第一太陽能 (FSLR) 2009 Q4 法說會逐字稿

Good day, everyone, and welcome to First Solar fourth quarter and year-end 2009 earnings conference call.

This call is being webcast live on the investor section of First Solar's website at www.firstsolar.com.

At this time, all participants are in a listen only mode and as a reminder, today's call is being recorded.

I would now like to turn the call over to Mr.

Larry Polizzotto, Vice President of Investor Relations for First Solar Inc.

Mr.

Polizzotto, you may begin.

Thank you.

Good day, everyone, and thank you for joining us for First Solar fiscal fourth quarter 2009 conference call.

Today after the market closed, the Company issued a press release announcing its fourth 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 fourth quarter presentation for this call, key quarterly statistics, historical data on the financial results and operating performance on our IR website.

We will be discussing the presentation during this call.

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, February 23, 2010 at 11:59 p.m.

eastern standard time and can be accessed by dialing 888-203-1112 if you are calling for the United States or 719-457-0820 if you are calling from outside the United States and entering replay passcode 224-0374.

A replay of the webcast will be available on the investor section on the Company's website approximately two hours after the conclusion of the call and remain available for approximately 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 Faxset or Thomson One, you can obtain a written transcript within two hours.

With me today are Rob Gillette, Chief Executive Officer, Jens Meyerhoff, Chief Financial Officer and Bruce Sohn, President of First Solar.

Rob will begin with an overview of the Company's fourth quarter achievements, followed by a market and business update.

Jens will provide you with the fourth quarter 2009 operational and financial results and provide an update of guidance for 2010.

We will then open up the call for questions.

During the Q&A period, as a courtesy to those individuals seeking to ask questions, we asked that participants limit themselves to one question.

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

I want to remind you that all numbers discussed in this call are based on US generally accepted principles unless otherwise noted.

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 the current information and expectations and are subject to uncertainties and changes in circumstances and do not constitute guarantees of future performance.

Those statements involve a number of factors that could cause actual results to differ materially from those statements, including the risks as described in the Company's most recent annual report and Form 10 K and other filings with the Securities and Exchange Commission.

First Solar assumes no obligations to update any forward-looking information contained in this call with respect to announcements described herein.

Now I'd like to mention during the first quarter of calendar 2010, the Company will meet with investors at the following conferences.

First, Piper Jaffray's Clean Technology conference in New York City on February 23, then CLSA Asia US conference in San Francisco on March 3, next, Morgan Stanley's technology conference in San Francisco on March 4, then Canaccord's sustainability forum in Deer Valley, Utah, on 3/4 to 3/5 and finally, Jefferies Global Clean Technology conference in New York on March 16.

Finally, before I turn the call over to Rob Gillette, we would like investors and analysts do know that we will will limit our comments and analysis about the currently being discussed changes to the German feed-in tariff, and that's in order to allow for the ongoing political debate among all the constituents to take its course.

We do not believe it's beneficial to our shareholders or the industry to judge the impact of any of the proposals at this time as history has shown that such proposals are inherently unpredictable, and not necessarily indicative of the future outcomes.

It is now my pleasure to introduce Rob Gillette, Chief Executive Officer of First Solar.

Rob?

Great.

Thank you, Larry, thanks to everyone for joining us today for our Q4 call and 2009 summary.

Starting off here to talk about Q4, we had a strong finish to the year and we achieved our 2009 guidance which we set over a year ago.

So despite all the challenges and changes in the market, we did very, very well.

Q4 net sales were $641 million, up 33% quarter-over-quarter.

We sold Sarnia and Blythe sites and drove $142 million in net income.

For the year, $2.1 billion in net sales, up 66% and Q4 diluted EPS was $1.65, bringing the 2009 EPS to $7.53, which was up 78% year-over-year.

Strong cash position as well, we finished the year at $1.1 billion in cash and marketable securities and generated an additional $395 million free cash flow.

We continue to execute well in operations and in Q4 and produced 311 megawatts and finished the year with 1.1 gigawatts of production in 2009.

We achieved a milestone of over 2 gigawatt cumulative production in sales.

So a great finish to the year.

Our annualized capacity per line gross to 53.4 megawatts, and our efficiency output was up to 11.1%.

Module cost was down to $0.84 and was impacted by $0.02 roughly due to the Ohio startup and $0.02 due to SBC.

So our core costs for the year was down $0.03 -- excuse me, for the quarter-to-quarter was down $0.03 to $0.80 a watt.

Total annual costs were down 19% from $1.08 to $0.87.

We also started to expand our capacity in Malaysia, plants five and six and adding eight additional lines.

Now in terms of systems business in our market development, we sold projects totaling 100-megawatts and shows that both the utility and investors have an appetite for solar projects and projects in sales.

We continue to progress our development business as well.

We are on the fast track for BLM, that's a semi project which is 550-megawatts and will start construction in Q4 of 2010.

We added one dozen Edison mission sites to First Solar's project development portfolio, roughly 20 to 120-megawatt sites on private lands which diversifies our project based from BLM projects.

We also started construction of two new utility scale plants, 48-megawatt AC Copper Mountain, which is an expansion of El Dorado for a separate generation, 60-megawatt AC Sarnia Ontario expansion.

For Enbridge, North American partners making progress in developing sites as well.

PNM 22-megawatt EPC agreement and our partner UV, sold Blue Ink San Antonio Project to Duke Energy as well.

So, great progress on the project side and our customer side.

Turning now to 22, industry outlook, 2010, our market environment was significantly better than in 2009, but uncertainties remain.

Larry mentioned the German FIT change, and we think it will drive strong first half demand and some uncertainty in the second half.

Italy 2011 FIT changes will benefit, we believe, the second half of 2010.

France, Italy and Spain, growing supported by radiance and attractive IR will continue to drive our growth in the business.

US utilities are getting more focused on solar projects and can be executed to comply with both the RPS standards and a lot of ownership interest in driving both the base assets and technology adoption.

In Canada, the RESOP has driven attractive returns.

We have a 200-megawatt pipeline, FIT content, and development that will continue to help us drive the business.

We anticipate Chinese FIT will likely be delayed somewhat, so from a business standpoint, we will see how that turns out.

As Larry mentioned, the FIT changes in the marketplace or some of the changes that are taking place we'll discuss somewhat.

We have included an insert in the back of the presentation for your review.

We continue to position ourselves in North America and have a significant base in the development business with strong demand from our customers in the pipeline continuing to develop.

We believe this will buffer our concerns about what is happening in Europe and the business as a whole.

So in general, good outlook for 2010 and an excellent performance in 2009.

To take a look now at the industry and overall, our forecast for growth, First Solar share doubled year-over-year to 18% to 19% approximately based on our preliminary market estimates.

So Germany in 2009, we think ended up between 2.8 and 2.9-gigawatts and that is in line with our estimates relate the first of the year.

Industry demand grows to 2010 -- in 2010 to 7.5-gigawatts, and we anticipate that the German FIT changes will happen approximately midyear or potentially third quarter, which is driving a strong first half and a potential pause in the second half.

First Solar's plan was really buffered by the systems business and building of the pipeline that we have.

So our forecast is roughly for Germany to be flat in 2010 at approximately 3-gigawatts.

Some estimates are calling for it to be somewhat larger, as it could be -- the FIT changes we will have to see what they do in the marketplace overall.

So we think we are conservative on that plan.

We continue to diversify from a lot of the European base and customers by development in North America and China.

So that growth, I think we are well-positioned for and will help us in the uncertainties that exist in Europe.

Our forecast from '09 to 2012 is a 35% kegger, so expect the German market to decline over time as the FIT changes will start to make the market itself less financially attractive and the economics there in terms of sunlight and other things making it less sustainable over time.

We transition markets we are focused on are US, China, France and Italy.

We'll continue to grow and probably over tim,e overtake Germany as a market.

These economics, I think will provide long-term growth for our business, especially as electricity prices start to grow.

We are cautious on the FIT market long-term, and FIT will decline and drive those economics down.

We are also focused on the growth potential that India provides and announcements that over 20-gigawatts of renewals will be mandated by 2022.

So we recognize there are significant challenges there, but from a business standpoint, an excellent growth for the future.

Turning now to our strategy, really fundamentally, our strategy has not changed from what was presented back in June of 2009.

This is a slide that Mike used to present the business and our focus on migrating from existing subsidy business and market places to transitioned markets.

Our goal and First Solar's goal overall remains to reach sustainable market economics where we can compete with and be positioned versus fossil fuel in the electricity market, and it will grow the market in general much more substantially than the subsidized markets that exist today.

Our technology and driving the costs down will enable us to compete, and we think grow the market overall.

The migration from these subsidy markets to transition markets and most of the European markets are existing FIT subsidy markets today and are based on mandates.

Some will move to transition markets based more on economics versus mandates, and several have the sun and electricity market that can be sustained based on economics.

Places like the United States, France, Italy, Spain and China.

It is important to understand the transition and addresses our constraints to grow First Solar.

We feel we are best positioned in the solar market and as a company, based on our integrated approach, both EPC, project development and the abilities to provide turnkey solutions to utility customers, we think this will help us drive the technology adoption and the business growth in the future.

1.4-gigawatt is contracted with the PPA or RESOP pipeline, plus we have a number of unannounced projects under development.

Driving costs down will help make solar affordable, and it will stay out ahead of the FIT cuts.

Work with utilities and the regulators on FIT structures and policies and will continue to drive the business model closer to conventional types of markets while the economics improve over time and the subsidy in market economics decline.

So our focus is still to target sustainable markets and grow in transition areas for the future.

The next page now, comparing those two markets, subsidized and transition market economics.

The subsidies really are designed to create markets, and they have.

We can see that in Europe and especially in Germany, and growing now in Italy and France.

The FIT decline over time to fossil fuel competitive levels may result in declining economics, as we've said.

And some of these markets do not have enough sun to make it a sustainable business in terms of economics.

But the rate and timing of decline could cause a little bit of disruption in the market, in Germany specifically.

So we are pursuing these transition markets and driving them to become sustainable and be able to compete with fossil fuel peaking generation in areas like the United States and China.

Since we're closer to conventional generation, economics improve over time.

As PD system costs decline, energy costs rises with inflation.

So we think through this, we also create opportunities for a margin expansion, over time, the ability to gain share of that large fossil fuel peaking market.

This will grow the overall pie for solar power and create market opportunities for us to grow.

We showed you in December the pipeline that we have for our development business, a 1.4-gigawatts of contracted North American systems volume, 310-megawatt small to medium projects, 1100-megawatt project in California, including 300-megawatt of sunlight project without PPA, pipeline spans from 2010 to 2014.

And as I said, this is a summary of what we presented during our analyst presentation in December.

So a great pipeline, and we continue to build on that pipeline for the future.

We have taken a look at the US utilities contacts for PC and solar thermal.

First Solar has 16% share of the announced US solar contracts.

There is 8.6-gigawatt total announced, although 71% is solar thermal, few of them have been built and the mix is shifting more to PV and in 2009, 65% of those that were granted were PV.

So First Solar is built a strong position in the US utilities market, and we have integrated value change as the project development, EPC, solid execution and the ability to drive lower and lower costs through our own panel production, but as well, as a balance of systems and our own M contracts.

So we feel really good about our position in the US utility market and our growth for the future.

We continue to drive Copy Smart and capacity growth.

This pipeline we talked about, the 1.4-gigawatts pipeline is the leading position in the United States, and it allowed us to have the confidence to increase our capacity in Malaysia by adding plants five and six.

Construction began with production ramping in the first half of 2011 at 427-megawatts, bringing our total capacity to 1.47-gigawatt at Q4 run rate in 2011.

Increased scale, low operating costs and tax incentives also will help us to drive profitability in the future expansion of our business.

The two line plant, partner with EDF PM in France allows another 107-megawatts by Q1 of 2012 for a total of 1.8-gigawatt in capacity.

All the work that we do to continue to drive our line run rate and increasing from Q4 of 53.4 greater than 80 by 2014 as organic growth across 34 lines by 2012, approximately 2.7-gigawatt of production from the lines that we have as a business.

So in summary, I'd like to say it was a really strong year, despite all the volatility and challenges that we faced.

Strong module demand in the year and in specifically Q4, we completed the sale of both Blythe and the Sarnia at 20.

A lot of the revisions to the FIT that are being proposed, discussed now in the marketplace are going to drive some uncertainties, especially in the second half, depending on what happens in the decisions for the future.

So the first half is very strong demand, orders look very strong.

The second half, we'll have to see.

We believe Italy will start to accelerate in growth with a lot of development that has taken place.

And we believe that some of the challenges that may exist in Germany, we have more than offset by a lot of the pipeline that we had mentioned during the presentation.

So we feel really good about the outlook for growth and demand.

Our systems business in North America, the contracted pipeline is continuing to grow.

Add 1.4-gigawatts now, we sold 100-megawatt AC systems in Q4 and as we discussed, approximately 50% to 55% of the announced utilities contracts we have in the PV market started construction in Malaysia to increase our capacity, and the site I mentioned as well in France.

So we continue to look at additional capacity expansions from a business standpoint and see what we can do in the future.

Nothing to announce at this time, but we are definitely considering those alternatives.

And with that, I'd like to turn it over to Jens Meyerhoff to go through the financials.

Jens?

Thank you, Rob, and good afternoon.

On today's call, we are reporting our 2009 financial results.

These results confirm our guidance given back in October of 2008.

Despite one of the worst financial crises in recent history, module oversupply and rapidly declining crystalline silicon prices, a global recession and a financial climate that significantly impacted project financing and customer working capital.

Annual net sales grew 66% year-over-year to $2.1 billion, operating margin was 32.9% and diluted EPS rose from $4.24 to $7.53, a 78% increase that includes the impact of the OptiSolar acquisition during 2009.

We achieved a (inaudible) of 25.5%, exceeding our weighted average cost of capital by approximately 12.4 percentage points.

During the fourth quarter, we experienced strong module demand, aided by competitive pricing and rollback seasonal trends in advance of annual change in the feed-in tariff in our core markets.

Net sales for the fourth quarter were $641 million, an increase of $160 million compared to the third quarter of 2009.

The increase was driven by higher module production volumes, system revenue recognition for the 20-megawatt AC Sarnia and 21-megawatt AC Blythe project, as well as a slightly favorable euro exchange rate.

These effects were partially offset by lower marginal ASV's.

We produced 311-megawatts during the fourth quarter, up 6.4% compared to the prior quarter.

During the fourth quarter, we began the ramp of the new Perrysburg, Ohio line.

The Ohio line expansion to four lines remains on plan to be at full capacity in the first quarter of 2010.

Cost per watt produced for the fourth quarter was $0.84, down $0.01 and benefited from lower material costs, higher throughput and conversion efficiency, which was partially offset by $0.02 for the Ohio ramp and $0.01 of unfavorable foreign exchange impact.

Coal manufacturing costs, excluding ramp penalty and stock based compensation declined 3.6% to $0.80 per watt quarter-over-quarter.

Gross margin for the fourth quarter was 41.5%, down 9.4 percentage points over the prior quarter, in line with our previous guidance.

About 5.9 percentage points of the decline was due to the significant increase in EPC/development business which represented approximately 14% of our fourth quarter net sales.

In addition, we amortized a portion of the project assets related to the OptiSolar acquisition with the realization of phase one of Sarnia.

The ramp penalty associated with the Ohio ramps impacted gross margins unfavorably by another percentage point.

Module margins declined approximately 1.6 percentage points quarter-over-quarter due to less than favorable economics of the Blythe PPA.

Operating expenses increased by $39.3 million sequentially to $121.5 million due to $22.9 million of one-time personal expenses, approximately $7 million of other non-recurring expenses, primarily attributable to a dispute with a Dutch bankruptcy court and $9.1 million of turnaround effect of one-time benefits recorded during the third quarter.

On a normalized basis, operating expenses stayed approximately flat quarter-over-quarter.

While operating income for the fourth quarter was $144.7 million, or 22.6% of net sales compared to $162.8 million, or 33.9% during the prior quarter.

Slide 24 provides the reconciliation between the third and fourth quarter operating margins, reflecting the changes in gross margin and one time operating expenses discussed earlier.

Net income for the fourth quarter was $141.6 million, or $1.65 per share on a fully diluted basis.

The effective tax rate for the fourth quarter was 5.8% and 6.7% for the fiscal year 2009.

For the fourth quarter, free cash flow was $345 million, driven by operating cash flows of $414 million.

We spent $69 million for capital equipment during the fourth quarter against depreciation of $37 million.

For the full year, free cash flow reached $395 million after financing $280 million of capital expenditures.

Cash and all other marketable securities increased by $284 million quarter-over-quarter to $1.1 billion in the fourth quarter, principally due to our free cash flow performance, partially offset by cash uses and other investing activities.

Our debt to equity ratio remains low at 7%, providing us with the strongest balance sheet in the industry.

To further exemplify the degree of differentiation, slide 29 -- actually 28, sorry, compares First Solar's balance sheet to the aggregate of 12 pure play competitors, showing a $939 million net cash position for First Solar and a cash deficit of $5 billion for the peer group based on the latest reported results and/or estimates.

With our fourth-quarter net results and net sales breaking through the $2 billion trailing four quarter performance, First Solar achieved the last quantitative metric for an investment grade company.

As the industry moves into the transitional markets, access to low cost capital for large scale project finance becomes an imperative.

This is becoming an important competitive advantage.

We expect the rating agencies will focus on the quality of each project, down the line debt structures, service and warranty agreements and the balance sheets is backing them.

Strategic and equity investor consider the financial strength of the system developer to assure a multiyear project builds can be fulfilled.

25-year warranties are backed and operations and maintenance contracts are supported.

We believe we are well-positioned to lead the growth and to transition into sustainable markets enabled by our proprietary technology, the superior business model and a strong balance sheet.

This brings me to our guidance for 2010, which remains unchanged since our December meeting.

Just to summarize, net sales are expected to range from $2.7 billion to $2.9 billion, with module net sales of $2.1 billion in EPC project development sales of $600 million to $800 million.

Gross margins of 38% with module gross margins of 48% to 50% and EPC project development gross margins up 5% to 6%.

We expect planned startup costs of approximately $25 million, primarily from Malaysia plants five and six in the second half of 2010.

Stock based compensation is estimated at $95 million to $105 million, with approximately 20% allocated to cost of goods sold.

GAAP operating margin is expected to be 23% to 24%, with module operating margins of 30% to 33% and EPC operating margins at breakeven levels.

We expect our 2009 tax rate to be around 15%.

Year-end 2010 fully diluted share count guidance is an estimated 86 million to 87 million shares.

EPS remains at $1.06 and $0.05 -- at $6.05 to $6.85 per share.

CapEx for the year is expected to be $500 million to $550 million.

Operating cash flow, $730 million to $790 million.

Free cash flow $180 million to $290 million.

At this, we expect to own our performance off about 16% to 18%, and we expect to continue to scale our EPC and project development business to achieve our long-term goal of 20%.

Slide 32 shows our quarterly profile of revenues by segment and the mix impact on our consolidated margin presented in our December's guidance meeting.

We feel urged to repeat the content of the slide due to numerous inconsistencies and our recently published research report following our guidance meeting in December.

Please note that as you read horizontally across each line, the quarters will add up to 100%.

While reading the slide vertically will likely lead to another late night of model revisions.

The majority of our EPC and project development revenues are expected to be recognized in the second half of 2010.

The first quarter is largely driven by module sales.

Model and consolidated revenues are expected to decline in the second quarter as more production capacity is being allocated to the systems business, driving revenue increases for both module and EPC project development in Q3 and Q4.

Keep in mind that we will be allocating modules in advance of revenue recognition, causing a dip in second quarter consolidated net sales.

The margin profile follows that trend as module margins stay fairly flat with an expected slight decline in Q2 due to EPC inventory builds.

However, the growing EPC revenue mix is expected to dilute our consolidated margin between the second and fourth quarter.

As stated in our December meeting, we have made several key assumptions underlying our guidance.

These assumptions remain largely unchanged.

Please refer to the back of this presentation for the slide outlining them.

These essentials are, however, subject to change representing opportunities and risk.

We currently believe our guidance balances these factors.

We see opportunities from the potential to increase a percent of captive business in 2010, which improves module ASP's.

In addition, the expected 2011 change in Italy's feed-in tariff could drive increased amount in the second half of 2010.

And France recent change in feed-in tariff together with our strong partnership could promote further growth in that region.

The recent dollar/euro volatility currently creates risk to our guidance.

We are providing sensitivity that a $0.01 deviation from our assumed $1.40 per euro exchange rate impacts revenues for 2010 by approximately $10 million and net income of $6 million.

We continue to have uncertainty on the amount of German feed-in tariff cuts by segment and the impact on module ASB, the potential demand for and the overall implication timing.

Any deviation from our assumptions could cause our actual results to differ from our guidance.

With this, we conclude our prepared remarks and open the call for questions.

Operator?

Thank you.

(Operator Instructions) We will take the first question from the share Vishal Shah with Barclays Capital.

-- taking the question.

Question on the US market, since the December guidance call, the MPR in California was revised down to about -- call it about 11,2, 11.50 -- $0.11 per kilowatt hour from $0.14 previously.

How has that impact your system pricing assumptions, and what is the risk to 2010 second half guidance on that particularly?

And then secondly, what percentage of your modules will be shipped to the German market in the first half?

Okay.

I think on the MPR side, as you know, at least for 2010 and pretty much a good portion of 2011, the PPAs are in place.

But I think revisions of the market price wrapped in the California market will be ongoing.

Actually, quite a few PPAs have been executed in recent history, slightly above that MPR and PPA prices in these negotiations, slightly higher, and they seem to be passing through the CPUC.

Obviously, a decline in natural gas prices and a related reduction in MPR could have an impact, right, on our longer-term outlook.

With respect to the economics of the California market, we have seen the MPR go up.

We have seen it slightly go down.

It will fluctuate.

Our focus is essentially to insure our that we drive our cost reductions further down, right, because they are somewhat regardless of long-term of the impact of of the pricing in the MPR.

We need to be competitive with fossil fuels, which is somewhat independent of the MPR.

Essentially the -- as you know, the MPR makes assumptions, right, on long-term gas prices.

As a result, I think still sit in the $6.50 to $7.50 range in those assumptions, which I think overall, I think is in line with our long-term assumption in that market segment.

And then as it relates to Germany, I think overall, with respect to module consumption for 2010 into Germany, we look at roughly about 50%, give or take, of volumes right now, production volumes going into Germany for 2010.

Thank you.

We will take our next question from Satya Kumar with Credit Suisse.

Yes, hi, thanks.

Just a follow-up on the Germany question.

Would you care to talk about the first half exposure of the volumes in Germany?

And I know you don't want to talk about specifics on the proposals, but if I look at slide 34 in your presentation, if that governmental proposal were implemented, is there a framework you can give us to think about your 2010 guidance in that scenario?

So generally, I think as I talked about a 50% deliveries into Germany for 2010.

I find they are more front loaded into the first half.

I candidly don't have the exact percentage of Germany for the first six months in my head, Satya.

But it is more front loaded, right?

We are trying to mitigate the impact of any feed-in tariff revisions for our own captive pipeline.

So -- as it relates to the feed-in tariff, and even if you take some of the proposals, we like to refrain on this call from any type of qualitative assessment, whether we feel that these proposals provide risk or opportunity against our guidance, since we are in the middle of the political debate, and essentially, we like that to run its due course before we comment in a more qualitative way on that.

We'll take the next question from Sanjay Shrestha with Lazard.

Good evening, guys.

Just a quick update if you could.

Out of your pipeline in the US market, how much of that do you see potentially qualifying for the grant money as well as for the FIPP under the DOE loan guarantee program?

And what type of capital structure could we potentially be talking about some of these near-term opportunities?

So essentially, as you know, the grand allure of ITC is a sunsetting at the end of 2010.

So right now, one of the large projects we are essentially trying to house under that umbrella.

As it relates to the DOE loan guarantee money, we did submit applications on the process to submit further application into this process.

At the same point in time, the DOE program is not yet fully defined.

There are ongoing negotiations between the commercial lenders and the government as it relates to risk distribution among players.

So there is still some uncertainty around the DOE loan program.

If you assume that those will be resolved, there is a significant economic benefit to the capital structure in these projects.

We'll take the next question from Steve O'Rourke with Deutsche Bank.

Thank you.

Good afternoon.

Just a follow-up on overall demand.

When you consider what may happen in respective markets, how do you think second half overall demand looks compared to first half?

And secondly, from kind of just a competitive perspective, what do you assume for crystalline silicon module ASP declines this year?

So I think -- it is probably a difficult question to answer with any degree of precision.

Because I think one of the biggest drivers, as you think of the time phasing out demand, especially given the fact that Germany will still account for 40% to 50% of the market, as Rob presented it, the timing essentially and then obviously to the extent the size of the cuts in the feed-in tariffs, right, both could create a disruption to the off take of modules.

I think the shorter, essentially the lead time to the feed-in tariff digression becoming active requires the much swifter reaction throughout the overall value chain as it relates to reorganizing and reallocating the economics.

So one thing we believe we have successfully done is we have acquired, as you know, a significant captive pipeline that we are executing ourselves that we believe allows us a good degree of mitigation with respect to these types of demand uncertainties.

We'll take the next question from Steve Milunovich with Bank of America.

Actually, Steve, hold on for one second.

I think I actually missed the second thing, and that's about the crystalline prices.

We essentially, as I stated, I think in the December meeting, we assumed by year end 2010 a spot price of $40 per kilogram for poly, with essentially a $0.75 manufacturing cost -- non-poly manufacturing cost of our crystalline competitors, and they would operate at roughly 20% growth margin.

So that's what we assume for the piece of business that where we're competing head-to-head with these companies.

-- program how much that's being used?

I know it continues through this year, how much you expect it to be used.

And how about the balance of systems penalty today?

Okay, Steve, I think you got cut off there in the middle.

I got the second part of your question as it relates to the balance of system penalty.

I think candidly, as we are bidding into projects around -- predominately in Europe right now, we don't really see in the oil and system pricing a significant balance of system penalty due to the energy yield and the real world performance of our product.

In addition, we continue to see that we achieve better financing cases as well that aids to the overall economics.

So we have not anywhere actively created a pricing delta that we attribute to the BOS penalty that is often claimed.

I think you also could have probably had access, recently some of our customers and Germany actually gave some presentations and public forums of how they feel about the rea; world systems performance, which actually confirms what I just said.

We'll take the next question from Jesse Pichel with Piper Jaffray.

Hi, good afternoon.

How difficult will it be for you to transition your second half German pipeline that is on farmlands to other markets?

And I'm also hoping to get some additional color around the one-time operating expenses you had in the quarter.

I didn't see that in the slide.

Thank you.

Okay.

So maybe real quick, as we mentioned, so obviously there is potential depending on what type of changes by market segment we get around the German feed-in tariff that you need a recalibration off your distribution channels.

So this is particularly true if you look at some of the proposals that have been made around agricultural land and the possibility of signaling free field installation out with a much higher feed-in tariff digression.

As you know, historically, we have operated in and around roughly a 50/50 split between rooftops and free fields.

So we do have channel access to rooftops.

If these cuts came through, obviously, some of our channel partners would have to get more aggressive in rooftops.

Which means the overall competitive dynamics for us pushing more product into that segment would generally increase.

Given our cost leadership, we believe we will compete quite favorably in that market.

That market segment, as you know, would also then include probably the smaller commercial rooftops, which historically have not yet been a target market for us.

But I think the comment, and the comment with respect to that there could be, again, depending on how much lead time you have with respect to the changes becoming active, there could be essentially some disruptiveness out of that.

So we believe, again, like we said before, if you look at our own pipeline of what we have built, I think we have a good degree of resilience against some of those uncertainties.

As it relates to OP accessing in the third quarter, I reported to you that we had some one-time benefits in the OpEx structure of about $9.3 million.

Then in the fourth quarter, essentially, between hiring Rob and the associated expenses there, and one of our senior executives parting with the Company made up the majority of the one-time events that we had in the fourth quarter.

Also as I mentioned, we took a reserve since we got notice from the Dutch bankruptcy court that they were in disagreement with us essentially monetizing one of the bank guarantees that originated out of the bankruptcy of EcoScreen earlier in 2009.

The next question comes from Rob Stone with Cowan and Company.

Hi, guys.

My high-level strategic question is, as you noted, you guys are piling up a lot of cash.

How do you think about you're long-range strategic use of that in more Copy Smart capacity versus branching out some way in other businesses?

And then my more prosaic follow-up question is if you could comment on sort of the linearity of expenses.

Q1, I assume is down quite a bit because of the one-time.

If you could just talk about the shape of the expense curve during 2010 please?

Thanks.

So I would say generally, since we're deploying return on that asset as a metric, we like it because we are saying it disciplines you, even around the amount of cash you are holding on your balance sheet, because the total cash balance is factored into the calculation.

Obviously, like to reinvest a majority of our cash flows into the buildout of manufacturing capacity, right?

That continues to build the core of our business.

That's what drives costs and LCOE down for the industry.

As we look at some of the very large scale projects, a development effort has had some degree of cash consumption where it's utilized right now.

We like to have the buffer and a strong balance sheet, even though, obviously, we are unable to earn anywhere near our own target out of this cash balance.

It's the strength of the balance sheet as a whole allows us, right, to achieve significant benefits of the project financing side, just due to the overall aspect of credit quality within the Company.

I think time will tell, and I think the growth rate of this industry will tell with respect to how these cash flows continue to trend.

We believe we will operate in a free cash flow positive basis, and there may be a point in time and our future, I wouldn't say that in the next two or three years, but maybe in the outer future, where we might return and start to return some of that cash generation back to our shareholders.

With relate to the operating expenses, essentially, I think right now, there's nothing on the radar screen for us as it relates to one-time items.

So I'm saying if you kind of take the Q4 run rate, adjusted for those one-time items, and then keep in mind, Q1 usually you have a slight increase in your expenses due to payroll taxes, et cetera.

And also, a merit increase is usually taken back during that time period.

So you should see a gradual increase.

And then I think it's a fairly linear function, I think, throughout the quarter, over the quarters against the guidance.

The next question comes from Stephen Chin with UBS.

Great.

Thanks for taking my questions.

Jens, I just wanted to get back to your conviction level of being able to sustain this module gross margin of 48% to 50% in 2010.

The reason I ask is that you had a record sales quarter and probably favorable pricing, but you still came in close towards the low end of the module guidance.

Are there bigger cost per watt gains that we might be underestimating this year that still (inaudible) conviction level high on the module gross margin?

I think there are a couple of pieces in here.

I would say our overall cost reduction roadmap, I don't want you saying that there is vast acceleration in those right now, as we look at 2010.

As you know, to roadmap assumes roughly 10% year-over-year decline.

We have historically been able to outperform this, but we believe that's still not a bad gauge to apply.

Other impacts are, if you look at Q4, the Q4 module margins were impacted, as I mentioned in my remarks, unfavorably due to the economics in the Blythe project.

You may recall, the Blythe PPA or the PPA signed very early.

It came to some degree -- it was the acquisition of Turner Renewables which probably to some degree was priced, I would say, 20%, 20% plus under the market then.

So there is an impact that that just in the fourth quarter.

So if you look at 2010, it's a combination of the -- of our reduction, but also an increase in what we consider captive demand in our own or our customers' development pipeline.

The change in the different geographical regions all attribute to that margin outlook.

We'll take the next question from Kelly Dougherty with Macquarie.

Hi.

Thanks for taking my question.

Two quick ones.

I guess the first one to follow up is, do you have any other PPAs that you would say are priced significantly below maybe where some of the other ones are that might have an impact on module margins?

And then a question about cash.

I think we have a pretty good idea annually how you think the working capital situation will look, but just kind of wondering what the lumpiness, if you will, of the quarters and the various revenue recognition might have on your quarterly working capital needs?

Okay.

So real quick, I would say generally, I think we have a distribution PPA prices.

The distribution, I think is generally fairly tight.

Historically, we talked about the $0.14 to $0.16 per kilowatt hour range.

So we do not have outliers, I think, like Blythe.

We committed to Blythe, and the Company, we are, when we commit to something, we execute against it, and we hold true to our commitments.

That's what we did with that project.

And there are no similar circumstances in the current portfolio.

As you think about through the quarterly trend, this is obviously highly subject to, on the development business, with respect to whether you achieve milestone payment terms versus completed contract payments.

To give you an idea, obviously, Blythe and Sarnia were completed contract, both from a revenue point of view as well as from a cash collection point of view.

In our mind, the question is, do you get positive arbitrage?

So for example, can you negotiate milestone payments without impacting the overall costs of capital and the capital construction in the projects?

That obviously is what we try to prefer and we try to get the market to hold that efficiency.

That doesn't work in every case.

So especially on some of the smaller projects, we will essentially finance the construction through our balance sheet, which allows us in cases then to achieve a higher price than our profitability and higher cash collection in a timely offset way.

Or has question comes from Chris Blansett with JPMorgan.

Thank you, guys.

Jens, my question was related to your better credit rating for the Company.

And going forward, how does this impact the economics of the system?

Is there some way you can give some competitive metrics?

I would say fundamentally, there is two pieces to the thing.

If you look at some of the larger projects we've got in our pipeline, I'm saying in order to finance them successfully, our biggest task as we look at 2010, 2011 and beyond is to effectively, right, get the projects rated so that we can access the institutional market, especially on the debt side and essentially start to issue solar bonds either in a private placement or in a like a 144 type A mechanism.

The initial feedback we're getting out of the capital source appears to be favorable and open.

So obviously, the rating of the project is subject to the quality of the offtaker with respect to electricity and then who the counter party on the PPA is.

It is very much subject to how you structure the capital search of the project.

And then, what we have learned is also highly subject to the quality of essentially the provider office system and the provider with respect to warranties, with respect to execution, construction financing as well as on the long-term O&M performance.

All of these pieces factor in.

As you know, I think you can just look at essentially some of the yield curves.

There is obviously a significant separation between achieving investment grade ratings on these type of projects or for the corporation where it is sitting essentially in junk bond environment.

So from that perspective, we are pursuing this.

I think we haven't announced in the ratings yet, but essentially, I think that's where we stand.

That's how we look at it.

So if you think about our overall roadmap as it relates to reducing LCOE capital costs, it becomes a significant part of the equation, and we believe we compete very favorably in that segment.

And our final question comes from Jed Dorsheimer with Canaccord Adams.

Hi.

This is Josh Baribeau for Jed.

Just a question, really on throughput.

You have done a good job of achieving around a one point increase in module efficiency per quarter, but in some of the analyst events, you have talked about numbers such as 12% and higher.

Are we to expect a large step function at some point based on, let's say a technological breakthrough, or is this more of a linear ramp that we should expect throughout the quarters?

Thanks.

Josh, this is Bruce.

The performance of our lines improves somewhat in an event driven methodology.

As we develop new technologies, we are able to prove them out in the lab, integrate them into the factories and then deploy them out to the lines using our Copy Smart methodology.

We have historically through efficiency improvements and run rate, line rate -- line run rates and yield improvements generally improved at the rate of about 3.5% per year.

We think that we are still on the roadmap for our long range goals into 2014.

And thank you, everyone.

That does conclude today's conference, and we thank you for your participation.