call over to Michael Ahearn, I would like to mention that during the fourth quarter of 2009, the Company will meet with investors at the following conferences and road shows. First, there will be an East Coast road show to New York City, Boston and Baltimore November the 3rd through the 6th. Then there will be a Texas road show to Dallas, Houston and Austin on November the 6th through the 18th. We will be attending the Credit Suisse Technology Conference in Scottsdale, Arizona on December the 2nd, and then a Los Angeles road show on December the 3rd, and then a Barclays Capital Growth -- Global Technology Conference in San Francisco 12/8 through the 9th.

And then in addition, First Solar plans on announcing -- hosting a conference call on December the 16th with investors to communicate our 2010 annual guidance. We will provide more details on this later. It is now my pleasure to introduce Mike Ahern, Executive Chairman of First Solar. Mike?

Thanks, Larry. Good afternoon, and thanks for joining First Solar for our third quarter earnings call. Before discussing the quarterly results, I would like to briefly introduce Rob Gillette, our new CEO. Rob assumed the CEO position on October 1st. He has been immersed in the business and organization here for the past three weeks, making excellent progress with the transition, and we are delighted to have Rob on board. Starting next quarter, Rob will join Jens in delivering quarterly discussion. For today, what I thought we'd do is ask Rob if he'd say a few words to you by way of introduction. So Rob?

Yes, thanks, Mike, and pleasure to meet all of you, at least over the phone, and I look forward to working with you. As Mike said, I have been immersed in learning all about the power industry and the solar industry, so I've been pretty busy over the last three weeks and learning a lot, and it is a great opportunity to lead First Solar. Mike has been great at helping me and educating me and allowing me to dig in with the team and learn all about the business, so I am looking forward to continuing to drive the results to the great success that we have had in the past and in the future. So thanks for the introduction, and I am excited to be here.

Okay, thanks, Rob. So turning to the quarterly results, we had another strong quarter in Q3. Our net sales were $480.9 million. That drove net income of $153.3 million and diluted earnings per share of $1.79. The rebate program was administered throughout the quarter and had some downward effect on our gross margins, although as you can see, gross margins remain at a relatively strong level and slightly over 50%. From a timing perspective, although we shipped all the modules we produced in the quarter, we were unable to recognize revenue on shipments into our Sarnia project Canada that represented about $58 million of revenue. This is purely a timing issue. That project has been sold. The contract wasn't signed until early in the fourth quarter. We remain on track for annual guidance, and Jens will provide the additional detail on that when we get to his part of the discussion. Operationally, production was 292 megawatts, slightly above that, up 1% quarter over quarter.

Our annualized capacity per line grew to 53 megawatts -- that's up 2.5% over the quarter. Efficiency was up 11%, or was at 11% on average, up .1% And the combination of higher watt throughput and a number of other operational improvements drove manufacturing cost reduction to $0.85 a watt, and that's down 2% quarter over quarter and 21% year-over-year. The quarter to quarter changes here obviously aren't traumatic. We don't expect them to be necessarily, because as you know, most of the conversion efficiency and cost initiatives -- significant ones -- are event-driven rather than time-driven. The most important takeaway for us is that we remain on track to the five year program we laid out at the Analyst Call in terms of manufacturing cost per watt and conversion efficiency. Things are progressing nicely. We made significant process in Q3 building our pipeline of business for the future In new markets.

We signed a power purchase agreement that totaled 550 megawatts AC -- so right around 650, 660 megawatts DC -- with Southern California Edison. We announced an MOU with the City of Ordos in China to develop a 2 gigawatt solar plant, which I'll talk about here in a minute. We signed at 55 megawatt AC PPA agreement with LADWP. We sold the Sarnia project, as I mentioned -- the 20 megawatt project -- to Enbridge. The added significance there is that Enbridge is a major player in the natural gas business in Canada and the U.S. and we believe will be an ongoing customer for First Solar, and a very significant one. We announced previously that we're working with UV, supplying UV on 27 megawatts worth of installations in Florida and Ohio, which I will talk about, which marks a move of sorts with our European customers into serving the U.S. project business as well. In terms of market environment, I think our impressions are generally consistent with a lot of the analyst reports that have been published over the past several weeks. We are seeing strong demand in Germany. That's triggered mainly by the impending digression rate for feed-in tariff as of January 1st. That has unlocked a lot of activity. Demand factors in Italy and France remain strong, as they do in California, with respect to the utility project. The Ontario RESOP program, which has been grandfathered. in Canada, and under which we built the initial Sarnia project, is continuing to be a good driver of volume for us.

So fairly positive things to report on the market environment. The significance of that is really twofold. The positive significance, that one, inventories have reduced as a consequence not only for First Solar but for our customers and really for the industry, and the ability now to go into Q1 with normalized and very low inventories, I think, is a very significant positive factor. The other, of course,is that the strong demand is going to enable us to sell all we could produce this year in a year where we've produced as much as we possibly could, and so we are obviously delighted in the market and business environment that's prevailed for the year that we have been able to achieve that. I guess on the negative side, we would say crystalline silicon module pricing in 2010 and therefore to some extent our module pricing, remains unclear and subject to a number of dynamics that we can talk about.

And as reported, as everybody, I think, knows, there has been an election in Germany. There is a potential for a reduction in the feed-in tariff rates sooner than might have been anticipated had the election gone another way. We think it is really difficult to handicap where that is going to come out in terms of scope and timing. So it looms into an uncertainty that we have to plan around. I have got several slides in here just to provide a little bit more color on the project pipeline we've been working on. The first slide shows on a map our U.S. project pipeline, which totals 1.3 gigawatts now AC. These are projects for which we've signed our purchase agreements.

And with the exception of Blythe, which I will talk about here in a minute, these power purchase agreements all remain subject to a number of development contingencies. So we don't take from this that these are firm take or pay type situations, but this is sort of the mouth to the funnel. It's important to build pipeline with quality projects that are financially feasible. That's what we have been doing, and making very good progress -- and we will continue to do, I might add. The next slide is an aerial photograph of the project that is currently under construction in Blythe, California, a 21 megawatt AC. The offtake there is Southern California Edison, under long-term power purchase agreement. We are partially completed today. We intend -- the target is to complete construction of the entire project by end of year. This project has not been sold yet, but we are in a number of discussions with potential buyers and working -- continue to work that. And Jens will discuss how that interplays with our guidance here in a few minutes.

The next slide is an aerial photograph, a recent one, of the Sarnia project. We are approximately two-thirds completed with the construction of that project. The target is to complete that in December. That project, as I mentioned, has been sold to Enbridge, and we're -- I would say in both of these cases, we are very pleased with the speed at which our construction has proceeded, and with the cost reductions and efficiency improvements -- productivity improvements we are seeing. And so a lot of this, as you know, has put us -- there's a strategic element in terms of reducing our module cost, and we feel like we are obtaining the benefits that we hoped to. This last slide, I think, just highlights what we are doing -- or at least did in the third quarter -- with our European customers with respect to North America. We supplied EDF EN with 23 megawatts DC worth of modules for deployment in projects in Ontario, Canada under that RESOP program. And as I mentioned, supplied UV with 27 megawatts, some of which will go into projects for Jacksonville Electric authority in Florida and then the balance for AEP in Ohio.

The last slide just summarizes what has been pretty well publicized, the memorandum of understanding we entered into with the City of Ordos to build what will become over time a 2 gigawatt PV power plant. In a nutshell, this represents a significant opportunity to serve what could be -- was likely to be most important in significant markets in the world. But it is also very early in the process, and this opens the door for us, so we've got a lot of work to do. There are a lot of issues that have not been resolved, and we have begun the work -- on first phase now -- but we are excited to be serving this market. So in summary, let me just give -- there's a few points, I think, that capture it. The market demand is seasonally stronger. Inventories have been reduced. We and our customers will enter 2010 in a healthy position from a balance sheet perspective. The rebate program combined with the market dynamics is facilitating throughput. It has been successful from our standpoint. And the fact that we have maintained fairly strong gross margins, we view that as significant. Overall, our efficiency cost and throughput improvements are in line with the mid-year targets that we laid out -- we feel good about that. And we are progressing with the development of our project pipelines for the future, both with respect to North America and China. So with that, let me turn the discussion over to Jens Meyerhoff, our CFO, who will summarize our financial results for the quarter. Jens?

Thank you, Mike, and good afternoon. During the third quarter, we continued to experience strong module demand, aided by competitive pricing, strong seasonal trends in our core markets and our growing systems business. Net sales for the third quarter were $480.9 million, a decline of $45 million compared to the second quarter of 2009. The decline was driven by increased module shipments EPC side, most notably to Sarnia; a reduction in pricing driven by our rebate program; a lower brand of foreign exchange rate of approximately $11 million; and the fact that the second quarter benefited from $27 million of deferred revenues for the (Inaudible) project.

While we shipped our entire production to customers and project sites, revenues of approximately $58 million were not recognized during the quarter as the revenue recognition criteria for the Sarnia project We produced 292 megawatts during the third quarter at 1% over the prior quarter. During the third quarter, we started to decommission line one in Perrysburg, Ohio as we transitioned the site to a four line configuration. The annual line run rate after 22 lines and continues production during the third quarter was 53 megawatts, up 2.5% over the second quarter due to improved throughput and conversion efficiency: The Ohio line expansion remains on plan to ramp in the first quarter of 2010. The 53 megawatt run rate brings our total existing in announced capacity to 1.4 gigawatts per year. Cost per watt produced for the third quarter was $0.85, down $0.02 or 2.3% sequentially as we benefited from lower material costs, higher throughput and conversion efficiency, partially offset by the higher foreign exchange rate.

We expect continued throughput and conversion efficiencies and material cost improvement in line with our long-term cost road map, partially offset by near-term ramp costs associated with the Perrysburg expansion. Gross margin for the third quarter was 50.9%, down 5.8 percentage points over the prior quarter, mostly due to the effect of the more competitive pricing environment, customer mix and foreign exchange rates, mostly offset by lower cost per watt. The third quarter gross margin is primarily reflective of our PV module business, since system business revenues were not material in the third quarter. Operating expenses declined by $11.9 million sequentially. SG&A was down 18.9 million due to the nonrecurring items reported in our Q2 earnings call that burned operating expenses by $9.1 million and the fact that we recorded one-time benefits of approximately $9.6 million during the third quarter. Net of these effects, SG&A would have been approximately flat.

R&D expense increased $5.5 million per quarter over the prior quarter, driven by continued execution of our technology road map to improve efficiency and lower overall production cost. Operating expenses were unfavorably impacted by a rise in plant start up costs of 1.6 million related to our Perrysburg expansion. Operating income for the third quarter was 162.8 million or 33.9% of net sales compared to 204 million or 38.8% during the prior quarter, and included in 22.2 million of stock-based compensation expenses. Net income for the quarter was 153.3 million or $1.79 per share on a fully diluted basis. The effective tax rate for the third quarter was 7%. For the third quarter, free cash flow was positive at $114 million, driven by operating cash flows of $179 million. Year-to-date, free cash flow reached $51 million after financing $210 million of capital expenditures and $290 million of accounts receivables due to our revised payment terms. We expect free cash flow to remain positive during the fourth quarter.

We spent $65 million of capital equipment, capital expenditures, during the third quarter against the depreciation of $35 million. Cash and all other marketable securities increased by $53 million quarter over quarter to $830 million in the third quarter, principally due to the improved free cash flow, offset by debt repayments of $49 million for the financing of our Frankfurt/Oder manufacturing site. Our debt to equinity ratio improved from 10% to 8% during the third quarter, leaving the balance sheet largely unleveraged. Rolling fourth quarter (inaudible) was 28.2%, down from 29.4% in the prior quarter. During the third quarter, First Solar secured a $300 million revolving credit facility from nine leading banks led by JPMorgan Securities and Banc of America-Merrill Lynch. The agreement grants us a right to increase the facility to $400 million over time if needed. The facility has a three-year term and a market now dominated by one-year terms, with a current borrowing rate of approximately 3.5% indexed to LIBOR.

This line of credit in our cash and marketable securities balance now represent over $1 billion of liquidity that provides flexibility to short and medium term business needs. This brings me to our guidance for 2009, which is raised to the higher end of the previous guidance. We have made several key assumptions underlying our guidance. First, for the fourth quarter. 80% of our expected net sales are hatched at an average exchange rate of $1.36 per Euro. In addition, our natural hedge brings the net income hatch ratio to 97% for the fourth quarter. We assume an average exchange rate of $1.45 for Euro, for the annexed portion of our guidance, bringing the average Euro exchange rate to $1.38 per Euro for the quarter. As of today, a $0.01 Euro fluctuation impacted our 2009 net sales by about $500,000. Our guidance assumes about 15 to 25% of our fourth quarter net sales to be driven by systems revenues.

We expect a one-time Q4 SG&A charge of approximately $11.5 million for the recording of the previously announced CEO compensation expense. Finally, 8.2 million of the capitalized project efforts related to the OptiSolar acquisition will be amortized in the fourth quarter with the Sarnia project sale. Now for our 2009 guidance, we are raising our previous net sales guidance to a range of 1.975 to $2.025 billion We expect planned start up costs of $14 million. Stock based compensation is estimated at $85 million, with approximately 20% allocated to cost of goods sold. GAAP operating margin is expected 34% in the low case of the revenue range and reduced to 33% of the high case of the revenue range, due to higher portions of EPC sales.

We expect our 2009 tax rate to be 7 to 8%. Year-end 2009 fully diluted share count guidance is an estimated 86 to 87 million shares. CapEx for the year is expected to be 260 to 275 million. To provide a little bit more detail of the implied guidance for the fourth quarter, we can look at slide 31, which shows that the net sales guidance range of 550 to $600 million for the fourth quarter on the low and high case, with planned start up costs of 1 million, and stock-based compensation expenses of $28 million, with again about 20% allocated to cost of sales. The GAAP operating margin is expected to be 25% of the low case and reduced to 23% of the high case, again due to the higher EPC mix. We expect our Q4 tax rate to be 10%

Year-end 2009 fully diluted share guidance is estimated again at 86 to 87 million. CapEx is expected to be 50 to $65 million for the first quarter. For more detailed analysis, slide 32 reconciles for you the implied Q4 gross margin as a result of this guidance. Module margins are expected to remain flat compared to the third quarter at between 50 to 51%. Consolidated gross margins are expected to decline in the fourth quarter to approximately 41 to 44% due to the increase in EPC revenue mix, amortization of project assets related to the acquisition of Optisolar and ramp costs associated with the Ohio plant expansion. Going to slide 33, you see the same reconciliation at the operating margin level, reflecting the changes in gross margin discussed on the prior slide, and the added fee of hiring costs is a one-time fourth quarter expense. With this, we conclude our prepared remarks and would like to open the call for questions. Operator?

(Operator Instructions). We will take our first question from Steve O'Rourke with Deutsche Bank.

Hi, thank you. Just a first question, how should we be thinking about system business gross margin going forward? Are there some metrics you can kind of give us on this?

So I would say, Steve, I think the best guidance we have around the impact of the EPC portion of our business on the overall consolidated margins can be found in our analyst slide deck that we presented to you back in June.

We will take the next question from Sanjay Shrestha with Lazard Capital Markets.

Good afternoon, guys. Just a quick point, I want to make sure I am doing the math right. So based on the crystalline module ASPs in Q3, and based on what you guys said you shipped versus your revenue recognition, it seems like there is still about $0.35 per watt kind of a difference between the pricing. When do you guys think that you start to get a benefit for higher yield on a rated KW basis for you guys? And is that sort of a rough number that we should use for 2010 in terms of -- regardless of what the crystalline price is -- that should be the difference between you guys versus the general crystalline module prices?

Well, I would think that's probably two questions. And I would say, question number one, we highlight the Sarnia system. We shipped actually module (inaudible) to other EPC sites, predominately the Blythe site. So however, since we haven't signed a contract as of today, we don't believe it is appropriate to call that out as a reconciliation for the third quarter revenues. It certainly accounted for the amount of modules. And as it relates to your second question, is there an opportunity to benefit from better product performance in the field, better energy yields, we believe the answer to that is yes. We actually will see that these cases are built in, in many cases, into the financing cases that we have seen in Europe.

We will take our next question from Rob Stone from Cowan and Company.

Hi, I wonder if you have any preliminary comments on your thinking about capacity beyond the Ohio extension? Thanks.

Bruce, you want to take that one?

Yes, so our look at capacity is predominantly strengthening our view of how markets develop over time. Certainly our ongoing work with efficiency and line run rate afford us the ability to continue to expand output even in the absence of bricks and mortar construction. We continue to evaluate the timing and prepare ourselves for additional growth as we see fit. And we will look to future -- the December meeting to make any future decisions on that.

So I think Rob, our guidance that we're giving for 2010 would certainly comprehend any type of capacity decisions when we talk about CapEx start up costs, et cetera.

We will take our next question from Steve Milunovich with Merrill Lynch.

Thank you. Could you talk about how often you found you had to use the rebate during the quarter and sort of where the benchmark price was competitively, and if you still believe there is about a 40 to $60 million second half hit to revenue from them?

So the rebate was issued broadly into the market segments, so the rebate is not functioning in a case by case basis, so the rebate was offered broadly when certain criteria are met. Generally, we don't like to compare our pricing as a benchmark to crystalline silicon pricing for the simple reason that this has gotten much more competitive pricing environment and (inaudible) open broad reconciliation of pricing probably doesn't help our competitive position, nor does it help the industry. Generally, as the original estimate that we gave which was in the range of about 35 to 50 million Euros when we estimated the 40 to 60 at our spot market assumption, that budget has gone up. So we have seen a higher degree of rebate consumption. And that higher degree of rebate consumption today we are estimating just for the third quarter probably approximately close to 50 million Euro impact. It was driven by much higher the amount in the German market, so we saw a lot more volume gravitating due to the strong seasonal pattern that we have seen into the German demand. Obviously our margin performance in this quarter reflects that. We gave you actually this time guidance on our (inaudible) margins for the fourth quarter. You see they are unchanged, so we kind of expect similar dynamics for the fourth quarter.

We will take the next question from Timothy Arcuri with Citigroup.

Hi, Jens. If I sort of just back into your guidance and I take sort of the mid-range of the systems guidance, I sort of come up with roughly 7 to 10% gross margin in the systems business, which is a bit lower than I thought it would be. And I am wondering that it is the fact that it's the first couple of systems you are shipping, or is that sort of -- is that sort of the right number to think of going forward? And then also, on the rebate, any thoughts on extending the rebate beyond Germany? Thanks.

So at this point in time, I would say with respect to the system guidance, I think similar to my answer to Steve. I encourage people to look at the analyst deck. Actually, that 8 to 10% margin roughly we used indicative, roughly actually those numbers in that deck. To us,the EPC business is not a profit center, it's a throughput enabler of our module business. And so I -- again, I encourage people of how we think about these two reporting segments and our reporting on them financially. As it relates to rebates or pricing outside of Europe, we have not offered our rebate program outside of Germany, at least for installations outside of Germany. However, we believe we have a very competitive offering in the non-German European market.

We will take the next question from Brian Gamble with Simmons.

Yes, good afternoon. I was wondering if you could possibly go over -- we haven't touched on China yet. Maybe you could go over a little bit more on your strategy there, IP risk in the country, and maybe a little bit on what potential cost drivers could develop there and how that could be a benefit to your overall cost?

Our interest in China really starts with market opportunity and the ability to engage around the Chinese market as the program that they have been working on is ruled out. So there really isn't -- has not been much of a market in China, so the downstream channels are not well-developed -- there's not a lot of capacity to deploy significant volumes. So we sort of start with the structure of the Ordos project, and the way we phased it, it really is designed to get a start here in the next few months, build 30 megawatts, engage with local installers and suppliers and begin to get traction, and then expand that in an orderly fashion and hopefully leverage off of that into a number of other projects.

Somewhere during the course of this work, we are going to be looking at manufacturing sites, so we will address the IP issue you raised and some of the other manufacturability issues are going to come to the table. The deal is not structured to require that we manufacture prior to getting started on the market. And so it would be our intention priority-wise to really work this first 30 megawatt phase. But I do think if we can address these same issues on manufacturing we would attach to any market, if we can address that and get into production, there is a good opportunity for low cost manufacturing in China and the rest of the value chain. I think there's significant cost reduction possibilities, and we have got teams put together now. We are just starting to really do the drill down.

The next question comes from Satya Kumar with Credit Suisse.

Yes, hi, thanks. What portion of your shipments will be to the German free field market in '09, and what portion of Germany in general. Given there is a lot of talk about the government might move to limit the unwanted information, what are you thoughts on that? How do you plan to adapt if you see a definitive German free field market in 2010?

I mean, generally, historically -- and I think the current activity I don't think deviates on the trend, Satya, have been about 50 to 60% of the shipments that have gone into the German market have found installations in the free field market. So which means approximately 40 to 50% on roof tops. So if there is pressure with respect to the free field market, the question will be, A., by how much would additional digression happening, and would that impair long-term viability of our (inaudible)? We don't know that today, but we believe also, and I think history has show, that we have a compelling offering on the roof tops during the European and German market.

The next question comes from Jesse Pichel with Piper Jaffray.

Hi, this is Connie [Wang] for Jesse Pichel. SunEdison has historically had First Solar projects and business with one gigawatt plus in the pipeline; now that a silicon company has acquired SunEdison, do you see a shift going toward crystalline from (Inaudible)?

So I mean, generally, I don't think we really talk -- and I don't think it's the right place to talk about customers specifics. So we are not in detail with respect to what is SunEdison's plans are post the MEMC acquisition. All I can tell you is that SunEdison does not account anywhere for anywhere near measurable material amount of our business.

The next question comes from Stephen Chin with UBS.

Hi, guys. How confident are you that this operating margin has (inaudible) 23% levels? (Inaudible) as a percentage of total sales kind of peaking at the 15 to 25% of sales, or going forward is this likely to change materially?

Steve, can you repeat that? You were very hard to understand. It sounds like you're on a cell phone.

Yes, I apologize. Just on the guidance, I was wondering how confident you are that this operating margin has a floor of 23 to 25% going forward? Is the EPC sales mix as a percentage of sales kind of peaking at this 15 to 25% of sales going forward, Jens?

So again, I think if you look at our long-term financial model that we presented on multiple occassions, right, that would suggest actually that we do better than the 23 to the 25% floor. You got to think about the EPC business, right? These are our first larger commercial installations we are doing. We are making very strong progress with respect to reducing the (inaudible) costs. All of those obviously will be, over time, margin accretive; so as we continue to scale that business, lower our cost on balance of planned, in addition to our cost road map that we have on modules, we we, from today's point of view, have no reason to believe we would not be meeting our long-term financial goal.

The next question comes from John Hardy with Broadpoint AmTech.

Yes, thanks for taking my question. This is sort of a follow-up on the last question. You obviously have a lot of visibility into your long-term contracts for next year, as well as it seems like the utility pipeline in the U.S. is expanding a little bit. So I was wondering if you could sort of narrow the range on what you think the systems mix will look like in 2010 and maybe an update on that utility project pipeline that you gave at the Analyst Day.

Yes, so maybe one more time to clarify the 23 to 25% we had showed on one of my slides. First of all, keep in mind there is about 3 or 4% decline of items in there that are either ramp related as it relates to the Ohio plant or one-time SG&A expense nature. So if you take that out, you have 26 to 28% fees. As it relates to how we are looking at the U.S. utility pipeline and how that phases in from a perspective into next year, that probably will be one item we will be discussing in more detail on our guidance call in December.

The next question comes from Kelly Dougherty with MacQuarie.

Hi. One macro question on the Ontario market. Obviously you're pretty well-positioned up there with the feed-in tariffs. Just wondering if you can give us some kind of expectations for the market in general and what First Solar might be able to do, given the OptiSolar pipeline that you acquired in Canada?

Yes, I mean, I would say that the majority of the pipeline that we acquired out of OptiSolar is all under the RESOP program and not under the FIT program, as the RESOP program has been grandfathered against the provisions that you have found. In the FIT program -- the Feed-in tariff obviously requires certain local content provisions that we are analyzing. But essentially as we are looking out of the OptiSolar acquisition right now, the assets acquired there fall into the RESOP and we are continuing to execute under those pipeline. Sarnia, one that we discussed today, is one example of them.

The next question comes from Colin Rusch with Thinkequitity.

Good afternoon. Can you talk a little bit about the markets outside the major subsidized markets, and how you see development of projects evolving there, particularly in India and the Middle East? And what do you expect over the next year to three years in terms of the volume and the (inaudible) development there?

Yes, I can tell you what we are seeing, Colin. I think there is activity in -- you mentioned two of them -- parts of the Middle East, India, China. I think they are all similar in the sense that they have not been solar markets. They don't have a developed downstream capability. The subsidy problems that will drive growth are still being put into place. And traditionally, when markets are in this stage, it takes a while before you really get to robust, predictable demand. But it's important to participate early and be part of the learning, and in our case, I think we can help facilitate these markets, both with the well priced modules, but also some best practices and so forth. So we would anticipate some volumes in these and other new markets, 2010, 2011. And I would assume that they just take a while before they get to a strongly vertical trajectory. That's basically where we are.

(Operator Instructions). We will go next to Ramesh Misra with Brigantine Advisors.

Good afternoon, guys. In regards to your EPC business as a (inaudible), what are your revenue recognition procedures going forward? Will it be based upon completion -- the entire completion of the project, or is it a percentage of completion? If you could give some guidance over there.

Okay. So I think generally the most prevailing method would be a percentage of completion method. There are exceptions. You could, I think, in rare occasions get to a completed contract method. There are other standard guiding revenue recognition if land is involved in the transaction. and a power plant is built on owned land and land is part of the sale. At that point in time, you get into the territory of real estate accounting, which actually puts you, in most cases, more towards a completed contract. And so that is probably one area we usually probably would like to avoid, so whereas you'd separate the real estate from the power plant sale. There's also the applicable standards for the EPC business.

We will take a follow up from Satya Kumar with Credit Suisse.

Yes, hi, thanks. I just was wondering, Jens, on the amortization expense for the OptiSolar acquisition. Your acquisition cost was $400 million, for which you got a lot of gigawatts -- more than a gigawatt of projects. How did you real estate point amortization in Q4, and how should we think about that effect going forward?

So you may recall that on the last earnings call, I believe, is where we outlined how we consumed the OptiSolar acquisition and that next to the goodwill that we recorded, we recorded also approximately $103 million worth of project assets that we acquired. So these project assets relate obviously by definition to specific projects. So as these projects get completed and sold, we relayed a portion of that $103 million is amortized and expensed into the P&L.

We will take a follow-up from Timothy Arcuri with Citigroup.

Hi, Jens. Just kind of generally, how you think of pricing going forward? Many of your customers are sort of indicating that you don't really have much of a reason to cut pricing, given that you are selling everything that you produce. Yet crystalline pricing is, in many cases, sort of in line with where you are right now on an efficiency adjusted basis. So I'm sort of wondering as you think about pricing, is it a proactive approach or is it a reactive approach, where you won't cut pricing until you begin to lose business and until you begin to kind of get to that point where you are not selling everything you produce? Thanks.

So I mean, obviously, we have certain market share goals, and defend our market share pricing as a function of supply and demand. I mean, maybe we'll take you next time to one of our customer meetings as they tell you there is no reason to cut any prices or increase prices, and that obviously always helps. I mean, we price to clear the product, and that can be on a case by case basis. We are the industry leader. It doesn't means that we have to be the price leader in each and every one occasion -- I don't know whether that means that, right? We want to turn our production and maintain market share in our core markets, and that guides our pricing decisions.

We will take the next question from Mark Bachman with Pacific Crest.

Hi, Jens. Quick question for you. On the percentage of completion for the EPC revenues, why wasn't Sarnia then recognized this quarter? Was it the fact that you sold it at the start of Q4?

So we did not have a signed contract. So you need to have a sales contract -- you need to have a signed contract in order to have any form of revenue recognition. That criteria did not exist at the end of the third quarter.

And with no further question in the queue, this will conclude today's conference, and we thank you for your participation.