第一太陽能 (FSLR) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to the First Solar first quarter 2010 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.

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 Incorporated.

Mr.

Polizzotto, you may begin.

Thank you.

Good afternoon, everyone, and thank you for joining us for First Solar's first quarter 2010 conference call.

Today after the market closed, the Company issued a press release announcing its first quarter 2010 financial results.

If you did not receive a copy of the press release, you can obtain one from the Investor section of the First Solar website.

at firstsolar.com.

In addition, First Solar has posted the first quarter presentation for this call, key quarterly statistics and historical data, and financial and operating performance on the IR website.

We will also be discussing this presentation during the call and webcast.

59 PM Eastern Daylight Time, and can be accessed by dialing 888-203-1112 if you're calling from the United States, or 719-457-0820 if you're calling from outside the United States, and entering replay passcode 95344574.

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 Investor section of the Company 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 Rob Gillette, Chief Executive Officer, Jens Meyerhoff, Chief Financial Officer, and Bruce Sohn, President of First Solar.

Rob will provide an overview of the Company's first quarter achievements, discuss our NextLight renewable power acquisition, and give an update on the market and business.

Jens will then provide you with the first quarter 2010 operational and financial results, and provide an update to guidance for 2010.

We will then open up the call for questions.

During the Q-and-A period, as a courtesy to those individuals seeking to ask questions, we ask the 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, except our free cash flow is a non-GAAP measure, and is reconciled in the back of the presentation to operating cash flow.

Now I'd like to make a brief statement regarding forward-looking remarks that you may hear on today's call.

During the course of the call, the Company will make projections and other comments that are forward-looking statements within the meaning of the Federal Securities laws.

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 the actual results to differ materially from those statements, including the risks described in the Company's most recent Annual Report on Form 10-K and other filings with the Securities Exchange Commission.

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

Deutsche Bank's Clean Tech conference in Washington, D.C.

on May 12, Merrill Lynch's Clean Tech conference in New York City on June 2, Credit Suisse's Alternative Energy Conference in Washington D.C.

on June 3, and then Inner Solar 2010 in Munich, Germany June 9-10.

In addition, First Solar will be holding our annual shareholder meeting on June 1 in Phoenix, Arizona.

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

Great, thanks, Larry.

Welcome to everyone.

Thanks for joining our call.

I want to turn the attention to our Q1 performance summary on Page Six.

We had another strong quarter, with net sales of $568 million, which is 36% growth year-over-year.

Our net income was $172 million, or 30.3% of net revenue, and our diluted EPS was $2 a share.

Return on net assets, or RONA, was 23.2% on a four quarter rolling basis, which is well above our target of 20%.

Cash and marketable securities were$1 billion, a $200 million increase year-over-year.

On the operations and production side, Q1 production was 322 megawatts.

That's a 47% increase year-over-year.

We reached an annual capacity per line of 55.7 megawatts.

This increases our current and announced capacity to 2.1 gigaWatt by the end of 2012.

Conversion efficiency was 11.1%.

That's 0.2% of improvement year-over-year, and our cost per watt was $0.81 a watt, which is down 13% year-over-year.

We're on track with our Malaysian plants Five and Six expansion, with production to begin in the first half of 2011.

Finally, today we're announcing that our Board of Directors has approved an additional four line factory and we expect to be operational by Q4 2011.

This new plant will add over 220 megawatts and we will announce its location, once we've completed all of the necessary permitting and negotiated a final agreement.

Our systems business will continue to grow, and we see a strong demand for the business.

During the quarter we sold the 30-megawatt Cimarron New Mexico facility to Southern Company and Turner Enterprises.

The 22-megawatt Badajoz Spain project to Voigt and Collegen.

This project was jointly developed by First Solar in cooperation with Blitstrom and [Leticie] Fotovoltaica, who acted as EPC contractor.

Our contracted project development pipeline increased from 1.4 to 1.7 gigawatts, as we signed a 300-megawatt PPA with PG&E for Desert Sunlight, bringing the total site capacity to 550-megawatt.

Construction is in progress on the 48-megawatt Copper Mountain project, the 60-megawatt Sarnia project, and the Cimarron site, with substantial completion expected by year-end.

We continue to work with the Chinese government on Ordos Phase 1, the 30-megawatt project.

And today we're pleased to announce an agreement to acquire Next Light Renewable Power LLC.

They have a 1.3 gigaWatt project development pipeline, including 570-megawatt of PPAs with very experienced and a talented team.

Next Light adds to our North American pipeline and expands our strategy to drive growth and technology adoption of solar power.

Their experienced development team, combined with our former [Aussie] and Edison Mission people, allows us to provide North American utility customers with a complete solution to the renewable energy needs, which is both low cost and predictable performance.

This puts First Solar in a unique position to provide system solutions tailored to customer requirements, by providing services from development, EPC, operations and maintenance, and project finance.

Our focus will be to continue to focus on the growth of the solar power market through these enabling capabilities.

We had a 1.1 gigaWatt pipeline, which includes 570 megawatts of PPAs.

Once closed, the transaction will bring our total contracted pipeline to 2.2 gigaWatt.

The preliminary financial impact is an earnings reduction of $0.09 to $0.10 per diluted share in 2010.

We will finalize the financial impact of the acquisition once the transaction closes.

This agreement is contingent on CPUC approval of the project -- of one project under development, as well as Hart-Scott-Rodino clearance.

Subject to these approvals, we expect to close in early Q3 of 2010.

Here is a summary of our pipeline of 2.2 gigaWatts, and this is really our North American Canadian pipeline contracted business,s and it includes the addition of the 300-megawatt that I mentioned on Sun Light, PPA, and also the NextLight acquisition.

So we've got a lot of good new business opportunity with the addition of Next Light.

I want to focus now on the market and how we see it in 2010.

We're getting improved clarity around the 2010 and 2011 FiT changes and their magnitude, impact, and the implementation and timing as things change, including the growth corridors that are being defined.

We expect the final decisions to be made by early June of this year.

First Solar is well positioned to manage the potential impact and uncertainty in the second half, and we expect to remain capacity constrained throughout the year.

Our priority will be to service customer demand while utilizing our captive pipeline as a buffer to potential demand fluctuation.

As a result, some of our projects have shifted to 2011, so that we can provide more modules to our customers.

Our captive pipeline can provide for take off of approximately 20% to 25% of our total second half production.

The European market is expected to grow approximately 25% year-over-year, including 60% growth outside of Germany.

We continue to work with our partners to expand the market throughout Europe.

In North America, utilities continue to show a high interest in utility scale PB.

Since the fourth quarter 2009, we estimate that the volume of US utility solar PPAs has increased approximately one gigaWatt.

China has continued to delay announcement of its FiT program, and new project development may continue through a less transparent concessionary bidding process.

First Solar continues to work with provincial and federal agencies on the Ordos project for the first 30-megawatt phase of our 2 gigaWatt cooperation agreement.

We have submitted the Ordos pre-visibility study, and I have been developing local partner relationships.

Industry demand and estimates for us, you can see highlighted on the next page.

This is a chart that summarizes the industry view of the global PB market, size and growth from 2009 through 2012.

Although there's a range of estimates, continued strong growth is expected as the market diversifies.

After significant growth in 2009, industry demand is expected to increase at 30% compounded annual growth rate, or approximately 7 gigaWatts in 2009 to over 15 gigaWatt in 2012.

We at First Solar aspire to be a clear global market leader, and we are targeting to grow share from approximately 15% in 2009 to 30% in the long term.

Looking at our production capacity growth, Slide 12 shows our current capacity plan, including the announcement today.

Our eight line expansion of KLM Malaysia is under way and on schedule for shipments in the first half of 2011.

We have completed negotiations on our two line factory in Blancford, France and are in the permitting and design phase.

Shipments are anticipated in the first quarter of 2012.

Our expansion in Malaysia and France and the new plant that we will add will give us 14 new production lines, 780-megawatt of increased capacity at our current run rate, which is a 58% increase from our current production, equates to 2.1 gigaWatt of capacity in 2012.

Based on the run rates we mentioned earlier.

So to summarize, we had another strong quarter in Q1, delivered very, very good results.

Our captive pipeline enables us to accelerate technology adoption and buffer demand uncertainty.

The pricing environment has continued to improve and strong global demand appears to be absorbing the industry supply.

With the acquisition of NextLight, we've grown our contracted pipeline to 2.2 gigaWatt, providing long term visibility to growth, and significant business in the future.

We're continuing to invest in both that growth, as well as our capacity to fuel that growth.

Now I'd like to turn it over to Jens, to cover the financials.

Thank you, Rob and good afternoon.

During the first quarter, we experienced strong module demand, ahead of the expected mid-year feed-in tariff change in Germany, continued growth in France and Italy, and sales for our development business.

Net sales for the first quarter were $568 million, an increase of 36% year-over-year and a sequential decline of $73 million, compared to the fourth quarter of 2009.

The sequential decrease was driven by a shift from turnkey system sales to module sales as the fourth quarter benefited from the revenue recognition for Sarnia, Phase 1, and the Blythe project.

This was partially offset by higher average selling prices and revenue recognition from the sale of the Badajoz project.

The 22-megawatt AC project was developed at First Solar in Europe in cooperation with Blitstrom and (inaudible) Fotovoltaica, who acted as the EPC contractor.

The project was sold to Voigt and Collegen, and is expected to be completed by the third quarter of this year.

The blended exchange rate in Q1 was flat quarter-over-quarter at $1.39 to the Euro.

We produced 322 megawatts during the first quarter, up 3.6% compared to the prior quarter.

During the first quarter, we completed the ramp of Line four in Harrisburg, Ohio.

Turning to cost per watt, cost per watt produced for the first quarter was $0.81, down $0.03, benefiting from the completion of the Ohio ramp and throughput improvements, partially offset by higher manufacturing overhead cost.

Core manufacturing cost per watt was flat, at $0.80 per watt quarter-over-quarter.

Q1 gross margin was 49.7%, up 8.2 percentage points over the prior quarter.

Module revenues increased to 93% in the first quarter, compared to 86% in the fourth quarter of 2009.

Module ASPs increased quarter-over-quarter based on strong market demand and mix.

The completion of the Ohio ramp also strengthened gross margin.

Gross profit increased sequentially by $15.8 million, despite the sequential decline in net sales.

Module gross margins were 52% during the first quarter of 2010.

Operating expenses were flat quarter-over-quarter, excluding the impact of the one-time items recorded in the fourth quarter of 2009.

Operating income for the first quarter was $191.1 million or 33.7% of net sales, compared to $144.7 million or 22.6% during the prior quarter, due to the higher gross profit and lower operating expenses.

Net income was $172.3 million, or $2 per share on a fully diluted basis.

The effective tax rate was 11.8% for the first quarter.

Following very strong cash generation in the fourth quarter of 2009, the first quarter free cash flow consumed $118 million of cash, with operating cash flows of $31 million.

We spent $106 million for Capital Expenditures against depreciation of $37 million.

First quarter cash flow followed the same seasonal pattern as in prior years, and is impacted by Accounts Receivable in the already annual bonus pay out and end-of-life recycling funding.

Accounts Receivable and inventory grew on higher volumes, and more construction and process, in our systems business.

Cash and all other marketable securities decreased by $94 million quarter-over-quarter to $1.02 billion.

Our debt to equity ratio remains low at 6%, providing us with the strongest balance sheet in the industry.

This brings me to our updated guidance for 2010.

We have made several key assumptions underlying our guidance.

We allocated modules from the systems business to the module business, due to strong module demand discussed earlier.

The low end of our guidance maintains resilience to competitive pricing based on $40 per kilogram[polycrystalline] cost, and $0.75 per watt conversion cost, by the fourth quarter for our non-captive demand.

We have reduced our spot foreign exchange rate assumption from $1.40 to $1.30 per Euro.

For the remainder of the year, approximately 43% of our net sales and 52% of our expected net income exposed to the Euro are hedged at an average rate of $1.39.

Guidance includes approximately $12 million of operating expenses for the NextLight acquisition, impacting earnings per share by $0.09 to $0.10, subject to final purchase price accounting.

Capital spending includes KLM plants Five and Six, and the additionally announced new four line plant.

In our guidance, we are increasing our earnings per share expectation, while reducing net sales, due to the mix shift from systems to module sales, and less pass through revenues.

In addition, guidance includes the impact of the NextLight acquisition.

Net sales are forecasted to range from$2.6 billion to $2.7 billion, with module net sales increasing to $2.1 billion to $2.2 billion.

Gross margin guidance of 41% to 43% is up from prior guidance, due to the increased module segment mix and a better pricing environment, partially offset by the lower foreign exchange assumption.

Module gross margins are expected between 49% and 51% for 2010.

We expect plant start up costs of $27 million, primarily from Malaysia plants Five and Six, as well as the newly announced plant in the second half of 2010.

Stock based compensation is estimated at $90 million to $100 million, with approximately 20% being allocated to cost of goods sold.

GAAP operating margin is expected to be 25% to 27%, with module operating margins of 31% to 33%.

We expect our 2010 tax rate to be 12% to 14%.

We estimate year-end 2010 fully diluted share count of 86 to 87 million.

Earnings per diluted share are estimated to range from $6.80-$7.30.

The increase from prior guidance is primarily driven by higher average selling prices, partially offset by the weaker Euro.

CapEx for the year is expected to be $625 million to $650 million.

This is up from our prior guidance, due to spending for the new four line plant.

Operating cash flows projected to be in the range of $725 to $775 million.

RONA guidance has increased to 18% to 19%, but remains below our 20% target for the year.

Slide 25 reconciles, for your convenience, the prior EPS to the current EPS guidance, and the primary drivers of change.

Going to the following slide, Slide 26 shows the expected quarterly profile of revenue recognition by segment and the resulting mix impact on our consolidated gross margin.

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

The majority of our EPC and project development revenues remain in the second half of 2010; however the reduction in EPC net sales for 2010 comes from the third and fourth quarter.

Note that both module segment and consolidated net sales are expected to decline slightly in Q2, consistent with our prior guidance, as we will be allocating modules to the systems business in advance of revenue recognition.

The margin profile follows the segment mix.

The growing EPC mix is expected to dilute our consolidated gross margins slightly in Q2 and more significantly in the second half of the year, consistent with the prior guidance provided.

Module margin remains relatively flat throughout the year and are up from prior guidance, even after absorbing the foreign exchange impact changing from $1.40 per Euro to $1.30 per Euro.

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

Operator?

Thank you.

(Operator Instructions)

Our first question will come from Sanjay Shrestha with Lazard.

Great.

Good afternoon.

First of all, congratulations on a great quarter.

Just because it's probably going to come up.

One quick point.

So the slightly lower than expected systems business, it's more of a function of capacity constrained rather than any delays that occurred with the permitting or anything like that during 2010,correct?

Yes, that is correct.

I mean, that's a decision you may recall, I think we stated that on prior calls, that we looked at the captive amount coming of our systems business, to some degree as a buffer, against any form of demand fluctuation given some of the changes in the feed-in tariff.

Right now, from what we can see, is a very strong demand on the module side, and we have enough flexibility in the pipeline in order to serve that module demand ahead of realizing those systems.

So there's no implied delay in those.

This is a conscientious decision as to how we allocate our capacity.

Our next question is from Vishal Shah with Barclays Capital.

Yes, thanks for taking my question.

Just a follow-up on that.

Do you assume that most of those systems can be implemented in the first half of 2011, the push outs that you are doing right now just to meet your demand, or do you think it's going to be more linear in 2011?

Vishal, this is Bruce.

The strategy is basically to continue to use our captive demand as a buffering mechanism alongside of our module sales business.

We've currently got three major projects under construction or in various phases in North America.

Those will get completed this year, and the ones that we've decided to flex into 2011 will just be sequenced in accordingly.

The next question comes from Satya Kumar with Credit Suisse.

Yes.

Hi.

Thanks.

It seems like you're seeing new module demand for the second half of the year, given you're pushing out systems and you're saying you're capacity constrained for the second half.

I was wondering if you could give some color on which geography that new demand is coming from and as a follow-up to that, for 2011 given the German tariff declines would be dependent on 2010 market levels, is there a level of market size in 2010 above which you would be concerned on the economics in Germany in 2011?

Thanks.

Yes, it's Rob Gillette, thanks for the question.

I think I would say that, given the uncertainty with all of the starts and stops and negotiations that have taken place on the FiT in Germany specifically, I think a lot of customers were uncertain, and we looked at the market and tried to provide the opportunity to buffer, as Bruce said, the fluctuations that we might anticipate in demand.

And I think that all of our customers and, we are surprised at how strong the demand is, and so I think it's a combination of the delay and a lot of effort on our part and our customers part to make things happen in 2010.

And I think also a clear understanding of what's happening with the FiT changes and maybe not being as difficult or concerning as they might have been early in the year or into Q4.

So that would be 2010, so what we're trying to do is balance our customer needs with what we can do in terms of meeting customer commitments on capacity that we're building, but also allow to flex some of that demand, and make sure that all of our customers have panels to build products.

So I think in 2011, once the actual decision is made, which we anticipate by early June on the FiT changes in Germany, everyone will have a clearer picture of what the market outlook is.

But right now we anticipate, as we said, that growth rate in the total business including growth of the 60% outside of Germany, that we mentioned on the market page.

So as we said we're working with our customers to really grow the business and market outside of Germany, but also maintain and grow our position in all of the market aspects in Germany as well.

But a lot of good growth opportunities still exist throughout the world.

Yes.

I mean, I think in particular, Satya, second half we see good, strong demand increases outside of Germany and France, and I think to some degree in Italy.

If you think about 2011, as you see obviously there's a function of the growth corridor now.

We're actively diversifying, we're moving actually captive pipeline out.

The underlying economics of the captive pipeline are very strong, that allows for a possible higher grade of digression in the German market, as we look at 2011.

So that's the fact that we are saying how we're buffering against that.

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

Great.

Thank you.

Jens, could you talk a bit more about the ASPs?

How does that work in terms of being sequentially up, when you have the feed-in tariff digression coming into the year and it looks like, from your graph, that the modules may actually go up in the third quarter, and so I guess how does that work?

I guess part of it might have been fourth quarter you had Blythe, which sort of depressed the module margins, but how do we think about that?

So you have a couple aspects.

So, one of Blythe, the next one as you may recall, there's a mix component in our ASP between German installations and shipments outside of Germany, as it relates to a legibility of the rebate, that is the second component.

And then there's a discussion with respect to the overall amount of rebate that is extended, so foreign exchange could be another impact in our quarter.

Quarter-over-quarter we're flat on our back, so that didn't have an impact, but those are the three key drivers there.

Our next question comes from Steve O'Rourke with Deutsche Bank.

Hi, thank you.

Just a follow-up on Germany.

How do you handicap demand in the second half versus the first half, if the feed-in tariff proposal, as it is now, goes through, as expected?

So again, I think right now, every indication that we have, even though you're going to get the feed-in tariff reduction, the timing is not yet entirely certain.

But let's say it's about a mid-year event, even though it could differ by segment,.

So right now, obviously there's a push to get projects through, so now that could be an air pocket as we get into the following half depending on the inventory situation.

Our understanding is that inventories are extremely low, but it doesn't appear to be a lot of inventory overhang.

But then keep in mind you'll also have the second digression by the end of the fourth quarter, which in itself is a process that can't be realized ahead of the mid-year reduction -- still will drive (inaudible) in order to drive completion.

If you take that, combined with my earlier statement of stronger demand or demand rising in markets outside of Germany in Europe, and our own pipeline, again at this point in time, we're a lot more focused on how to allocate the product ,as compared to thinking about where to place it or where we have excess.

Our next question comes from (inaudible) with Morgan Stanley.

Yes.

Hi, Rob.

Can you talk more about your 30% market share target by 2014?

Yes.

For us, we want to be the leader in the industry, and we as a team discussed what we believe would constitute being in a leadership position, and that's where we basically set it as a goal for our business, to expand our position in the market and to grow the market as well.

So that's our target, which obviously has implications, part of what we mentioned today in terms of our capacity.

But in the future we'll continue with the teams to evaluate capacity and where we would install it to enable us to achieve those growth objectives.

And all of our strategy really is centered around driving technology adoption much quicker on the project development side as well.

So therefore, the acquisition announced today of NextLight and continuing to drive the performance of a world class PV plants, so they become a more acceptable part of the equation.

So for us, it's a goal.

It's out there and we know that calling this market four or five years ahead of time is a little bit of a risky thing to do, so we don't claim to do that,.

And we forecast it based, as we said, on the input and information we have and do our best to roll up the market, based on the applications we know that we're involved with, and couple that with market information as well.

So that's the 30%.

The next question is from Stephen Chin with UBS.

Great, thanks.

Just a follow-up question about the market share aspirations.

I think you said you're shooting for about 30% share.

That would imply a lot of capacity growth.

I think you said you've got about 20% share now and the market is growing about 30% a year.

So how would that tie in with focusing on ROIC and RONA?

I think it ties in as, that kind of is the measure that we look at, whether it's an acquisition or what we do in development, is to clear that hurdle.

So I think that's always our metric and yardstick, and we look at a combined business that is our own captive pipeline and the total market growth, and it would imply that we would need to continue to invest in, and expand and drive scale, and drive the cost as we've continued to do it.

So we're always looking at and evaluating where that next increment of capacity will be and, once those things are finalized, we'll make sure to communicate it.

Yes, I have something just to add to that.

So, by definition, these planned investments, on an incremental basis, far exceed the RONA requirement with our current outlook, even in a highly competitive pricing environment.

You have to keep in mind that, in most cases that, as we add capacity, especially as we add capacity in different locations, that the capacity comes in a different cost point as well.

Our next question comes from John Hardy with Broadpoint.

Yes.

Thank you very much for taking my question.

Just looking at the core cost per watt number and just looking at what a good job you guys did on throughput gains, I was somewhat surprised to see that flat sequentially.

I was just curious if that was maybe currency-related, or maybe there's a delay, and we should expect a significant decline in Q2 there.

Yes, John.

As you know, we've got a road map for ongoing improvements in efficiency and throughput and yields, as well as we have ongoing work for driving down the bill in materials costs.

And the teams have been doing a pretty good job with bill of materials.

During the last quarter, we also qualified the ramp, pulling off the start up costs associated with the fourth line in Perrysburg, Ohio, but we did encounter some modest manufacturing overhead costs that we've dealt with.

Some of those are seasonally related and a number of other relatively small ones, none of which significantly affect our thesis for ongoing improvements from a cost perspective.

We'll take the next question from Timothy Arcuri with Citi.

Hi.

How do you think about, as you get at least in the US, as you kind of get into the development business more and more, you're sort of competing with these big project developers that are your current customers today.

So in a sense in the US, you're sort of competing with your customers a bit more and more, so how do you think about that balance, number one?

And then number two, I think on your last call you had your own demand forecast of 7.5 gigs for 2010 and 9.7 for 2011, and you've moved to a consensus forecast here, so can you maybe give us what your own view of the market is for 2010 and for 2011?

Thanks.

Yes.

I guess the view of the market, I'll start with that.

We've learned this much, I mean we've framed it, we've looked at it.

We're a little bit surprised by actually the number of installations that occurred in Germany, based on the actual data that came out.

And I think it surprised everyone, and I know they're relooking at that, to make sure all of that data is consistent and other things.

I think the growth rate we talk about, in that range of the 25% to 30% compounded, between now and 2014 is directionally what we think.

We know that pending legislation and changes can affect that line, and so we focus on that, whether it's to our government relation efforts or development pipeline.

So I think that we have a pretty good view on what the market will be, and it will continue to grow in that range.

And we want to make sure that we can help drive to make it grow faster by some of the investments that we're making in development and pipeline.

And on the question of our customers are viewing us as competitors.

I think that we continue to work with our customers and they get a clearer understanding of our investment.

And remember, our strategy is to expand the market in new regions of the world, and invest to drive the technology adoption.

So I think they have a good understanding that helps all of us do that and helps to grow the market.

So it also is an opportunity for us to work together with them, whether it's a specific development project that may be out there, and participate with customers to build that site and develop the application.

So I think it's getting clearer and clearer to both, and a good understanding is there from our customers and our business.

Yes.

Maybe just to add one point to that.

I actually believe it is somewhat of a misconception that our activities in North America are constituting a competitive environment with our customers.

We're in the business of developing and constructing power plants and we sell those power plants to independent power producers.

Our customers are largely independent power producers.

So they are natural buyers and owners of these assets.

They can be overlapped, where some of our customers have their own development effort, in which case we often support them through our EPC capability, while at the same point in time there's a scenario where we partner them early into our own development effort, in order to jointly realize the asset.

So I would actually describe that relationship not as competitive, but synergistic.

Our next question comes from Burt Chao with Simmons Company.

Good afternoon.

Thanks for taking the question.

Congrats on the great quarter.

Just, maybe taking a step back, we've talked market sizing.

There's been a lot of news out there about there Spain retroactively potentially reducing the subsidies that they provide on some of the projects that were installed there.

Can you just give some information how you think about that, and how it may affect, obviously not directly, module manufacturers, but the investability and the forecastability for investors in solar?

How are you looking at that?

Is it more pervasive?

Could this be a precedent for other countries?

I will tell you personally, I can tell you that I'm directly aware that that is a serious discussion.

I think if that was implemented, obviously I don't even know whether it can be easily implemented on a legal basis, due to the underlying financing that you mentioned.

I would deem that a very unlikely case, but if you want to see a (inaudible) spin through it, yes, it would make people a lot more nervous as it relates to long term financing of solar power plants.

But for the same reason, I do not believe that is a probable outcome at all.

The next question comes from Kelly Dougherty with Macquarie.

Hi, thanks for taking my question.

Just wondering if you can help us think about the pricing differential between what you sell to third parties in the open market if you will, versus what you price into your own projects where you don't have to compete directly with anyone head-to-head?

And then if maybe we should look at the NextLight acquisition as that you're focused on building out that captive pipeline, so looking forward into 2011 you don't have to compete with the Chinese as much, especially if the demand slows?

Is that a good way to think about it?

Kelly, it's Rob.

I would say that, a couple things.

One is, remember a lot of our investment is to expand the market and drive growth and technology adoption, and depending on the marketplace and because of our position as a business and credibility with our customers, we can create a pretty good financing option in the business to make it a good investment for a lot of different types of constituencies and parties.

And the basis of that investment varies from region to region and market to market, so there is opportunity, we believe, to capture more value for our customers and enable growth in a more rapid way, by having the captive pipeline.

I think in terms of -- because, as we've mentioned throughout the year, we're going to be sold out in terms of our capacity, so if Bruce gets a lot of input from the rest of us as to how much more we can make and produce, he's smiling at me, but we want, that's why we make the investments in our capacity in the future, but it also has created an opportunity for I think a strategy for us going forward to develop how our channels to market are constructed and what other opportunities there could be on, think of it as a panel and distribution side.

So I think the cost to serve that market can be different, which could have an impact on the economics versus putting hundreds of megawatts into one site and shipping containers there and all of the productivity that we put into the BLS cost reduction and other things.

It's a different equation and a different customer base.

So I think that we can do a better job of developing that for growth in the future and I think when you're just talking about a distribution sale, it obviously is where more of the competition can occur because it's not certified.

It's not something that's gone through permitting, environmental requirements and standards and so on, so the distribution market is where you'd see more of the competition.

And Kelly, on the Next Light acquisition, so obviously that is a logical continuation of us increasing a higher degree of captive demand and value chain control, so that in itself as you may recall, all of our Analyst day last year, we had a big emphasis on the economics and that part of our strategy.

The piece that I want to add to in addition to controlling that value chain, is with this acquisition now, we have about a 2.2 gigaWatt pipeline under contract of PPAs which allows us to standardize our system design over the largest pipeline as an industry, which helps us to scale cost not only at the module level but also very much of the balance of the system level, which creates a significant competitive advantage over time.

Your next question comes from Christine Hersey with Wedbush.

Hi.

Thanks for taking my question.

Real quickly, could you give us an update on when you expect Desert Sunlight and Topaz to start construction, and the bigger picture as we move into 2011 and the systems business becomes a larger percent of your revenue, could we expect I guess more detail or updates on some of these larger projects that may be more impactful to your results?

Yes.

So again, I don't think it's conducive.

I think after giving specific dates on each of these production starts, we have these projects scheduled in 2011 and forward, however they are subject as you know, both of these projects are right now in the final permitting stages.

And as we mentioned on many cases, the permitting is something that you will not pin down to a day.

So we believe we're doing quite well on both of those projects as it relates to permitting.

We're seeing a lot of support in relevant and involved constituencies, and we will announce on a call when we reach full notice to proceed, which obviously includes all permitting and all financing for these large scale projects.

As of today, we're excited about these opportunities.

We believe we're on track with these large projects.

Your next question comes from Pavel Molchanov with Raymond James.

Thanks for taking my question.

I remember at your Analysts' day you spent a lot of time talking about the various transition markets that you see geographically, and it seems like your focus on the downstream has been almost exclusively North America.

Do you see a meaningful opportunity set outside perhaps OECD countries, or is it still too early for that?

It's Rob.

I think that we see opportunity for that and we're working through, in our minds, how we define what is sustainable.

Remember, that curve that we presented at the meeting, from the subsidy markets through transition and then to sustainable markets.

So that's part of my comment on the distribution side, how do we serve markets that we're not going to be participating in, meaning continually with people on the street, on the ground.

,I think we did also talk about the transition opportunities that exist outside of North America and that would be in China, India, Australia, and other areas, including outside of Germany throughout Europe, so a lot of growth opportunity on the subsidy side as well.

So we are also, as part of our strategy development, working through how we would participate in some of these markets, how we could work with IPP customers who are involved in those regions, and we see those areas of the world as significant opportunities in the future.

Your next question comes from Dan Ries with Collins Stewart.

Hi.

Thanks for taking my call.

My question is about the project business, and the sale of the large projects.

So far most of the sales have been to power-related entities, whether they are NRG or utility or Enbridge -- Natural Gas.

Are you seeing any new types of buyers come in as you look to sell some of the much larger projects, specifically financial buyers?

So, yes.

We do have, as you know as we're bringing these assets to market, we generally have a fairly broad interest.

So as we announce who buys a project, obviously there were other bidders involved.

Generally on all these assets we have a fairly competitive bidding environment.

And yes, the range of participants goes just beyond classical utilities or energy companies, and reaches to some degree into financial buyers.

So now you may recall a financial buyer, longer term requires tax appetites, so right now under (inaudible)I think you have the ability for broader participation of pure financial buyers on the equity side.

As we move into 2011, that is somewhat limited as it relates to entities with the right tax appetite.

Your next question comes from Collin Rusch with ThinkEquity.

Thanks, guys.

And can you, just to follow-up on Dan's question, can you talk a little bit about the syndicate formation for project finance, how mature you're seeing that and how many participants you're seeing out there, that are willing to finance these projects?

And then also what size chunks they're willing to take on, for any given project.

Yes I mean if you think about it, so far we have been placed, I don't want to call it a syndicate formation, because I think that that's not what it is, right?

So right now, you've got individual buyers.

These buyers are fully financed project of the debt finance and can come through bank financing, expert financing.

We're obviously thinking on the larger project side, we're thinking about bond issuances either on a stand-alone basis or combined with the DoE loan guarantee program.

So that's effectively how we're thinking, so there you get more into the public debt market.

As it relates to the equity fees, we generally like to place the equity with a single party.

Having multiple parties in the equity can be complicated as it relates to sharing the infrastructure and the overall financing.

So what we're using as a strategy, you see that we're using generally the strategy of taking some of the smaller projects, or mid-size project, I should say, as we have in the US and Canada.

But to some degree also what we're doing with some of our partners in Europe, as entry vehicles, as learning vehicles for some of these investors and then step them up over time.

And the Sarnia 20 moving into the Sarnia 60 is a good example of that stepping up a customer once we demonstrate a capability.

And the next question comes from Adam Krop with Ardour Capital.

Hi.

Thanks for taking my question.

A question on inventories.

It looks like your inventory days picked up a bit in the quarter.

Can you just give us a little color behind that, and how you expect that to trend in Q2, and if you can give us any idea or any commentary behind how inventory levels are trending at your customers, that would be great.

Thanks.

Okay, generally, I think we maintain inventory levels, especially on the finished goods side, at a pretty consistent flat levels.

I think you see a little bit of inventory fluctuation, mostly out of the EPC, out of the EPC side.

So as we're positioning product towards the construction, you can see temporary rises there until we either recognize revenue through percentage of completion or upon completion of the entire power plant and sales.

As I mentioned on my earlier comments as it relates to channel inventory to our best understanding right now, the channel inventories appear very low, and so from that perspective, that feels healthy.

I think that's a very strong demand, that doesn't appear there's a lot of inventory distributed through the channel.

And our final question comes from George Santana with Greener Dawn.

Thank you for taking my question.

Can you provide sales by country and how much, if anything, was spent during the quarter on the rebate program in Germany?

Sales by country, I don't have that right at the top of my finger tip.

But maybe Larry can follow-up with you on that.

But I think we're saying Germany was just shy of the 60%, 59%.

I don't have the breakdown for the rest of Europe or US, right now at my finger tips here.

Sorry about that.

We could probably fit in one last question if you have one last one.

We've got a moment here.

We'll take our next question from Gary Hsueh with Oppenheimer Inc.

Great, thanks.

So 2009 was a pretty big year for German installations, just wondering relative to that growth quarter what you think the risk is, and qualitatively even if there is a risk if you outgrow that growth quarter in 2010, going into 2011 in the German market?

And just a quick question on NextLight, if I could squeeze this in.

Under the PPAs that NextLight has over the megawatts of projects, are those PPAs within the $0.14 or $0.16, sort of average for you right now, or are there any significant outliers we should expect in the Next Light PPAs so far, maybe impacting 2011?

Thanks.

Yes.

So I think generally, I think we addressed it in an earlier question, as it relates to Germany outgrowing or growing at a pace in 2010 that would trigger the full digression under the growth corridor concept.

I think at this point in time, I think we got to see it through.

I think there's some plausibility around it as it relates to the installation activity that we're seeing, as I mentioned to you earlier, if you look at the demand we're seeing right now in the rest of Europe, even as we go into 2011, we look at our own captive demand and the underlying economics of that .

I think were to the best extent we can gauge it right now.

We're buffered there.

With respect to the Next Light PPA, generally again, we're talking about pricing.

We're going to market with other development assets, we're negotiating power purchase agreements as part of our business.

So I don't think it's necessarily meaningful or attractive to us to broadcast under which terms and conditions we're signing these contracts.

However, as we all know, the market price reference in place that regulates, I think, pricing of these PPAs under the concept of least cost best fit, which provides certain variance distribution curve around that market

And our final question does come from Mehdi Hosseini with FBR Capital Markets.

Hi, this is Rafi for Mehdi.

Thanks for taking the question.

Quick question on your RONA.

You're changing your revenue from this year to next year, in terms of project push out.

Do you expect RONA to go down to single digit next year?

I mean, you obviously increased the RONA guidance to 18% to 19% because you're getting more.

And if I may, IRR from USPPF projects, do you expect it to be double digit?

Okay, so real quickly, I think the short answer is, no we do not expect our RONA to go to single digit.

That will be effectively very contrary I think to how we make investment decisions, so the short answer there is no.

So as it relates to IRR, so again, as we're placing and we're selling these assets, IRRs, for us we're trying to keep the nomenclature so IRRs will be unlevered.

ROEs we look at on a levered basis, that's the pricing at which we're selling these assets.

So generally, I can say at a high level, double digit unlevered returns, we will not deem a bit at that level that's attractive.

We're seeing single digit bidding from an unlevered IRR point of view from these assets.

And thank you.

This does conclude today's conference call.

We thank you for your participation.

Thank you.

Thank you.