第一太陽能 (FSLR) 2011 Q1 法說會逐字稿

Good day everyone and welcome to the First Solar first-quarter 2011 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 call is being recorded.

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

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

Mr.

Polizzotto, you may begin.

Good afternoon everyone and thank you for joining us for First Solar's first-quarter 2011 conference call.

Today after the market closed the Company issued a press release announcing our first-quarter financial results and our guidance update for 2011.

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

In addition, we have posted the presentation for this call, as well as key quarterly statistics and historical data on financial and operating performance, on our IR website.

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

An audio replay of the conference call will also be available approximately 2 hours after the conclusion of the call.

The audio replay will remain available until Sunday, May 8, 2011 at 7.30 PM Eastern Daylight Time, and can be accessed by dialing 888-203-1112 if you are calling from within the United States, or 719-457-0820 if you're calling from outside the United States, and entering the replay passcode 326-6707.

A replay of the webcast will be available on the Investors section at FirstSolar.com approximately 2 hours after the conclusion of the call, and will remain available for 90 calendar days.

If you're a subscriber of FactSet or Thomson ONE you can obtain a written transcript.

With me today are Rob Gillette, Chief Executive Officer, and Mark Widmar, Chief Financial Officer.

Rob will present an overview of the Company's first-quarter results and give an update of the market and business.

Mark will review the first-quarter financial results and update guidance for 2011.

We will then open up the call for questions.

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

First Solar has allocated approximately one hour for today's call.

I want to remind everyone that all numbers reported and discussed on today's color based on US generally accepted accounting principles, except free cash flow, which is a non-GAAP financial measure, which is reconciled to the operating cash flow in the back of our presentation.

Now I would 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 security 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 material from those statements, including the risks as described in the Company's most recent annual report on Form 10-K and other filings with the Securities and Exchange Commission.

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

During the second quarter of 2011 First Solar will be attending the following conferences and events.

First, JP Morgan's Global Technology Conference in Boston on May 17.

Second, Goldman Sachs BRICs conference in London on May 19.

We will also have our annual shareholder meeting in Tempe, Arizona on May 25.

Next, Merrill Lynch Bank America's Technology Conferences in New York City on June 1.

Lazard has their Capital Markets Alternative Energy Summit in New York City on June 2.

We will be at Citi's Alternate Energy Conference in London on June 6.

We will also be visiting Europe and Paris and Zurich for investor meetings on June 7 and 8.

And finally, we will be at Intersolar 2011 in Munich June 9 through June 10.

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

Thank you, Larry.

And welcome everyone to our Q1 earnings call.

We have a lot to talk about, so let's get into it here.

We will talk about the market, as well as our financial performance.

So first, we had a solid quarter with net sales of $567 million.

The first-quarter net income was $116 million or 20.4% of net sales, resulting in diluted EPS of $1.33.

Return on net assets of 17% on a four-quarter rolling basis, representing an EVA of approximately 5%, in-line with our target.

Our cash and marketable securities balance of s $713 million, decreased $400 million sequentially, as we invested in CapEx in new factories, take down of $100 million of debt, and began construction of several systems and system projects, as well as funded our recycling program.

The Q1 production was 407 megawatts, up 26% versus the prior year, and up 3% quarter-over-quarter.

The sequential increase was driven by the production ramp of the KLM 5 factory and improved by conversion efficiency, partially offset by 7 fewer calendar days than in the fourth quarter.

The annual capacity per line increased by 1.5 megawatts quarter-over-quarter to 64.1 megawatts.

Our conversion efficiency was 11.7%, which is up 0.6 percentage points year-over-year and in-line with our roadmap.

As a result of continuous improvement in efficiency and process, we recently released or Series 3 85-watt module for higher efficiency applications.

The module manufacturing cost per watt was $0.75, which is flat quarter-over-quarter.

The benefit of increased efficiency and material cost reductions were offset by factory ramp costs and fewer calendar days.

Core costs, which excludes the ramp penalty and stock-based compensation, was $0.73 per watt, down 9% year-over-year, in-line with our cost reduction roadmap.

To summarize our capacity buildout, in March we announced Mesa, Arizona as a location for our previously announced four-line manufacturing plant in the United States, with expected production ramp in the third quarter of 2012.

Construction of our Vietnam site is progressing on schedule for shipments in the third quarter of 2012.

Malaysia 5 reached full production by the end of the first quarter, and Malaysia 6 is ramping in Q2 of 2011.

Frankfurt-Oder 2 remains on plan for third-quarter ramp this year.

Our two-line factory in France remains on indefinite hold.

So we have removed it from our 2012 capacity plan pending further clarity on the tender process for projects in France.

Moving to page 7, the market development, we are focused on executing our North American systems pipeline, managing through European market uncertainty and developing new markets.

We are expanding market diversity, growing pipeline, and maintaining our technology leadership and business model flexibility to increase our visibility in 2011 and beyond.

In North America we began to execute on the 450 megawatt DC of planned 2011 systems build, including Agua Caliente, several projects in Ontario, as well as Santa Teresa, PNM and Paloma.

The Agua Caliente DOE loan guarantee is progressing, and we expect the financing to close in late Q2 or early Q3.

Topaz received its final environmental impact report, and the Bureau of Land Management issued the final environmental impact statement for desert site Sunlight in April.

In Europe we are managing through market uncertainty due to FiT and policy changes.

Ambiguity about the magnitude of Germany's midyear FiT conversion, lack of clarity with respect to Frankfurt's tender process, and Italy's delayed implementation of the new decree all created uncertainties about project economics and financing.

Industry channels are adversely impacted by the lack of transparency around pending policy revisions or contemplated FiT changes.

We are making progress in developing the Indian, Australian and Chinese markets.

Our pipeline in India has the potential to drive more than 100 megawatts of shipments in 2011, up from 10 megawatts in 2010.

In China we are discussing additional agreements with leading Chinese generating companies.

We also announced that we will begin to offer our modules for installations as small as 10 kilowatt in response to customer demand, having previously limited availability to 30 kilowatt systems.

About one-third of our modules are currently installed on rooftops around the world, and this expands our offering in this growing market segment, giving our current customers more flexibility and provides access to a new range of customers, which should further diversify our or sales mix.

During Q1 we hired a new CFO, Mark Widmar.

Mark joined us in really April, and he has proven to be a quick study.

Mark brings nearly 25 years of experience in finance and accounting to First Solar.

His broad technology and industrial background will be an asset as we continue to scale.

Mark, please say a few words.

Thanks, Rob.

I'm excited about the opportunity to be at First Solar to support our mission of making solar affordable and to deliver value to our shareholders.

In my first 30 days I have had an opportunity to meet with the executive management and financial leadership teams.

I'm truly happy and impressed by the depth of First Solar's management team and the strength of the finance and accounting organization here.

First Solar is uniquely positioned in the market, and I'm looking forward to helping the Company scale and achieve our goals.

Great, thanks, Mark, and welcome to the team.

On page 9 you can see some of the project activity in the first quarter.

We delivered the 5 megawatt Tilbury site to Enbridge, and completed the 2 megawatt [Leeds] project for PNM in the first quarter.

[Reese] is the first of five we are building for PNM.

We continued site work on Agua Caliente, and we expect to begin module installation in the third quarter.

The 20 megawatt Santa Teresa project is under construction, and is our first project resulting in the conversion of the [CSB] site to PV, and the first to employ trackers to increase energy yield.

The next slide lists the projects in our contracted pipeline in North America.

We highlighted projects in green for which execution has begun in 2011.

Our current North American pipeline is 2.4 gigawatts AC of PPA, EPC or Ontario RESOP contracted projects.

We plan to execute on about 450 megawatt DC with contributions from a dozen projects in 2011, up from 3 in 2010.

And we currently have the flexibility to build up to 600 megawatts DC in 2011.

We expect to sign new EPC agreements to continue adding to our contracted pipeline developed by First Solar and/or our partners.

Overall we are experiencing strong buyer demand for our utility scale systems projects due to our prudent systems' performance, execution record and attractive financial profile.

Turning to slide 11, I want to update you on how we see the key markets evolving and how this relates to First Solar's growth strategy and our investments.

In Europe, Germany, France and Italy are implementing changes to their feed-in tariff structures, market caps and tender processes.

The industry will require a period of adjustment and understanding of the changes since some of the implementation details have not been finalized.

In addition, the Italian government decision-making process resulted in a market pause and excess channel inventories.

Rising European interest rates are also applying pressure to project economics.

These factors create a demand over supply and price risk and highlight the importance of global market development and project pipelines, which are strengths for First Solar.

Tighter industry economics are expected in the second half of 2011, which we believe are largely reflected in our guidance.

Overall, First Solar supports consistent and predictable policies because it is critical to achieving sustainable markets.

Reductions in subsidies are necessary to reduce speculation and to drive progress toward affordable solar electricity generation.

We look forward to clarification of the policy uncertainties.

To be more specific earlier this year, the German government adopted a partial July and September pull-in of the January 2012 FiT [conversion].

The changes and trends suggest a market of about 4 gigawatts in 2011.

There is potential that nuclear energy concerns may influence future renewable policies and targets, but it is really too soon to assess the impact.

In France the government revised the FiT program and implemented a 500 megawatt cab on the annual market size and introduced a tender system for large projects.

We are disappointed that the new decree does not provide sufficient multiyear visibility and certainty for our sizable French PV market.

The government has failed to take into account the needs of investors in existing projects.

We are now waiting for details about the tender system before making a decision about the long-term viability of the market, and our French factory remains on indefinite hold.

Because of grandfather projects, the French market should exceed the cap in 2011 and range from 500 to 800 megawatts this year.

Italy remains unclear with regards to both an extension of their current program, CE3, and the timing and terms of the new program, CE4.

But it is clear, however, that the existing delay in FiT clarity will require a quarter or more to restart project financing and development.

Further delay in FiT details will continue to impact project realization, as well as future project planning and development.

We are actively engaging in the FiT policy discussions and monitoring the situation.

As a result of these anticipated changes, we expect the European industry demand to go through a period of adjustment in the second and third quarters.

However, a number of our strategies will help us mitigate these risks.

First, we continue to adapt our third policy module -- our third-party module offering to levels we anticipate to drive sell-through.

We are extending into the 10 to 30 kilowatt European commercial rooftop segment to further diversify our business.

This is enabled by our Series 3 technology and will be executed with current and new customers.

As we have in 2010, we plan to use our 2.4 gigawatt North American pipeline as a buffer against demand fluctuations in Europe.

Most of our approximately 450 megawatt North American systems builds are planned for second half.

And we have the flexibility to build additional 150 megawatt systems if needed.

We expect to continue to add new EPC and PPA agreements in North America to increase our pipeline.

We continue to diversify geographically and invest in market development in North America, India, Australia, the Middle East and China.

We are also continuing to invest to drive for minimum LCOE and maximum energy yield.

In California Governor Jerry Brown signed a law to increase the RPS requirements to 33% by 2020 with compliance milestones, which establishes California as the national leader in renewable energy.

We believe that California IRUs are on their way to fulfilling their 33% RPS requirements.

But the final realization rate is yet to be determined, which we see as an opportunity for First Solar.

We are also continuing to encourage policy in those states to support the development of sustainable PV markets, and we are starting to see project opportunity in other states.

The DOE Loan Guarantee Program funding was preserved in the 2011 budget negotiations and existing applications were grandfathered.

It is unclear if there'll be need -- there will be a need through additional appropriations for running authority and to cover the credit subsidy fee to fund all of the existing applications.

The program is important because it helps establish the capital markets and builds an investor base, which we hope will support the ability to price long-term, unguaranteed project bonds into the US institutional market.

In China the government has recently increased its commitment to developing a solar market.

As part of the 12 five-year development plan China has set a goal to install 5 gigawatts of solar by 2015, and is considering increasing this goal to 10 gigawatts on its way to achieving at least 20 gigawatts by 2020.

In addition, the government increased the surcharge that the grid company can apply when selling power to the end consumer, which should help fund renewable programs.

However, systems providers, including First Solar, need sustainable economics to drive growth, and we are hopeful that a transparent and appropriately set national market support structure will be implemented.

First Solar is focusing on the execution of the Ordos project and is actively pursuing several other potential solar project opportunities in China.

We continue to see momentum in India, driven by the National Solar Mission objective of 20 gigawatts by 2020, as well as by robust programs in states like Gujarat.

Over 1 gigawatt of PPAs have been assigned, but the high cost of capital and immature project finance markets are possible constraints to realization.

We are increasing investment in India to help the market realize its potential.

We are working with a number of customers,k and our pipeline could result in more than 100 megawatts of projects in 2011.

The market is expected to grow to 500 to 600 megawatts in 2012.

In Australia the federal government's Solar Flagship program and state FiTs are promoting market growth.

The preferred bidders for the 400 megawatts first phase of the Solar Flagship's program are expected to be announced in Q2.

We are participating in a number of programs with local partners, including two of the four shortlisted PV projects that are in the first phase of the Solar Flagship's program.

The Australian market offers emerging segments, such as large-scale off-grid PV installations, that could replace the high-cost existing diesel generation that is there.

In the Middle East, Saudi Arabia and other countries are exploring the introduction of utility scale solar into their energy mix.

The Saudi government announced a $100 billion plan to meet rising electricity demand and cut its dependence on oil, which could increase from 3 million barrels per day today to 8 million barrels by 2030.

Policy details are expected in the third quarter.

Other Gulf countries are also putting in place support mechanisms.

For example, UAE recently launched a prequalification procedure for a 100 megawatt project, and Oman is expected to launch a similar process for a 200 megawatt project.

On slide 12, we highlight the areas we are focusing on to drive predictable, long-term growth and make solar affordable.

We have made progress in achieving multiyear visibility through our North American pipeline, contracts in developed markets, and by developing new markets.

Although individual market performance may vary from time to time, our diversification strategy will enable us to maintain flexibility to respond to these changes.

We are focused on minimizing LCOE, optimizing project returns, and enabling the fastest leadtime to generation to drive towards grid parity in the markets we serve.

This will be accomplished by reducing our proprietary thin film module cost per watt to $0.52 to $0.63 by 2014, and increasing conversion efficiency to 13.5% to 14% by 2014.

We are on plan to achieve this and have the lowest module cost in the industry today by 30% to 40%.

These improvements, along with continued execution of our balanced and systems roadmap, should allow us to drive pricing to grid parity.

First Solar's project development pipeline and EPC capability are world-class, and we will leverage this to provide complete low-cost application solutions as we develop new business [in seconds].

Over the next few years we plan to execute on our 3.4 gigawatt pipeline in North America and expand it further.

We expect this pipeline to support our 1 gigawatt of annual build starting in 2012.

This gives visibility to a significant portion of our planned production for the next several years.

We are increasing our investment in new market development and technologies to grow our pipelines.

This includes developing new channel partners in the United States, Asia, and the Middle East by leveraging our experience and technology.

We are developing technology and application solutions tailored to market segments to create favorable economics and drive the transition to affordable solar electricity.

Our thin film module technology will evolve to enable us to pursue new market segments with higher efficiencies and electricity yields and with lower costs.

Our almost 3 gigawatt of production capacity by the end of 2012 will support this growth.

Finally, we plan to maintain financial discipline and deliver strong predictable returns as we pursue economically sustainable markets.

Our goal is to deliver an EVA of 5 percentage points above our weighted average cost of capital on our projects, technology and capital investments.

Our strong balance sheet will continue to enable our growth and provide a competitive advantage.

Before we discuss slide 13, I want to take a moment and thank Bruce Sohn for contributing to the development and operational success of First Solar.

And to let you know he's leaving operations in the very capable hands of executives like [Simon DeYoung], who has been running our manufacturing plants for about 15 months.

Simon has 26 years of semiconductor manufacturing experience at Intel and Mnemonics, and has been working closely with Bruce since joining First Solar.

Slide 13 shows that our end-of-year capacity is now at 2.8 gigawatts in 2012.

We continue to execute our factory expansion plans, which remain on schedule, with the exception of the two-line French factory, which is on indefinite hold and has been removed from our 2012 capacity plans.

We are now projecting 44 lines in total by the end of 2012, down from 46 prior.

Note that with both the Vietnam and Mesa facilities we are implementing a new strategy that involves constructing more building space than required to meet our current capacity planning.

For example, the Mesa expansion is a four-line factory, but the building shell and infrastructure can accommodate 10 production lines and allow for future growth.

With this new strategy, additional lines can be added with shorter leadtime.

To summarize, European demand has been impacted by FiT changes and uncertainty, but we believe we are uniquely positioned to drive sell-through of our 2011 production.

We continue to invest to develop new markets and will drive solar PV industry growth in the future.

We are making progress increasing visibility through our North American pipeline, our partnerships in developed markets, and by developing new markets.

We will focus on executing our systems' pipeline, factory expansion and cost roadmaps.

And we remain committed to our mission of driving solar PV to sustainable economics.

Before we go to the financials, I would like to take this opportunity to thank James Zhu for serving as our Interim CFO over the past few months, and enabling a smooth transition to Mark Widmar.

With that, I would like to turn over the call to Mark to discuss our future quarter financial performance and updated guidance for 2011.

Mark.

Thank you, Rob, and good afternoon.

Looking at slide 16, during the first quarter we delivered solid financial results in-line with our full-year guidance.

Net sales for the first quarter were $567.3 million, down $42.5 million or 7% compared to the fourth quarter of 2010.

The decrease was primarily driven by lower volumes as we allocated modules to system builds to meet contracted delivery schedules.

Revenue recognition is expected for those volumes later in the year.

Additionally, we had 7 fewer days in Q1, resulting from our adoption of the calendar fiscal year in the fourth quarter of 2010.

ASPs declined slightly due to a full quarter's impact of 2011 prices, which we implemented in December of 2010.

These impacts were partially offset by the positive effect of increased systems revenue recognition.

Our EPC revenue mix increased from 5% of net sales in the fourth quarter to 8% of net sales in the first quarter.

The blended exchange rate in the first quarter increased $0.01 sequentially to $1.34 per euro, while the spot rate also increased $0.01 to $1.37 per euro.

The stronger euro had a minor impact on net sales as we were heavily hedged, in-line with our long-term strategy.

We produced 407 megawatts during the first quarter, up 3% compared to the prior quarter.

The increase was driven by the ramp of our FiT factory in Malaysia, KLM 5, which reached full production by the end of the quarter.

We also improved our line throughput rate to 64.1 megawatt per year.

These positive factors were partially offset by the impact of 7 fewer days during the quarter.

Looking at our cost per watt, our module cost per watt in the first quarter was $0.75, flat with the prior quarter.

Our core manufacturing costs per watt was also flat at $0.73.

The conversion efficiency improvement and material cost savings were offset by the decrease in the number of days and by the increase in the ramp penalty as we ramped KLM 5 and qualified KLM 6.

Turning to the next slide.

First-quarter gross margin was 45.8%, down 290 basis points from the prior quarter.

The decrease was a result of the mix shift to more systems sales, as well as lower average selling prices, partially offset by the nonrepeat of the Q4 module replacement program accrual and the improvements in the conversion efficiencies.

Our module gross margin was 49.7% during the quarter, up 60 basis points from the prior quarter.

Turning to slide 19, operating expenses were down $0.8 million quarter-over-quarter due to lower compensation expenses, driven in part by the nonrepeat of our fourth-quarter bonus accrual increase.

Information technology, travel and other expenses also contributed to the sequential decline.

These items are mostly offset by increase in R&D investments.

Looking at slide 20, slide 20 shows net sales and operating income trends.

Operating income for the first quarter was $129.4 million compared to $165.7 million in the fourth quarter due to the decrease in total net sales.

Operating margin for the quarter was 22.8% compared to 27.2% in the prior quarter.

As we progressed through the year, our operating margin is levered to a timing of both systems revenue recognition and operating expenses.

First-quarter net income was $116 million or $1.33 per share on a fully diluted basis.

And the effective tax rate was 12.8%.

Looking at cash flows, in the first quarter operating cash flow was negative $43.8 million and free cash flow was negative $275.5 million.

We spent $169 million for capital expenditures, and depreciation was $47.1 million.

We also funded $63 million to our end-of-life recycling program, for which we set aside cash once per year in the first quarter.

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

Project assets, inventories and deferred revenue grew on more construction and progress in our systems business.

Also, we invested about $50 million more of capital expenditures compared to the first quarter of 2010.

Due to the timing of revenue -- net revenue recognition for our systems build we expect to consume cash in the first half of the year and generate cash in the second half of 2011.

Looking at our balance sheet, overall our balance sheet remains strong.

During the first quarter we used $401 million of cash.

In addition to the items mentioned earlier, we also paid down our revolving line of credit by $100 million, funded our recycling program as mentioned earlier, paid for our RayTracker acquisition, and increased components inventory, including strategic raw material.

Net debt -- excuse me, debt decreased by $106 million and our debt to equity ratio improved to 4%.

This brings me to our updated guidance for 2011.

We made several key assumptions underlying our guidance.

We increased our spot exchange rate assumption from $1.30 to $1.35 per euro.

For the second quarter we are fully hedged at a rate of $1.34 per euro.

For the full year about 53% of our net sales and 84% of our expected net income are hedged at an average rate of $1.34 per euro.

As of today, a $0.01 change in the dollar/euro spot rate would impact our revenue guidance for the year by about $3 million and our net income guidance by about $1 million.

Our module pricing reflects expected European FiT changes in 2011, and is intended to enable sellthrough economics.

We plan to build approximately 450 megawatts DC of system projects in North America, up from 400 megawatts in prior guidance.

We retain the flexibility to increase this amount to 600 megawatts should demand in other markets fall short of current expectations.

However, that flexibility has declined and will continue to decline as we progress through the year.

We began shifting from a laser plant size in the first quarter and it ramped to full production by the end of Q1.

We are ramping (inaudible) in the second quarter, followed by the ramp of our second German factory in the third quarter.

Our capital expenditures is primarily driven by capacity expansions in Malaysia, Germany, Vietnam and the US.

Page 24 shows that based on these assumptions we expect net sales to be in the range of $3.7 billion to $3.8 billion.

The new factory ramp penalty and cost of goods sold will range from $10 million to $15 million.

And the factory startup expenses will range from $50 million to $60 million, $10 million below prior guidance due to the investment hold of our French factory.

Stock-based compensation is expected to be between $115 million and $125 million, with approximately 20% allocated to cost of goods sold.

That is in line with prior guidance.

GAAP operating income is expected in the range of $900 million to $970 million, which is slightly below prior guidance.

We expect our 2011 effective tax rate to be in the range of 11% to 13%.

We estimate the year-end 2011 fully diluted share count to be in the range of 87 million to 88 million shares.

Earnings per fully diluted share to range from $9.25 to $9.75, in-line with prior guidance.

Capital expenditures for the year is expected to be between $1 billion and $1.1 billion.

Approximately 75% of our capital budget in 2011 is for capacity expansion and another 15% to 20% is for factory maintenance, which includes productivity improvements and R&D investments.

The remainder covers infrastructure spending for IT systems, facilities and others.

Operating cash flow is projected to be in the range of $0.8 billion to $1.0 billion.

This is slightly below Our prior guidance, primarily due to the timing of system-related milestone payments received during the year.

Annual return on net assets will be 17% to 18%, in-line with our goal to deliver returns exceeding our weighted average cost of capital by 5 percentage points.

Finally, slide 25 is an update of the expected quarterly profile of revenue recognition and operating income dollars through 2011.

Please note that as you read across horizontally from Q1 to Q4 on each chart, the sum of all the quarters is 100%, [though] in the second quarter we are expecting to recognize less than 16% of our full-year revenue guidance and approximately 9% of our full-year operating income guidance.

The profile is driven by the following assumptions.

First, Agua Caliente revenue recognition starts in the third quarter and accelerates into the fourth quarter.

The commencement of revenue recognition for Agua is one quarter later than in prior guidance, impacting the quarterly profile.

This is due to the continued delays in the DOE funding.

Second, factory capacity is ramping throughout 2011.

Third, Canadian projects under completed contract accounting show revenue recognition primarily in the fourth quarter.

Fourth, the pattern of operating expenses is lumpy.

In particular, during Q2 we expect an increase in research and development associated with process improvements that will have a positive cost per watt impact in the mid-to long-term.

We also expect an increase in SG&A as we invest in market development and due to one-time severance expense.

Additionally, severance expense is spiked to approximately $18 million to $20 million in Q2 before moderating back to Q1 levels in the second half of 2011.

Finally, we continue to use our assistance pipeline as a buffer against European demand fluctuations, which could affect our balance of systems revenues.

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

Operator.

The question-and-answer session will be conducted electronically.

(Operator Instructions).

Mark Wienkes, Goldman Sachs.

I am just wondering, could you comment on the slight delay in the DOE funding?

And then could you characterize the status of the other non-Agua Caliente DOE loan applications, if any, the overall market for access to financing?

And then how you think the proposed SunPower acquisition of affects that competitive landscape?

This is Larry Polizzotto.

So the DOE loan program -- the Agua Caliente financing is really two parts.

It is the DOE debt and then equity from NRG.

Both of those need to close in order to close the deal.

And the process on the DOE side is just taking a little bit longer than expected.

It could turn out that that gets done at the end of the second quarter, but that deal may not get completed until the third quarter.

And so we are not sure at this point.

So at this point we believe that it will be in the third quarter before that deal is completely closed.

But no issue with the process.

It is just taking with it longer than expected.

As far as other projects, there is three other projects that are applied for in the DOE process, and those are progressing through the process.

Sanjay Shrestha, Lazard Capital Markets.

On this guidance question for 2011, a two-part question.

One, you guys did mention it was all Agua Caliente for Q2, but given a lot of focus on what is happening in Europe and the Italian market, was there anything related to that where you guys actually ended up having any cancellation of any potential opportunity in that market?

Given the change in the FiT is there anything in that future guidance related to that?

Two, how big do you think your European exposure is going to be, let's say, 12 months out, given what is happening in that part of the world?

It is Rob.

Mark can comment, but I will start out.

With a lot of the changes -- the pending changes that are out there, especially Italy, the market started out really slow in 2011, and so there is some build in channel inventory.

Due to that build and the uncertainty, there is pressure on average selling prices, so I think prices are moving faster than people expected.

So additionally, there is -- it is not just that, but it is also the financing costs are rising in Germany and elsewhere, that is impacting the project economics overall.

So our outlook in terms of the year, it carries some of the lower ASP assumption.

And that is embedded in our guidance, which as Mark described, is partially offset by (inaudible) FX in what we are seeing.

And as we have discussed, we are going to look at what we have in our captive pipeline and now are planning to build 450 megawatts versus the 400 we talked about before.

So I would tell you that the market has been delayed.

And as we said relative to Italy especially, we saw something came out today as we were just joining the conference.

We haven't had a chance to review that.

But the impact of Italy has created a challenge and a delay, and it will take another quarter or two, I think, to sort out once they tell us what the rules are.

Stephen Chin, UBS.

Just a question on the increase in inventory at the end of the quarter.

I know you said higher inventories for the utility projects, but how quickly do you think you can work through this inventory, and when do you think you can get back to, let's say, normal inventory days?

We saw inventory build during the quarter, which about almost half, a little over half is related to the systems business.

We did see a little bit of inventory build though as well as we were ramping up KLM and our plants in Germany, which drove a little bit of additional inventory.

As well as we increased our investment in strategic inventory that we currently are carrying on the books.

The systems-related business will, obviously, follow the revenue recognition, so I would not anticipate a dramatic change in the inventory profile until we see the second half of the year.

To some degree that is Agua.

Yes.

Smitti Srethapramote, Morgan Stanley.

I just wanted to follow up on the Total investment in SunPower that occurred last week.

I am just wondering if the fact that SunPower will now have a lower cost of capital will give them a bit of advantage when they go up for bidding against you guys for large-scale projects?

Do you see similar deals occurring in the industry in the near term?

It is Rob.

I think it was a little bit of surprise in terms of the partnership overall, but I think there will be probably more and more large companies, as we know, investing in the industry.

And we really think to continue to drive the industry forward we need a lot of viable competitors to continue to drive the technology adoption and really driving it into utility systems.

So I think it will help to create greater awareness and drive the industry as a whole.

I think there is plenty of room for competitors in the industry.

I think it will be something we will have to wait and see.

So, obviously the cost of capital is a plus in general, but a lot of it comes down to having the projects and executing to them.

So that would be what I would say.

Steve Milunovich, Bank of America Merrill Lynch.

Can you comment a bit more about what is going on in Europe?

You have contracts.

Are you being impacted in your ASPs to the same degree as some of the other vendors?

Are you able to reallocate modules?

Any of your counterparties renegotiating contracts?

I know you're having to use rebates more than you expected coming into the year.

Well, I think what you're doing -- we talked a lot -- I tried to emphasize each of the countries as I went through the prepared remarks.

But in general there are two things.

Obviously, we are positioning our product, as we always did, for sellthrough.

So we talked about it in 2010 for 2011.

And then we always will put our customers to manage the feed-in tariffs and the other things that are happening.

So I think what is driving a lot of the challenge is the uncertainty.

We want to be able to price for sellthrough in the future, so 2012 and 2013 and beyond.

So we continue to do that.

I think the other part of it is -- so we did include what we anticipate as some of those pricing impacts in the guidance that we provided, and so we continue to work with our customers there.

We are also placing material in the Balkan regions in developing regions of the world to achieve some of this market growth and geographic diversification that you know is our focus.

So we are -- that is impacting us a little bit, but we think it is a great investment for the future in terms of the people that we are putting there and what we are doing to expand the use of PV in places like India and Australia, China, elsewhere.

Satya Kumar, Credit Suisse.

I was wondering if you could provide a quick update on the marketing of the AV Solar Ranch?

Will that sale proceed or go after any loan guarantees?

And for you to hit the low end of the 450 to 600 megawatt system guidance, are you contemplating any (inaudible) from AV this year?

And a quick question for Mark, if he can give us an operating cash flow and CapEx guidance for Q2?

Thanks.

This is Larry.

Yes, we are planning on building AV Solar Ranch this year and getting some recognition for that this year.

At this point we will start building that after we sell that project, and that is something we are working on right now.

It is something we planned on doing in the second half of the year, so we continue to expect to do that.

So no change in AV Solar Ranch.

In regard to the CapEx and the cash flow discussion, we really don't provide any specific guidance for the quarter.

What I can say though, as we said unrelated to cash flow, that cash flow will probably be more towards the second half of the year.

So as the systems business ramps up and we start seeing the revenue recognition-associated cash receipts we will see much stronger cash flow generation in the second half of the year versus the first half.

Robert Stone, Cowen and Company.

With respect to the North American systems business, you mentioned your ability to pull forward another 150 megawatt declined through the airport, can you give us a sense of by when you would have to pull the trigger to execute on that?

Also, any comments on when you might add to the 2.4 gigawatts in the pipeline?

Thanks.

It is Rob.

We are always focused on adding to that.

We just don't announce it until it is completely contracted, as you know.

So we still plan on that and continuing that effort.

The lumpiness in Agua Caliente revenue recognition is market (inaudible).

We now have it positioned as starting in Q3.

And it really accelerating in Q4.

So that is a big deal for us.

And some of the RESOP projects that we are involved with are also to the real estate type of accounting, so we've got to get the completion on them.

So that is part of what drives a little bit of the movement from quarter to quarter.

Keep in mind we added a lot of projects in the fourth quarter in our call just a couple of months ago.

So it hasn't been that long since we reported recently.

But there are quite a few projects in our pipeline that we will announce in the next few quarters.

Daniel Ries, Collins Stewart.

You mentioned India as potentially a 100 megawatt market.

Will that remain a module opportunity for you or you think you're going to systems in that country as well?

How does that 100 megawatts compare to where you were perhaps expecting entering the year, has that changed meaningfully?

It is Rob.

I would say it has changed meaningfully in a positive way.

And so, you know, we said in 2010 we only did 10 megawatts there in total, so when we talk about this 100 plus opportunity we are doing it on a module basis for the partners and customers today.

So we're evaluating the [work] and putting people on the ground and determining the best way for First Solar to establish a leading position in the market.

So we are open to all avenues of approach.

But as of now it is a module business with our partners, existing and new.

Timothy Arcuri, Citi.

I was wondering if you can give us some sense of finished goods inventory?

It was $59 million at the end of the year.

I'm wondering what it went up to.

Obviously, it went up.

Then I am obviously also wondering whether you can give us some sense of what the module EPC revenue split will be for June?

Thanks.

The actual finished goods inventory, I think, when up around $13 million -- $12 million, $13 million, somewhere in that range.

So it was a nominal increase of the total inventory build.

Again, the majority of inventory build related to the systems business.

And again, we have some increase in raw material as we are ramping for KLM and Frankfurt.

Then the other part of your question, excuse me, what is it again?

I just was kind of wondering you had previously given guidance on your 2011 guidance call for about $620 million of module inventory in June, and that has obviously gone down.

So I'm wondering what the module EPC revenue split is that is assumed in your June quarter guidance?

Thanks.

The EPC revenue in Q1 one was around 8% of the total.

And we would expect that number to approximately double, maybe a little bit more than that, as we move into Q2.

Chris Blansett, JPMorgan.

I had a quick question about future capacity expansion plans.

Although you have a longer-term positive outlook, with all the uncertainty going on in Europe right now, just the thoughts on why you're continuing to add right now as opposed to maybe taking a pause, letting it settle out before starting up again?

Well, I think a couple things.

One is we still have the strategy in place to build larger facilities to broaden the flexibility to add or not.

We did talk about taking the two lines out that we had intended for France, given the uncertainty, so we did that.

So we do also have the pipeline of business in place, which is different from our past, or the 2.4 gigawatts that we continue to grow.

Then starting in 2012 we have 1 gigawatt of installations planned on a go forward basis on our own captive pipeline.

So, in general, that is a significant change for us.

And then our investment in developing the new markets that we talked about versus the traditional agreements that we have in place in developed areas of the world.

So we talked about India.

We feel very pleased about that opportunity.

We see some opportunity in Saudi Arabia.

We talked a little bit about it.

We didn't highlight in significant detail on the call.

We went through a lot of things during the call.

We feel good about Australia and what is happening there.

Some of the comments that came out of China recently would reflect that there may be good opportunities to put together a commercial business that is viable.

That has been our challenge there.

So I would say those are the differences.

And as we look to the market and we assess it and find that there are challenges that are impacting us, we can always modify our [plants] on a go forward basis.

So our plan is to create flexibility with our capacity.

Jesse Pichel, Jefferies.

Hello Mr.

Gillette, and welcome Mr.

Widmar, thanks for presenting the facts are clearly as usual.

I have a two-part question.

I am just wondering, how exactly do you have the flexibility to pull in from 450 megawatts to 600 megawatts?

Would your customers thus be allowed to get the PPAs in the States started early?

My second question -- part question is what is the margin impact of shifting more of your systems to the roof, given the BOS penalty that maybe involved, along with more abundant silicon modules?

Thanks much.

Thanks for the question.

First is up to the 600 and then opportunity.

We deliberately -- we have multiple contracts that we talked about 11 projects that are in play in 2011 where we had 3 in 2010.

So each of those contracts has some range in it in terms of what you build when, and milestone commitments in terms of total.

So that is where we can do part of that upside.

But in addition there are unannounced customer projects.

So their customer develop projects where we would provide EPC and module installation in total.

And then also we can -- because of our focus and effort on cycle time we have increased our ability to put megawatts on the ground.

So that also provides the flexibility and opportunity to meet customer demands and drive it that way.

So I think that is where that range comes from.

What we try to do is moderate it with the external module demand.

So we view the external module demand as perishable, so we want to be able to serve that demand with our customers and ensure that they can develop their applications.

And this gives us a buffer to some of these fluctuations that take place.

That is where that comes from.

The second part of your question, can you restate what that (multiple speakers)?

Would the impact of shifting more of your systems to the roof, given BOS penalty and perhaps more abundant silicon modules this year?

When we started the business five, six years ago a lot of our product went to the roof because of our competitive scenario, and has for many, many, many, many years.

So I think I mentioned despite a lot of the big volume [brown mouth] systems that we are installing in North America and elsewhere, still 30% of our business is rooftop in total.

So it is really -- we have focused on the 30 kilowatt and above in large part because we have been sold out throughout our history, and a lot of our customers have always wanted to pursue that market.

I think it is an opportunity for us to apply some of our know-how in application development and feed installation rates and other things in that market as well.

So we have not focused on it, and I don't anticipate it would have a significant effect on our margins in total.

Kelly Dougherty, Macquarie.

I apologize if this has been asked.

We got cut off.

But we have been hearing about material cost increases from some of your peers.

And understood that you're using different materials, but maybe can you help us think about what is going on with some key material cost -- glass, encapsulants, things like that?

And then maybe how we think about the production cost improving by the end of the year?

Yes, it is Rob.

So I would say that -- a couple of things.

One is we see the similar commodity pressures that many people see in the BOS area.

So if you think about copper or some steel, things like that, so that kind of commodity price.

We try to do opportunistic buy and negotiate, but there is definitely some pressure there.

So that affects us.

Anything that you would read about transportation and costs related to transportation, so surcharges for transportation, whether it is on sea or over land, that is something that would affect us that we do our best to manage.

We have long-term contracts in place for the major commodities that we acquire.

So like as you mentioned, encapsulants or glass or other things.

Remember, we have gone from being basically a very small buyer of glass five years ago to one of the top three flat glass buyers in the world today.

So we have done a lot of good work, I think there.

So there is pressures, for sure, but given the fact that a large part of our costs are within our control, non-operational control, and we use so little key raw materials to make the semiconductor that it is a different scenario, I think, than some of our competitors.

We are not affected by things like [silver] (inaudible).

We have time for one more question.

That comes from Jake Greenblatt, Barclays Capital.

Thanks for taking my question.

Just a quick question on the guidance.

I noticed that both RONA and operating income are down from the previous guidance.

I am curious what drove that decision.

From a full-year standpoint the actual operating income is down just slightly.

You're talking a nominal change of a few million dollars.

Some of that is driven by the ASP pressure that we were talking about.

Again, some of that is more to seed higher growth or new emerging growth markets.

So as we move some volume away from Europe where we are seeing some slowness, and moving that into other growth markets like India, we are seeing a little bit of an ASP pressure from that standpoint.

The only other thing that was significant that within this round of guidance we didn't have, we do have some severance-related expense that was not in our prior guidance.

And to be honest with you, that makes up the majority of the drop of $10 million.

That does conclude today's conference.

We appreciate your participation.

Have a wonderful day.