第一太陽能 (FSLR) 2010 Q3 法說會逐字稿

Good day, everyone and welcome to the First Solar third quarter 2010 earnings conference call.

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

At this time all participants are in listen-only mode.

As a reminder, today's calling 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 afternoon, everyone.

Thank you for joining First Solar's third quarter 2010 conference call.

Today, after the market closed, the Company issued a press release announcing it's third quarter financial results and our guidance update for 2010.

If you did not receive a copy of the press release, you can obtain one from the investors section of First Solar's website at FirstSolar.com.

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

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

I want to remind you that an audio replay of the conference call will also be available approximately two hours after the conclusion of the call.

The audio replay will remain available until Tuesday, November 2, 20010, at 7.30 Eastern Daylight Time and can be accessed by dialing 9888) 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 8458462.

A replay of the webcast will be available on the investors section of our website approximately two hours after the conclusion of the call and will remain available for 90 calendar days.

Investors may access the webcast on the investors section of the Company's website.

If you are a subscriber to facts that are [Thomson one], you can obtain a written transcript as well.

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

Rob will present an overview of the Company's third quarter and give an update on the market and business.

Jens will review the third quarter operational and financial results and update guidance for 2010.

We will then open up the call for questions.

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

First Solar 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 general accepted accounting principles, except the free cash flow, because it's a non-GAAP measure which is reconciled to operating cash flow in the back of our presentation.

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 actual results to differ materially from those statements, including the risks as described in the Company's most recent annual report on form 10-K other filings within the Securities and Exchange Commission.

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

Now, during the fourth quarter of 2010, the Company will be attending the following conferences.

Goldman Sachs Clean Energy Conference in New York City on November 10, Credit Suisse Technology Conference in Scottsdale, Arizona, November 30, Barclays Technology Conference in San Francisco on December 8.

And I also want to mention today that we intend to provide guidance for 2011 for analysts and investors on December 14 via a call.

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

Rob?

Great.

Thanks, Larry, and welcome to our Q3 earnings call.

We had a strong quarter with net sales of $798 million, which is a 66% increase over Q3 of 2009.

The quarter includes revenue recognition of the 60 megawatt Sarnia project.

The net income was $177 million or 22.2% of net sales, and our diluted EPS was $2.04 a share.

Earnings per share was negatively impacted by $0.17 due to a $14.7 million charge, one-time tax expense to repatriate $300 million in foreign earnings.

Jens will describe the transaction during the financial portion of today's presentation.

The return on net assets was 20.4% on a four quarter rolling basis, representing an EBA of 8% or 300 basis points above our target.

Our cash and marketable securities balance of $997 million is an increase by $37 million sequentially.

We drew down $100 million of revolver and paid for NextLight acquisition in the quarter.

Our production was 350 megawatts, up 20% versus prior year and 2% quarter-over-quarter.

Also, our manufacturing team recently achieved a significant milestone by producing a cumulative 3 gigawatts of PV panels.

The annual capacity per line increased to 59.6 megawatts.

Our conversion efficiency was 11.3%, which is three-tenths of a percentage point improvement year-over-year.

Our manufacturing cost per watt was $0.77, which is down $0.08 or 10% year-over-year, and up $0.01 over Q2 of this year.

During the quarter, we started to qualify process changes to increase our module conversion efficiency.

It impacted our cost per watt by reducing yield and equipment up time.

We recently announced plans for two new four line manufacturing locations with 477 megawatts of annual run rate capacity in 2012.

The specific location of the US and Vietnam facilities will be finalized and announced at a later date.

Both of these sites are planned to have enough land to accommodate additional production capacity that we can build out in the future, depending on market demand.

Moving onto page 7.

In terms of the market, we've made progress in several areas.

We completed the Sarnia 60 megawatt expansion in the quarter and construction on both the 30 megawatt Cimarron and 48 megawatt Copper Mountain facilities is progressing very well.

The 290 megawatt Agua Caliente project is fully permitted and initial construction has begun.

And PNM Resources received PUC approval for 22 megawatt of projects in New Mexico for which First Solar is the EPC contractor and the module supplier.

Planned to begin in the first quarter of 2011.

We also achieved a number of milestones in developing our project portfolio.

The CPUC approved the SCE's request for the 250 megawatt sunlight and 300-megawatt state line power purchase agreements, and as well, PG&E received approval for their 300 megawatt sunlight PPA.

The 230 megawatt [inaudible] solar ranch project received approval of its final environmental impact report and conditional use permit from LA County in September.

However, an appeal of this permit approval was filed with the LA County board of supervisors.

We hope to resolve the appeal without any substantive delay to the project, but do not yet know if it will result in a delay.

The Silver State North 50 megawatt project received its right-of-way grant from the Bureau of Land Management to proceed with construction.

This grant is subject to a 30-day appeal period.

In Europe, we contracted 380 megawatts of new module volumes for 2011 under our existing framework agreements with seven of our customers.

When combined with our North American projects, this gives us good visibility to 2011 demand, and our production is well-contracted.

A majority of our pricing is set for 2011 at levels to drive sell through.

First Solar's Australia solar flag ship submission with true energy, or 180 megawatt AC plant is Victoria was selected by the Victorian government, who has also committed $100 million of complimentary state funding.

The project still needs to receive a federal government award to proceed, but if successful, we could start supplying modules to Australia in 2012.

We made progress on phase one of our 30 megawatt Ordos in China.

We received approval of the pre-feasibility study from the National Energy Administration and we continue our economic discussions with the government of inner Mongolia.

On page 8, you can see progress made on three of our North American projects.

The Sarnia 60 megawatt expansion was completed in August and is now the world's largest operating solar PV system at 80 megawatts.

The link you see in the slide will take you to a short video, which provides a better view of the scope of the project.

In addition, the pictures you see or hear of the El Dorado and Cimarron projects show that we are approaching completion, and a substantial portion of these sites are already producing power.

On page 9, we've updated the analyst consensus of the global PV market through 2012.

The growth in Germany driven by the [inaudible] reduction has increased expectations for 2010 to 13.5 gigawatts with a modest growth rate of 11% in 2011 to 15 gigawatts.

The market is forecasted to continue diversification in 2011, and the German market is expected to decline from 7.2 gigawatts in 2010 to 5.9 gigawatts in 2011.

Recent enthusiasm about the 2011 European demand should be tempered by a few risk factors, which I will discuss in just a moment.

The overall industry is expected to grow at a 33% compound annual growth rate, from 7 gigawatts in 2009 to 17 gigawatts in 2012.

The market will also continue to diversify globally.

On page 10, First Solar continues to execute on our strategy for growing the market and geographic expansion.

In the third quarter, the German portion of our net sales declined from approximately 77% to 29% year-over-year, and from 50% in Q2 of this year.

North America became the largest contributor to net sales, primarily due to the completion of the Sarnia project.

We expect the German portion of our revenue to decline about 45% in 2010 to between 25% and 30% in 2011.

We continue to work with our partners and through the execution of our pipeline to grow the markets in the US, France, Italy, Australia, and the rest of the world.

Based on consensus expectations for the market, First Solar expects to have a greater percentage of our sales in non-German, European, and North American countries than the industry in 2011.

I want to spend a couple of moments now talking about the specific markets and how they relate to First Solar's growth strategy.

The European markets are finishing strong in 2010, and we are sold out for the remainder of the year.

Germany, France, Italy, Spain, and other European countries continue to reduce FITs toward great parity, which is driving the demand growth that we see.

There is a potential for a softer market in Germany in 2011 as the industry adjusts to the lower feed-in tariff, and there is a further government action as the EEG and power grid is under review in 2011.

The Italian market should have strong growth in 2011 given the implementation of the new feed-in tariffs there.

France and Spain FIT reviews could impact 2011 economics and market opportunity.

So, given all those things, we've taken a number of steps to mitigate these uncertainties.

Number one, we've implemented price adjustments in Europe that we believe positions us positively for 2011.

Number two, we're incenting our partners to continue to diversify across Europe and other transition markets to grow the industry.

Three, as we have in 2010, we plan to use our 2-gigawatt North American pipeline as a buffer against demand fluctuations in Europe.

And four, we continue to invest to drive for the lowest LCOE and maximum energy yield.

The North American market, driven by renewable portfolio standards, the ITC and cash grant, DOE loan guarantees, and attractive ROE economics for supporting strong growth, it could double the market to 2 gigawatts in 2011.

Utilities are beginning to adopt solar PV technology, and realize large-scale PV power plants.

We've been working with the industry to promote the extension of the ITC cash grant and DOE loan programs beyond expiration to support project economics.

The California market has been driven by the 20% RPS by 2010 mandate, which fully supports our existing 2 gigawatts of contracted pipeline.

Future incremental growth is likely to be driven by the 33% by 2020 renewables target.

Currently, there is an uncertainty around the sustainability of the 33% goal, given a November state ballot initiative, but there is also the opportunity to convert it from regulation to law.

To expand the US market beyond California, we have been working to drive policy in other states and expand our channels to market.

Meanwhile, the number of utilities pursuing development and project ownership is continuing to grow.

We continue to develop our pipeline of projects and secure the necessary permits.

To mitigate the inherent risks of project development, we are managing the pipeline as a portfolio, where some are realized, get revised, have delays or are canceled, and new ones are added.

In 2011, we plan to start building plants over 200 megawatts in size.

We are also focused on investing to reduce system LCOE and maximize plant performance and reliability, the goal being to achieve parity with combined cycle gas peaking generation.

This would expand our market opportunity and lessen the dependency on policies and subsidies.

The Chinese government views the development of a low-carbon economy with a focus of renewable energy generation and energy efficiency as a top priority.

In addition, the electricity is demand expected to double between 2010 and 2020.

The Chinese are committed to a goal to build a multi-gigawatt per year solar market and at least 20 gigawatts by the year 2020.

Although the market has long-term potential, the systems providers need sustainable economics to drive growth.

China recently completed a 280 megawatt concessionary bidding process that provided very low prices and IRRs.

As we discussed last quarter, due to these delays in receiving the energy price on phase one of the Ordos project, construction is not expected to begin until early 2011.

First Solar is committed to building a long-term presence and we are building relationships at the regional and provincial level.

We recently received a pre-feasibility study approval from the national government for the Ordos phase one 30 megawatt project and opened an office in Beijing.

We're also working on several other potential projects across China.

We are hopeful that China can be a very large sustainable market that First Solar can participate in.

In India -- India has potential to become a very large market.

It's rapidly growing economy and electricity deficit is expected to drive strong demand for new generation for many years.

India has an excellent solar resource and PV technology is a great fit for the country.

Federal and state government programs are driving an acceleration in PV deployment with a national solar mission objective of 22 gigawatt by the year 2022.

We are investing resources and time to help the Indian market realize its full potential and are working with partners to deploy several projects in 2011.

Finally, Australia has excellent solar resource, site availability, and policy support to drive project development.

The federal government's solar flagship program and state feed-in tariffs are promoting market growth.

We are participating in both of these programs.

Although the solar markets and government policies continue to evolve, First Solar's growth strategy remains the same.

We are focused on our mission, which is to enable a world powered by clean, affordable solar electricity by driving the LCOE of solar power to parity with fossil fuel peaking and ensuring that system owners achieve an acceptable ROE.

Our goal continues to be $0.10 to $0.12 per kilowatt hour to compete with peaking assets like combined cycle gas generation.

Our decisions are guided by the goal of earning a runner that exceeds our weighted average cost to capital by at least 5%.

We intend to lead the industry from the existing subsidized markets through transition markets to large sustainable markets based on economics and minimal subsidies.

Our strategy in existing feed-in tariffs subsidized markets is to price for the long term, to grow penetration, enable throughput, and to scale production costs.

Our marketing and pricing strategy is not to be opportunistic for the short-term margin gain.

For instance, the majority of out 2011 production is now sold and price set under existing framework contracts or North American PPAs.

We have been working to develop transition markets that have good radiance and/or the strong potential to achieve price parity over time.

Some of these markets include the US, France, and Italy.

In transition markets, our approach is to drive down LCOE by pricing and anticipation of cost declines.

Add solutions that drive technology adoption and energy yield, and add capacity that develops markets or lowers costs.

We are investing a significant portion of our revenues in R&D, process development, and CapEx.

Over the long term, we believe several of the transition markets can become sustainable economically with solar PV at price parity.

To lead in sustainable markets, we are focused on a reducing system solution LCOE cost to the level of $0.10 to $0.12 per kilowatt hour, with minimal subsidies and integrating into the grid.

We expect to add further production capacity and build integrated solutions to access the large peak electricity market.

To support our growth strategy, we illustrate on slide 13 that we are in the process of significant capacity expansions that will add 22 new production lines or 1.3 gigawatt of new capacity by 2012 at our current run rates.

This is planned to nearly double our current annual capacity by 2012 to 2.7 gigawatt.

This new capacity will enable First Solar to meet increasingly diversified global demand for our modules while balancing our global supply base as we extend our cost leadership.

We are confident in our ability to scale and we have a strong track record of execution.

Our expansion of the Malaysian facility is going well.

Malaysia plant five is expected to ramp in the first quarter, and plant six is planned to ramp in the second quarter of 2011.

The Frankfurt Oder plant expansion is on schedule and production is planned for the fourth quarter of 2011.

For the Blanquefort France plant construction is planned to begin in the current quarter and we recently began hiring site management.

The new US and Vietnam factories are expected to ramp production during 2012, adding 477 megawatts of annual capacity at today's line run rate.

In summary, we delivered a solid Q3 results with record revenues and operating income.

The solar market is finishing strong in 2010, and First Solar has made significant progress in diversifying geographically and focusing in developing the markets that are in transition.

We continue to execute our mission in growth strategy.

The operations team is executing very well on the expansions in Malaysia, Germany, and France.

We announced more expansion in the US and Vietnam that we expect to almost double capacity by the end of 2012 to support our growth.

We made significant progress in our systems business and project construction, signed a 380 megawatt of incremental European contracted volumes for the year 2011, and First Solar's 2011 demand is strong and well-contracted with the majority of pricing being already set.

With that, I'd like to turn it to Jens Meyerhoff, who will discuss the third quarter financial performance and updated guidance for 2010.

Jens?

Thank you, Rob, and good afternoon.

During the third quarter, we experienced strong demand led by growing sales in our assistance business and by continued strength in our module business.

Net sales for the third quarter were $797.9 million with sequential increase of $210 million or 36% compared to the second quarter of 2010.

The increase was primarily driven by the completion of and revenue recognition for the 60 megawatt [AC] Sarnia phase two project and by continued percentage of completion recognition for the Copper Mountain and Cimarron projects, partially offset by a decrease in module average sale prices

EPC revenue increased from 15% of total net sales in the second quarter to 28% in the third quarter.

The blended effective exchange rate in the third quarter declined 3.7% sequentially to $1.31 per euro, but remained about the average spot rate during the quarter as we continued the consistent execution of our hedging program.

We produced 350 megawatts during the third quarter at 2% compared to the prior quarter.

The increase was driven in part by the 1% improvement in the annual line run rate to 59.6 megawatt.

We recognized revenue for more megawatt than produced during the third quarter as we met the revenue recognition criteria for Sarnia phase two.

Module cost per watt produced for the third quarter was $0.77 up $0.01 sequentially.

During the third quarter, we started the qualification of certain [profit] exchanges intended to result in future conversion efficiency, improvements and throughput gains which impacted line run rate and cost per watt unfavorably.

As a result, core manufacturing costs per watt increased by $0.01 quarter-over-quarter to $0.75 per watt.

Third quarter gross margin was 40.3%, down eight percentage points from the prior quarter.

The decrease was the result of increased EPC system mix, impacting margins by approximately the full eight percentage points alone, but also by FX and lower modules ASDs and higher cost per watt, which were offset for higher conversion efficiency in non-recurring Q2 manufacturing expenses.

Module growth margins were 49.1% during the third quarter of 2010 and negatively impacted by FX, declining average sales prices, mix in the increase, and cost per watt.

Operating expenses were up $6.6 million quarter-over-quarter, due to expenses related to the restructuring of certain office leases, the writedown of project assets, and our SAP implementation.

Operating income was $211.6 million compared to $180.5 million in the second quarter, due to the increase in total net sales.

Operating margin for the quarter was 26.5% compared to 30.7% in the prior quarter, due to the mix impact of higher EPC system revenues.

Net income was $176.9 million or $2.04 per share on a fully-diluted basis.

The effective tax rate was 16.9% for the third quarter.

In the third quarter, we recorded the one-time income tax provision of $14.7 million, which negatively impacted our fully-diluted earnings per share by $0.17.

This is caused by our decision to repatriate $300 million of earnings from certain of our foreign subsidiaries in advance of a change in the US tax law that would limit our ability to fully utilize foreign tax credits in the future.

Excluding that impact, EPS for the quarter would have been $2.21.

In the third quarter, we generated $230 million of free cash flows with operating cash flows of $248 million, due to the receipt of payment for Sarnia phase two.

During the third quarter, operating cash flows were negatively impacted by $102 million due to the US GAAP requirement to present that amount as a reduction of cash flows from operating activities, while the access tax benefits resulted from our decision to repatriate $300 million of earnings with an offset to cash provided for financing activities for the same amount.

We spent $138 million for capital expenditures against depreciation of $37 million.

Cash and all other marketable securities increased by $37 million quarter-over-quarter to $997 million, despite the cash payment of $296.7 million for the next live acquisition.

Debt increased by $112 million to $250 million as we drew down $100 million on our revolving credit facility.

As reported previously, First Solar increased this facility from $300 million to $600 million this month, while also increasing its term from three to five years.

Our debt to equity ratio remains low at 8%.

This brings me to our updated guidance for 2010.

We have made several key assumptions underlying our guidance.

We have increased our euro spot exchange rate assumption from $1.20 to $1.35 per euro.

For the fourth quarter, approximately 77% of our expected net sales and 92% of our expected net income exposed to the euro are hatched at an average rate of $1.33.

As of today, the $0.01 change in the euro spot rate impacts revenue by about $1 million and net income by about $500,000.

The impact of the next live acquisition to full-year 2010 guidance remains unchanged at $0.09 to $0.10 per share dilution.

We plan to begin shipments from KLM 5 in the first quarter and KLM 6 in the second quarter of 2011.

Capital spending includes KLM plants 5 and 6, Frankfurt Oder plant 2, and Blanquefort, France.

Fourth quarter pricing is set to reflect the reduced feed-in tariff in Germany.

Additionally, we have adjusted effectively -- effective December of 2010 our pricing to position our channel partners for sell through in 2011, in anticipation of the feed-in tariff declines in Germany and other European markets.

I would like to briefly comment on our pricing strategy.

Our pricing philosophy is guided by our mission to recuse the levelized cost of electricity to sustainable levels, to drive sell through and, most importantly, to provide a predictable outlook in execution capability to our channel partners.

This means that we do not adjust prices based on short-term market signals, since the segments we serve have longer development cycles, during which economics for projects are being established.

We do not subscribe to near-term price hikes that increase subsidy burdens to rate payers, but instead focus on our mission to make solar PV affordable and subsidy-independent.

Based on these assumptions and principles, we expect net sales to range from $2.58 billion to $2.61 billion.

Gross margins of 45% to 46%, up from prior guidance due to favorable foreign exchange trends and mix.

2010 module gross margins are expected between 50% and 51% for the year.

We expect planned startup costs of $18 million to $19 million, primarily from Malaysia plants 5 and 6, down from previously-guided $20 million.

Stock-based compensation is estimated at $95 million to $100 million, with approximately 20% allocated to cost of goods sold, in line with prior guidance.

GAAP operating margins is expected to be 28% or 29%, with model operating margins of 34% to 35%, up from prior guidance.

We expect our 2010 tax rate to be 13%.

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

Earnings per fully-diluted shares are increased to an estimated range of $7.50 to $7.65.

This range includes the $0.17 one-time impact in the third quarter due to the income tax provision I described earlier.

Capital expenditures for the year are expected to be $550 million to $600 million.

Operating capital is predicted to be in the range of $595 million to $620 million, slightly higher than prior guidance, but also incorporate the $100 million -- $102 million reduction due to our repatriation decision discussed earlier.

[Rollout] guidance is at 19% at the high end of our prior guidance.

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

Operator?

Thank you.

The question and answer session will be conducted electronically.

(Operator Instructions)

The first question comes from Vishal Shah with Barclays Capital.

Hi.

Thanks for taking my question.

Can you provide an update on the Agua Caliente financing for timing and to determine expectations please?

Thank you.

Yes.

So, on the Agua Caliente -- Agua Caliente financing is progressing in line with our plans.

But we're on track to close the financing latest, early first quarter of next year.

As you know, as you finance a project like this, sometimes [inaudible] or why you can't just go faster, or why hasn't this happened already.

I'd like to remind you that we're financing a $1 billion-plus PV power plant.

This has something that has not been done before.

So, the process of not only contract negotiation but also education of customers, due diligence requirements, take their due time.

But we're looking at a good execution here.

We have drawn ad short list of partners and we're progressing according to plan.

The next question is from Steve Milunovich with BofA Merrill Lynch.

Good afternoon.

Thank you.

Question about your project business.

Number one, can you talk about your confidence in doing 500 to perhaps 700 megawatts next year?

And could you also talk about the economics of that?

I think Rob alluded to wanting to having 5% above the cost of capital.

Do you expect to do that on the project business, and given the EPC component, how do you get there?

Do you have lower expenses so you can potentially get to a similar operating margin once you get the scale?

Okay.

So, maybe I'll take a crack at this one, too.

On the confidence, yes, we can reiterate the range of 500 to 700 megawatts today.

I think we have the optionality in the existing portfolio and obviously, also through the development efforts of some of our partners where we provide EPC to hit that range.

So, I think we can reconfirm that range today.

If you think about the economics and as you think about that, a large portion of the portfolio that we are realizing or intend to realize in 2010 came through acquisitions.

I'd like to remind you under what framework these acquisitions were made.

These acquisitions were made by valuing the acquired assets against our RONA requirements and RONA thresholds.

So, this means that the project portfolio in aggregate out of these acquisitions meets or exceeds that return requirement.

Now, what that means on an individual project basis, that you may have projects in the portfolio that could exceed those requirements, and you could have some of them that possibly could slightly fall short.

So, you have to look at the entire mix of project and aggregates.

But yes, they would need that.

And we'll take the next question from Stephen Chin with UBS.

Thanks.

The question's on the higher cost per watt.

Has all the equipment been updated so we won't see the cost go up penalty again?

And is it possible that the Company could see an increase in the efficiency from these upgrades at some point next year?

Thanks.

Yes, Steve, this is Bruce.

As mentioned earlier, we've got a variety of improvements that are going into the factories and what was -- might be easy on smaller scale is something that is more complex when we're dealing with 24 lines spread globally.

We have good quality systems in place to ensure that the product that we're shipping is -- to our standards.

But in the implementation, it becomes somewhat of a challenge and affected us in terms of yields and our equipment up time to do the implementations.

Nevertheless, we expect to continue to be on our cost per watt road map over the long term.

We'll continue to implement changes over the -- routinely, over time.

But it takes a while for those things to propagate out.

And the next question is from Satya Kumar with Credit Suisse.

Hi.

I was wondering if you could talk about the factors that were driving the accrued expenses and, specifically, could you talk about whether the warranty issues that you had last quarter, are there any additional allocations you expect to make in the second half of the year compared to the amount that you've already disclosed in Q2?

Thanks.

As mentioned, the increase in cost was really a direct result of the improvements that we're putting into the factories, and we expect to see those generate better efficiencies and performance and lower cost.

In terms of the excursion that we mentioned last time, there were no additional costs incurred in Q3.

The next question will come from Sanjay Shrestha with Lazard Capital.

Quick follow-up on Agua Caliente.

Considering that you're going to be breaking ground before the end of this year, and you have the cash grant, so you don't necessarily need to wait for ITC.

And with the yield market where it is, can you sort of talk in some more detail as to, shouldn't it be actually somewhat easier, even though it's a larger size project, that given the yield, you might be able to even get a broader pool of people to get this thing closed and set a standard as to how some of these larger projects can be done in the solar industry?

So again, let me repeat.

The constraint in the execution of this project is not necessarily how many bidders you have, how much liquidity is offered to us throughout this transaction from various interested parties.

This is a very large scale power plant, it's the largest power plant [IMMP] and PV to date.

And there's due diligence requirements.

The financing structures are more complex.

So are the arrangements, they take more time to structure.

And just to go through due diligence, and the whole legal review process.

So, these things take time.

I think you should look at this as any other large scale financing, you don't complete the financing of this size and magnitude in a week or two.

So, at the same point in time, we like the process to be competitive, too.

So, we're trying to, now that the price of electricity and everything is set, we're trying to maximize returns.

While at the same point in time offer a very attractive investment opportunity.

And the next question comes from Smitti Srethapramote from Morgan Stanley.

Yes, hi.

I was wondering if you could give us more color on where the incremental 3 -- 80 megawatts of modules that you originally signed for 2011.

Which countries are they going to in Europe?

What percent is going to Germany and other markets?

It's not specifically assigned to a given country.

But it's with seven of our key partners and framework agreement customers who have developed and applied new businesses.

We're developing and supporting them to develop markets beyond Germany, especially in Europe, but elsewhere in the world to help us grow the markets in transition and that business is incremental to the overall volume.

So, we have approximately 1 gigawatt or over contracted and in that area in Europe, when you combine these things.

So, we feel pretty good about that.

And so do our customers.

And we'll take the next question from Mark Wienkes with Goldman Sachs.

Thank you.

If I -- sort of a follow-up.

If I do the math on the expected allocation of megawatts to Germany next year, it looks like the expectation is, for 2011, about equal to 2010 sales on a volume basis.

I'm just wondering if that's the pricing action that you've already put in place, or what is it that drives confidence that that can be flat year-over-year?

Well, we forecast really that Germany is, I think we mentioned or not specifically, to be around 7 to 7.2 gigawatts this year which is an incredible growth year-over-year, driven in large part by the feed-in tariff changes and everyone wanting to get product in place and take advantage of that.

So, our forecast is for Germany to be in the range of 4 to 5 gigawatts and, as I think we mentioned, 25% to 30% of our production in sales in 2011 would be tied to Germany.

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

Hi.

I sort of had a question on pricing.

Your module pricing is about 20 eurocents lower that what some of the Chinese peers are.

And I sort of wonder what the breaking point is.

You're certainly selling everything that you make.

I'm wondering where there might be an opportunity for you to actually capture some pricing upside, because certainly, you haven't gotten to a point where you're not able to develop these new markets.

So, how do you think of that mix, between trying to develop the new markets and also trying to be opportunistic and capture pricing wherever you can?

Thanks.

Thanks, Timothy, it's Rob.

I think as we've said, we really don't necessarily price for the short term.

We're focused on the longer term.

And in some of these cases, the markets that we think will be -- that are in transition and could be sustainable over time are taking longer, in some cases, than we'd like them to.

Our strategy is still driven relative to pricing by our mission, and that really is to make sure that we enable our customers to develop these applications around the world.

The shortest cycle would be Germany at 8 to 12 months.

As you move out of Germany, it can take as long as 48 months or more, depending on where you're doing it.

Really, we don't pay attention to the near term or week-to-week type of pricing, all of our focus is to drive the LCOE down and get to a point where we can compete with these traditional sources, especially on a peaking side.

That helps us drive the cost down, which enables us to open the market.

That's what we were focused on.

We'll take the next question from Rob Stone with Cowen and Company.

Hi, guys.

A follow-up on the pricing question.

Leaving aside the issue of where the Chinese might be.

How do you think about your pricing philosophically in relation to FIT changes broadly.

How much of the decline in overall system costs has to be born by the modules, versus BLS improvement?

I think that we work with our customers and through our efforts on our own project development and applications have a pretty good understanding of what's required.

I think in terms of BLS or panel costs to develop applications that are going to be profitable for customers, I think in line with that, some of the interest rate expectations have been lowered because of it.

There's more comfort in financing a lot of these transactions.

So, yes, it impacts the panel, also the BLS, but also there's financing available and people have lowered, in many cases, their return expectations, which has helped collectively as well.

So, we think all those things combined will continue to drive growth for the market.

The next question from Christopher Blansett with JPMorgan.

Good afternoon.

I had a quick one related to continuity of demand as you see it in Germany as we get through this feed-in tariff cut on January 1.

Just thought process, how much of the Agua Caliente build out are you going to use as a buffer, and maybe what we, as analysts, should expect from that transition?

I think we've mentioned what we expect, at least directionally as it relates to Germany, which would be a decline year-over-year.

I think that we have multiple opportunities with our own pipeline to offset some of those fluctuations.

I think-- back to the pricing strategy, we've worked hard with our customers and partners to enable them to develop applications and grow our position in Europe, which includes Germany.

So, we feel pretty good about that.

And we don't really talk specifically and are not providing guidance relative to 2011 here.

But I think that the pipeline enables us to weather any of those transitions and changes and demands, so I think we're in good shape.

And we'll take the next question from Dan Ries with Collins Stewart, LLC.

Hi.

You mentioned some of your activities in India and China and some other developing markets.

I was wondering if you could comment specifically on the Middle East and North Africa, and how you rank that opportunity -- the opportunity in those markets over the next two to three years.

Well I think they definitely have significant solar resource, obviously.

There's a lot of activity and energy there.

We and our customers have had interactions and are reviewing some of the submittals and potential opportunities.

They're just starting, quite honestly.

In some cases, the markets are relatively small.

There's opportunity, but I think not the size and the market that you may see in other regions of the world.

But there is a great deal of interest and we are actively pursuing opportunities in that region of the world.

And we'll take the next question from Jesse Pichel with Jaffray.

And a follow-on to that prior question.

There seems to be 150 gigawatts of oil peakers -- especially in the sun belt.

And I'm wondering why the focus of the Company is on the long-term gas peaking rates and not the more near-term opportunity of these oil peakers, which are mostly in the sun belt, such as the Middle East.

Thanks.

You're welcome.

I think we probably didn't mention it, at least in this call.

But we've had a lot of conversation about opportunities that could be created and how we might position our technology in the future, which is why we are excited about being in a position to provide the development and the construction and technology to help drive LCOE down and look at the growth opportunity.

Not just with the oil burning applications, but also where coal retirements are.

And we continue to track and look at that as so market opportunity in the future.

We maybe failed to mention it, but in our market research we include that.

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

Hi, thanks.

Given your contact structure, how do you think pricing trends next year?

Do you think we'd get a big stepdown in line because of the feed-in tariff change and that it moderates, or does it move down throughout the year?

Based on our position, like I said, we don't pay a lot of attention to the shorter-term things you may read about, or others do.

Our pricing is essentially set, and as I said, we're essentially sold out in terms of our production, which is why we made all those announcements about adding incremental capacity and basically doubling between now and 2012 to keep up with the demand.

I don't know that -- I think for us, we have a good view of both the demand and the price scenario for 2011.

I think, maybe to add this, for the industry as a whole, I would expect, given that Germany as a market is going to pull down the feed-in tariffs by about 13% down, I think that should create at an industry level step function down and price decline.

There's not enough surplus economics left in the market.

[Inaudible] capital are fairly well rationalized.

And given the fact that we have not opportunistically raised prices in any type of spot market activity recently, and already started to set our prices to 2011 expectations, such a step function would be significantly less pronounced for us.

And we'll take the next question from Amar Zaman with Piper Jaffray.

Hi, this is Shawn for Amar.

Just wanted to step back to the cost per watt.

You guys talked about some qualification expenses.

Can walk us through that in a little more detail and let us know if -- whether that cost per watt, we should look for that to improve in 4Q?

Well, it's an ongoing process of implementing these things.

Certainly we've learned considerably and so the challenges we had with equipment availability and yields, we don't expect to continue.

And expect the advantages of the process improvements to start to roll out and see better throughput, better performance, better efficiency, lower costs.

And we'll take the next question from Mark Bachman with Auriga Securities.

Yes, hi.

Thanks for taking my call.

You really substantially increased your available credit lines here and you're also looking at taking a meaningful tax hit here to repatriation these funds.

How should investors be thinking about you need here for US dollar liquidity, and is there other types of activities that we need to be cognizant of?

In other words, this large projects in the US, are they going to take a large amount of cash here to fund them going forward?

Obviously, there's a certain working capital intensity to the fully integrated business model.

And as we've stated in the past, on the large-scale projects we generally seek financing ahead of significant construction expenses.

In that case, we're funding the development effort, including the down payments, the deposits, through our balance sheet or through letter of credit.

Then would expect to -- have the project fully financed.

So, if you look at US liquidity needs, based on our projections, given the cash generation that we will see in the US, was a significant ramp of business activity.

And given the increase, the revolving credit facility at the very attractive terms, those two pieces will provide adequate liquidity.

The repatriation actually was much more driven by the change in tax laws and by bringing the money back, and at a future time that would create adverse impact with respect to cost of such repatriations.

And look at the two separately.

They're really not necessarily seen together.

And we'll take the next question from John Hardy with Gleacher a& Company.

Thanks for taking my questions.

Rob, you made a comment in your prepared remarks about incentivizing customer to diversify outside Germany.

I was wondering if you were referring to something specific there?

And the also around the question of the majority of your pricing being set for 2011.

Are we to assume that the rebate program is sunsetting at the end of this year?

Thanks.

I think that we continue to look at what's necessary to enable customers to grow, so that's a big part of what we do in positioning strategy.

We didn't necessarily -- we maintain the opportunity to look at rebates or something that may make sense in the future.

So, I don't think that we completely rule that out.

I think that there are, as Jens said, a number of reasons, because mainly the decline in Germany, there's going to be price pressure, we think.

So, I think that what we are trying to do is make sure that our customers have what they need to go out and develop the market and continue to drive growth.

We'll take the next question from Peter Kemp with Deutsche Bank.

Hi, thanks for taking my question.

Since this is a follow-up to the previous question, I think that in your recent filings, you talked about potentially expanding your rebate program beyond Germany next year.

I was wondering, first, if that is still on the table, and was it included in your ASP pricing for the contracts in 2011?

And whether or not that would drive flexibility in the pricing in 2011?

So the rebate -- the continuation of the rebate program into next year is also -- it would be broadened out.

The way we monitor it is, obviously, we look at the rebate program, we also look at deal-by-deal pricing that we review.

So, from that perspective I think we get realtime feedback through the pricing process.

Many of those deal pricing events are happening in an open book process.

So, we understand cost structures, we understand economics across the different market segments.

So, those programs I think have proven the successful for us in 2010.

And we've decided to continue those programs in 2011.

and our final question will come from Burt Chao with Simmons & Company.

Thanks for taking the question.

As you spin your production footprint globally as well as your sales footprint, how do you think about the systems business?

Do you partner with local [ENCs] to build some of the projects in some of the far-reaching areas?

And also, is there a point at which it probably wouldn't make sense for First Solar to not only sell into those markets, but also build in certain markets?

How are you thinking about that going forward?

We've got a lot of discussion about that, and I think the answer is that it varies.

It varies by region of the world and market conditions.

In some cases, you need to pursue the market with a partner for political requirements as well as actual legal requirements.

So, I think that would have an effect on how we would pursue it, especially as it relates to EPC and other types of action.

I think we are very interested in the markets that we designated as what we believe to be sustainable, which is tied to the cost of electricity today and what it may be in the future, plus available solar resource and political will.

So, those countries we mentioned we believe have all those things and we'll continue to work and develop it.

So, I think the answer is we may consider a different approaches and different marketplaces that we believe can be sustainable, and which we think will accelerate technology adoption.

I think we'll be willing to look at them all with an open mind and take the best approach to drive growth there.

Thank you everyone for joining us today.

Operator, the call is now complete then.

That does conclude today's conference.

Thank you for your participation.