第一太陽能 (FSLR) 2011 Q4 法說會逐字稿

Good day, everyone, and welcome to First Solar's Fourth Quarter 2011 Earnings Conference Call.

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

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

As a reminder,today's call is being recorded.

I would now like to turn the call over to David Brady, Vice President, Treasury and Investor Relations.

Mr.

Brady, you may begin.

Good morning, everyone.

Thank you for joining us for First Solar's Fourth Quarter 2011 Earnings Call.

This afternoon the Company issued a press release announcing its financial results for the fourth quarter of 2011.

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

In addition, we have posted the presentation for this call on our investor relations website.

An audio replay of the call will also be available, approximately two hours after its conclusion.

The audio replay will remain available until March 5th, 2012, at 11.59 PM Eastern Standard 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 are calling from outside of the United States, and entering the replay passcode 8612954.

A replay of the webcast will be available on the Investors section of the Company's website approximately two hours after the conclusion of the call, and will remain available for approximately 90 calendar days.

If you are a subscriber of [FactsHead] or ThomsonOne, you can obtain a written transcript.

The with me today are Mike Ahearn, Chairman of the Board and Interim Chief Executive Officer, and Mark Widmar, Chief Financial Officer.

Mike will present an overview of market conditions, and then Mark will review our operational and financial results for the fourth quarter of 2011, and discuss in detail some of the charges we took.

We will then open up the call for questions.

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

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

Both the financial numbers reported and discussed on today's call are based on US generally accepted accounting principals.

In the few cases where we report non-GAAP measures, such as free cash flow or non-GAAP EPS, we have reconciled the non-GAAP measures to GAAP measures at 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 this call, the Company will make projections and other comments that are forward-looking statements, within the meaning of 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 filed on Form 10-K, and other filings within the Securities and Exchange Commission.

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

It is now my pleasure to introduce Mike Ahearn, Chairman of the Board and Interim Chief Executive Officer of First Solar.

Mike?

Thanks, David.

Welcome to our Q4 2011 earnings call.

As discussed on our recent call, traditional solar market subsidies are declining -- continuing to decline and significant non-subsidized markets are not yet developed.

Last week, the German Environmental and Economics Ministers released a proposal that would significantly reduce or potentially phase out the German solar market.

The fate of this bill, which will be presented to the Cabinet tomorrow and still needs to pass through Parliament and the Chambers in the Federal States, remains unclear.

However, it is likely that even if less draconian measures are ultimately adopted, Germany, like other feed-in tariff markets, will continue to be challenged in 2012 and beyond.

The key to First Solar's success is to develop new markets that do not depend on subsidies, and we believe we can do this by focusing on regions in the world that are blessed with a lot of sun and need more peak electricity.

Our superior module technology, combined with our ability to design, engineer, construct, and maintain large solar and electricity generation plants and integrate them with the grid should enable us to reduce solar electricity prices to good parity levels in these markets, while still making an attractive profit.

Our demonstrated success in selling solar electricity and solar generation plants to leading US utilities will provide targeted customers in these new markets with important validation of our capabilities.

Solar electricity has never been deployed without subsidies at the large scale we envision.

And local utilities, regulators and politicians will need time to understand how to plan and integrate solar electricity into their local grids.

But fortunately, our existing US project pipeline provides a level of continuing demand while we work on opening the new markets that will drive our future growth.

However, it is important that we begin taking steps in 2012 to create these new markets, in light of those long lead times involved.

We have been busy working on our three-year plan over the last several weeks.

As an out growth of the planning process, we have decided to idle four lines in our German plant for up to six months this year, postpone the commissioning of our proposed facilities in Mesa, and discontinue work on our proposed plant in Vietnam, which is expected to result in an impairment charge of up to $100 million this year.

We've also begun the process of eliminating unnecessary operating expenses, which will continue over the course of 2012.

At the same time, we have begun to add resources in targeted markets where we expect to derive significant growth in coming years.

The impact of these and additional actions will be rolled up in a three-year plan, which we had hoped to share with you today, but is now scheduled to be discussed in our Q1 earnings call in May.

This quarter we incurred $125.8 million in additional warranty reservesto reflect an updated estimate of costs related to the manufacturing excursion that occurred between June 2008 and June 2009.

As previously disclosed, a small percentage of product manufactured during that time period may experience premature power loss once in the field.

First Solar identified and addressed the manufacturing excursion in June 2009, and later initiated a voluntary remediation program that goes above and beyond our standard warranty obligations.

The remediation program includes module removal, testing, replacement and logistical services, and additional compensation payments to customers under certain circumstances.

A large volume of claims made under the remediation program were processed in the fourth quarter, and we identified a significant increase in remediation costs under the terms of our voluntary program.

Our estimates now benefit from having processed over 95% of the total claims submitted under the life of the program.

The total cost of remediating the manufacturing execution that occurred from June 2008 to June 2009, now stands at $215.7 million, including $145.6 million above and beyond our standard warranty.

There are approximately 4% of the claims submitted for which we have not yet been able to determine if remediation is required.

If it is determined that these claims should be remediated, there is at least a potential for additional cost of much as $44 million.

While the cost of the program has been much higher than we would have liked, we believe we have done the right thing in demonstrating our commitment to our customers beyond our product warranty.

Also, our analysis of hundreds of PV systems and modules returned under warranty as part of this program, combined with analysis of system-level performance for sites under O&M agreements, has given us unique insight into the real-world performance of our products in a wide range of PV systems.

That knowledge has contributed to the continuous improvement of our technology and refinement of our product development roadmaps.

Briefly turning to the markets; in North America, we continue to make progress with projects in our pipeline.

At Agua Caliente, we had completed approximately 60% of the balance of system and installed 2.9 million modules by the end of the fourth quarter, and we energized the first 30 MWs in Janurary of this year.

Construction has started at Desert Sunlight, and while we cannot recognize revenue under GAAP, we have received net cash received of $77 million as of the end of the fourth quarter.

AVSR One has yet to receive funding for the loan guaranty, but Exelon and First Solar are pleased that the Los Angeles County has approved changes to the construction permit for the project, satisfying a requirement for the funding of the initial loan advance for the project.

The companies have extended their deadline for receiving initial loan advances to April 6th to allow sufficient time for the funding to be received.

In the meantime, the project construction continues to move forward.

While Topaz did not receive a loan guaranty, we nevertheless completed the sale of the project to MidAmerican Holdings Company in January, and we'll begin recognizing revenue in the second half of 2012.

We're pleased to include on our growing list of customers MidAmerican, one of the leading investors in renewable energy, which also purchased 49% of the interest in Agua Caliente from NRG in the last month.

In China, we recently executed small demonstration projects with two strategic partners, one was a ground-mounted project, with Guohua Energy Investment Company, one of the largest [GenCos] in China, and a subsidiary of the Shenhua group, which is the largest coal-mining company in the world.

The other project was a roof-top project in Beijing, with BOE Energy Technology Company.

And we continue to complete the feasibility study for the Ordos 30 MW Phase One project and to secure project approval in 2012.

In Australia, we began construction of Australia's utility-scale solar installation, a 10 megawtt AC project being delivered to Verve Energy and GE Energy Financial Services near Geraldton in Western Australia.

This project will establish a platform for solar growth in the future, supported by existing renewable energy target of 20% by 2020, the national carbon legislation, and the Clean Energy Finance Corporation, which is committed to invest $10 billion in non-wind, large-scale renewables.

And finally, we have spent considerable time over the past several weeks in potential sustainable markets, including India, China, Southeast Asia, the Middle East, and parts of Latin America,and continue to be encouraged for the opportunity for First Solar to create non-subsidized markets in these regions.

Now I would like to turn the call over to Mark to review our operational and financial results and then update guidance for 2012.

Mark?

Thanks, Mike, and good afternoon.

We'll start with operations on slide six.

In Q4, our production was 540 MW, up 37% versus the prior year, but down 2% quarter-over-quarter.

The year-over-year increase was driven by capacity expansions in Germany and Malaysia.

Sequentially, in order to better align our supply with market demand, we (inaudible) our Malaysia facility over the year-end holiday season.

This downtime reduced our capacity utilization for the quarter to 94%, or 600 basis points below the third quarter.

Malaysia now, though, is currently running at full capacity.

At our 2012 guidance call in December, we stated that we will be running our manufacturing plants at 80% utilization in 2012.

As demand in Europe is more challenging than expected, we will be reducing our utilization rate further, to a range of 60% to 70%, which will reduce our production in 2012 to a range of 1.5 to 1.8 GWs.

As part of this process, we are suspending four production lines for up to six months in (inaudible), and accelerating our [go-fast] efficiency roadmap by idling and retooling each line, sequentially, in Malaysia.

These actions might not be sufficient to reduce production to a level that aligns with demand, so additional options might be neccessary as we continue to adjust production capacity to match expected market demand.

Because we will not be running at full capacity, we will be not be disclosing our line run rate on a quarterly basis.

That said, we continue to make improvements for our line throughput, held by our advancements in model efficiency.

Thus we are increasing our goal for our line run rate from 80 MWs per year by 2014, to over 90 MWs by the end of 2015.

Our average line conversion efficiency for our modules was 12.2% in the fourth quarter,which was up 0.6 percentage points year-over-year, and up 0.4 percentage points quarter-over-quarter.

This is our largest sequential increase since 2007.

Our best plant improved to 12.6%, which is up from 12.4% last quarter, and 11.6% last year.

We continue to make significant progress in conversion efficiency.

At 2012 year-to-date, our average conversion line efficiency is 12.4%, up 200 basis points from the end of the year.

And the current efficiency rate of our modules produced on our best line is 13.1%.

We expect sustained improvements in efficiencies as we continue to invest in our technology.

Last month we announced that we received confirmation from the National Renewable Energy Lab, or NREL, that First Solar achieved a record 14.4% efficiency, for cad-tell thin film modules, which eclipses the prior record of 13.4%, also heldby First Solar.

The record performance comes just six months after First Solar announced that it had achieved a record 17.3% efficiency for cad-tell thin film cell.

Both the cell and module record setters were constructed using commercial-scale manufacturing equipment and materials that can be implemented across our existing line, for a capital spend of around $100 million for each of the next three years.

The achievement supports our module efficiency roadmap, updated last month.

And underscores the tremendous, on-going potential of cad-tell.

Module manufacturing costs per watt for the fourth quarter was $0.73, which is down $0.01 quarter-over-quarter.

This cost includes a $0.01 impact from the increase in warranty accrual rate, and a $0.01 headwind from plant under utilization.

Had our plants run at a full utilization, as we historically have, then our module manufacturing costs per watt would have been $0.72 or $0.03 below the third quarter, on a comparable basis.

Our best plant is manufacturing modules at a cost of $0.69 per watt,excluding the impact of under utilization.

Moving on to slide seven; we show our updated view of available capacity and anticipated production utilization.

This updated slide no longer includes Mesa.

In our guidance call for 2012 in December, we noted that production in Mesa would be delayed until 2013.

As we further evaluate market demand and our capacity requirements, we have now decided to put Mesa on hold until market demand justifies additional capacity.

First Solar will retain ownership of the building associated with the site and we expect to relocate various engineering and administrative work rigs to the office space there.

Some of the space on the main floor will also be used to store product and equipment in transition.

Moving to manufacturing -- to our systems business, on slide eight.

In 2011, we added approximately 650 MW AC of contracts to our pipeline, and installed approximately 425 MW of DC.

Our pipeline stands at 2.7 GW AC, which represents the sum of the contractual MW of the projects in our pipeline.

As of the end of the fourth quarter, we have recognized revenue for approximately 180 MW equivalent.

The remaining pipeline will either be constructed in the future or is currently under construction.

But all revenue recognition criteria have not been met.

MW equivalence is calculated by taking total cumulative revenue recognized, divided by the total contracted revenue for each project, multiplied by the MW for such project.

Mike also discussed the solid progress we were making on our four large projects; Agua, AVSR, Topaz, and Desert Sunlight.

In addition to these large projects, we continue to advance the balance of our systems pipeline.

In the first quarter 2012, we began construction on Copper Mountain 2, and received initial funding under the contract.

In addition, outside of the four large projects previously mentioned, we have completed the financing of one of our projects, subject to certain conditions -- which we anticipate announcing the closing of the project in the next couple of weeks.

Moving on to the financial portion of the presentation, on slide nine.

Net sales were $660 million, down from $1 billion last quarter.

The decrease was primarily due to lower third-party module volumes and lower module and balance system buyings in our systems business.

Our EPC revenue mix decreased from 39% of total net sales in the third quarter, to 30% of net sales in the fourth quarter.

Our solar power systems revenue, which includes both our EPC revenue and solar modules used in the systems business, decreased slightly from 65% of sales in the third quarter, to 64% of sales in the fourth quarter.

Aggregate modulated SPs increased 2.9% quarter-over-quarter, including the impact of currency, or 4.1%, excluding currency.

Modulated SPs in the systems business increased sequentially, whereas third-party modulated SPs declined 4%, excluding currency.

We expect the largest sequential decline in third-party module ASPs from the fourth quarter of 2011 to the first quarter of 2012, as higher-priced, legacy contracts expired at the end of 2011.

On a year-to-year basis, fourth quarter module ASPs decreased 2% and third-party ASPs declined 24%.

Gross margin was 20.9%, down 16.8 percentage points from the prior quarter.

The decrease was due to an increase in incremental warranty charges, primarily related to our previously announced manufacturing excursion.

Absent these one-time charges, gross margins would have been 36.1%.

Module gross margin was 19.5%, down from third quarter module gross margins of 41.4%.

Excluding the impact of incremental warranty charges.

module gross margin would have been 35.5%.

Operating expenses were up $467 million quarter-over-quarter, to $623.4 million.

The primary reasons for the increase were a series of charges that we considered non-recurrent, namely a $393.4 million goodwill impairment, $31.8 million in lost power compensation related to the manufacturing excursion, and $60.4 million of restructuring charges, which consisted of $53.6 million for asset impairment and associated decommissioning, and $6.8 million in severance.

These restructuring charges were previously announced in our 2012 guidance call last December, where we said the total charges could be up to $85 million.

The goodwill impairment is a non-cash charge that does not affect our cash position, or cash flows from operating activities.

The goodwill was primarily related to acquisitions of OptiSolar in 2009, and NextLight in 2010, representing benefits from expected synergies, economies of scale, and vertical integration.

We allocated most of the goodwill for these acquisitions to our components business, consistent with our historical view of the systems business function as being an enabler for the components business to drive module through-put.

We believe that the acquisitions of OptiSolar and NextLight have provided tremendous value to First Solar, far in excess of the acquisition costs, including goodwill.

As a result of these acquisitions, First Solar has announced the sale of and is currently constructing four of the largest solar power plants in the world.

This impairment charge does not change the value of the acquired project pipeline, nor does it change the Company's view of its business prospects or future results, as discussed later in this call.

It is primarily triggered by the fact that the market capitalization of our stock was trading below the book value as of the end of the fiscal year 2011, and the related pressures on the industry as a whole.

In order to provide a comprehensive view of the manufacturing excursion and warranty charges in Q4, a break down is provided on slide ten.

In the quarter, we expensed $163.5 million.

Of this amount, $125.8 million was for the manufacturing excursion.

As Mike mentioned previously, a large volume of claims made under the manufacturing excursion program were processed in the fourth quarter, and we identified a significant increase in remediation costs under the terms of our voluntary program.

The Q4 costs associated with the manufacturing excursion is composed of three items.

The first item is the cost to remove, replace and provide logistical services related to the manufacturing excursion.

In the fourth quarter, we expensed $23.9 million for these efforts, and have expensed $99.7 million to date.

The second item is expected payments to customers, under certain conditions, for power loss prior to the remediation of the customer's system.

In the fourth quarter, we expensed $31.8 million for this compensation, and have expensed $45.9 million to date.

The third item, $70.1 million, is due to an increase in expected number of replacement modules above our standard warranty rate required for our redmediation efforts.

Finally, we recognized a $37.8 million charge to increase our warranty accrual.

We believe our PV modules are potentially subject to increase in cellular rates in hot climates.

As our geographic mix of sales has shifted to hot climates, we have increased our warranty accrual.

Our experience has shown that our warranty rates for hot climates are slightly higher than the return rates for temperate climates.

With this change, our standard warranty accrual rate has been increased by one percentage point to account for the potential returns, going forward.

We will continue to review our warranty accrual rate in the future and we'll adjust the rate as appropriate to reflect our actual experience.

Due to the charge for goodwill impairment, additional warranty accruals and restructuring, we recorded an operating loss of $485.3 million for the quarter, compared to an operating income of $222.7 million in the third quarter.

The fourth quarter net loss was $413.1 million, or $4.78 per share.

The effective tax rate was 14.2%.

Before the non-recurring charges mentioned above, that is;goodwill impairment, additional warranty accrual and restructuring, earnings per share for the quarter would be $1.26 on a fully diluted basis, and the effective tax rate would be 19%.

Overall, our fiscal 2011 net sales grew 8% from 2010, to approximately $2.8 billion.

On a GAAP basis, operating margin was negative 1.3%, and earnings per share was a loss of $0.46.

Excluding the full-year impact of the items listed above, the full-year diluted EPS would be $6.01.

Slide 11 presents a walk from our GAAP EPS to our non-GAAP EPS for the fourth quarter of 2011 and for the fiscal year 2011,calling out the three non-recurring charges related to warranty, goodwill impairment and restructuring.

The complete reconciliation of GAAP to non-GAAP numbers can be found in the slide at the back of the presentation.

Turning to slide 12; I'll review the balance sheet and cash flow summary.

Cash and marketable securities were $788 million, down slightly from $795 million as of the end of the last quarter.

Accounts receivable trade balance declined quarter-over-quarter, due to improved collections and lower shipments.

Our unbilled accounts receivables increased $208 million due to a $224 million increase in unbilled receivables at Agua Caliente.

Inventories increased, mostly due to higher inventories in our systems business, both for modules and balances systems equipment, partially to help secure the economic benefit of the 1603 program for our projects.

Project assets increased as we proactively developed projects that we have not yet sold.

Deferred project costs -- also increased -- sorry, I lost my page -- also increased, as we constructed projects that we have sold but for which we cannot yet recognize revenue.

As a reminder, when we sell a project, the project assets turn into either revenue or deferred project costs, depending on whether the applicable revenue recognition criteria have been met.

Our debt level increased by $55 million from the end of last quarter, primarily to fund working capital increases on our systems business, as certain projects anticipated to close were pushed out of the year.

Operating cash flows for the quarter were $11 million.

And free cash flow was negative $76 million.

We spent $118 million for capital expenditures,down $106 million from last quarter.

Depreciation was $67.9 million, compared to $60.8 million last quarter.

This brings me to our updated guidance for 2012.

We are reaffirming our guidance for net income and earnings per share, excluding any impairment and restructuring charges that we may be taking this year.

While earnings guidance is the same, the assumptions behind the guidance has changed, as shown in slide 13.

As we mentioned earlier, the Europe market will be more challenged than we initially expected.

Our third-party sales are expected to be in the range of 300 to 500 MW, down from prior guidance of 720 MW.

To accommodate lower sales, we will further reduce our manufacturing utilization rate to a range of 60% to 70%.

This will include our module manufacturing cost per watt from $0.67 under fully utilized to $0.74 under utilization rates of 60% to 70%.

Note that our costs, excluding under utilization, is the same as we had guided in December, despite incurring a $0.01 headwind due to higher warranty accruals going forward.

The reason is that we continue to accelerate our efficiency improvements.

We now expect to average a module efficiency of 12.7% in 2012, up from the prior guidance of 12.6%.

Turning to our guidance on slide 14; we are reducing our 2012 revenue guidance from a range of $3.7 billionto $4 billion, to a range of $3.5 billion to $3.8 billion, to account for the lower third-party module volumes.

Offsetting the impact of lower third-party module sales and higher module manufacturing costs due to our lower production volumes, its favorable balance of systems costs productivity associated with our systems business, where we plan to install 1.2 GW of modules.

Our operating cash flow guidance declined due to the 2012 cash impact associated with the incremental manufacturing excursion charges accrued as of the end of 2011.

Our operating cash flow guidance for 2012 includes approximately $75 million of net cash receipts from Desert Sunlight.

To summarize, on slide 15; overall our operating performance for the quarter and year end were solid, given the challenge from challenging market conditions.

We expect challenges in the subsidized markets to intensify in 2012, due to uncertain and in some cases collapsing FiT regimes.

Cash flow generation should accelerate in 2012, as working capital turns into cash flow.

We are accelerating module efficiency and cost road maps to increase our competitive advantage.

We are developing a three-year plan to aggressively enter the sustainable markets, the details of which we will unveil in the first quarter earnings conference call.

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

Operator?

Thank you, sir.

(Operator Instructions).

And we'll take our first question from Brian Lee with Goldman Sachs.

Hi, guys, thanks for taking the question.

I was just wondering, what is the rationale for not outright shutting down some manufacturing capacity, since you are taking some meaningful under utilization charges here and you have some higher costs facilities, relative to Malaysia, Germany is about 20% of your capacity?

So if you took a onetime charge, took that offline, it seems like you would have a shot at getting back on your original cost trajectory, even in 2012.

Yes, Brian.

This is Mark.

Right now what we're doing is assessing all of our options.

And we will continue to evaluate what makes the most sense.

We believe, at this point in time, the temporary shutdown that we have currently announced makes the most sense, given the current expectations of the underlying market.

To the extent the market demand continues to soften, or we have lack of visibility of stronger recovery as we begin 2013, we would evaluate additional actions.

But I think what we're doing right now is prudent, given what we are see in front of us.

We'll take our next question from Sanjay Shrestha with Lazard Capital Markets.

Thank you.

You talked about each line being 90 MW up from your prior goals of 80 MW, right?

What is an embedded assumption in that for your module efficiency, as well as cost per watt target for you guys?

That would be consistent with what we indicated last December.

We indicated that our module efficiencies should start to trend towards 14.5%, within that range, closer to 15%, as we exit 2015.

And the module cost per watt should start to trend down to the low 50s, call it between $0.50 and $0.52.

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

Hi, thank you.

I just wanted to ask about the component guidance of 300 MW to 500 MW; can we assume that that is going to be a profitable business, on an operating basis, in 2012?

And that First Solar is walking away from an unprofitable components business?

Thanks.

I think when you look at the third-party business right now, I think it also varies depending on geography, in terms of ability to capture value for the solution that you bring to the market.

In certain geographies, I would say pricing is much more aggressive, which makes it more challenging to price at a level that would be accretive to operating income.

As we think about the under utilization charges that we'll be taking this year, and our cost moving up to $0.74, I would not anticipate meaningful margin in certain geographies.

And that's one of the things we'll continue to evaluate;does it make sense to serve those markets, especially if its -- long term, we don't believethe economics will be viable or sustainable.

And those are the decisions that we'll look at as part of our three-year planning process.

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

Yes, hi, thanks.

Just a question on the guidance for 2012.

Your third-party sales is now down 40% below your prior guidance, and you are still guiding to 1.2 GW in system sales.

I think in the last call you said that a 10% change in your third-party sales would affect your guidance by $0.30.

Just want to understand, what has changed so significantly in the profitability of the systems business in the last three months, that earning variances are unchanged?

Thanks.

One of the things that we highlighted, in terms of the benefit is, we have achieved significant cost productivity and our balance of systems for our systems business.

And that's been more than sufficient to offset the earnings pressure that we see now with the lower volumes with third-party modules.

As we continue to scale and get greater purchasing power and drive earnings across the entire platform, as well as with the efficiency gains that we have now on our modules and the (inaudible) that we'll be able to utilize in order to build out those projects, we're seeing much better margin realization on that side of our business, which is more than sufficient to accommodate the volume shortfall in the third-party sales.

We'll take our next question from Amir Rozwadowski from Barclays.

Thank you very much, and good afternoon, Mike, Mark and David.

You folks seem to be taking a number of steps to reflect the current market environment with respect to your own manufacturing capabilities.

What I'm trying to assess is what is your embedded assumptions for the German market?

And then Mark, you mentioned at some point you are going to take a second look to see if this is the right strategy or if you need to continue to shut down certain facilities.

What is that trigger point that we should keep in mind in monitoring when that could emerge -- a decision along those lines?

Thank you.

Yes, I mean it's really -- this is Mike -- it's working through, as you know, the political process now.

And while the initial announcement was pretty grim, there are discussions underway.

And I think as we let the process work over the next couple of weeks, we'll have a better idea of where the German market is going to land.

And I think we would like to see -- we want to see where this ends up, before we do anything beyond what we have decided to do to date.

But we're certainly going to be watching to see what the German feed-in tariff outcome is, factoring that into our decision.

We'll take our next question from Smitti Srethapramote with Morgan Stanley.

I was wondering if you guys could give us an update on what you see happening in US utility scale project?

We haven't heard anything about 100 MW buzz projects in the past several quarters.

Given where natural gas prices are right now, what is your latest outlook on the US utility scale market?

Yes, I think we showed a slide on the last call in December that showed the new RFP solicitations in California, based on solicitation year that showed a pretty steep decline over the last solicitation years.

I think that's representative of the trend, that new RFPs and PTA agreements have declined pretty substantially -- the pace of them.

So the outlook is not for significant new solicitations or [off-take] agreements.

Contrasted to shipments and installations, which will continue to grow, but as a function of agreements that have already been put into place during the last procurement cycle.

That's our working assumption.

We see the US, in terms of new, additional solicitations and [off-takes] as being -- not nonexistent, but sporadic, and not at particularly high levels for the next several years.

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

Hi, Mike, on the last conference call on the 3rd of November, I asked you about warranty expenses, and you said that it had all been taken into account in the financials.

So did something change from the 3rd of November to the end of the quarter?

Was it a rush of warranty applications?

Is that what the issue was?

Thanks.

Yes, as Mark mentioned, we processed a large volume of the claims that were made over the life of the program in Q4.

For the last quarter, we reserved and reported based on the best available information then.

And we discovered, in the processing of claims, a lot of additional exposure, which is reflected in the charges that we have taken in Q4.

We'll take our next question from Jesse Pichel with Jefferies.

First Solar was early in identifying that the best return in the solar supply chain was selling projects and not commodity modules.

It would now appear that an even greater return is owning the projects, especially your projects, which were done under PPA agreements from years ago.

Would your new three-year plan consider owning and operating your pipeline projects?

Well, it's not -- we're not currently thinking of doing that, Jesse.

And I think we would continue to evaluate all sorts of options.

We're not currently thinking that we would actually own and operate the assets.

Part of that is the capital required, part of it is where we think returns will settle under a normalized state that would not be -- in its normalized way, the highest return part of the value chain.

I'm not sure this couldn't vary by market.

We see, clearly, that markets are very localized in their nature.

And what we might be interested in doing, if not directly with a partner in a given market -- could potentially take that into account.

But that's not the thinking as of today.

So we would have to evolve into something like that if we did it.

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

Hi, thanks for taking the question.

Just following up on an earlier one about limited profitability of the external module sales.

As we look beyond this year, do you have a target for how much of your production you want on the systems or the project versus external module sales?

And then you talked about each market being different.

Maybe you could talk about which markets you still find attractive for the third-party modules?

Yes, going forward, we've put this three-year plan together.

Our intent is to design, build, construct, and operate large PV systems.

So we're not intending, as we move into the future, to sell modules as a discreet component.

We think our competitive advantage derives partly from the module, but principally, from the ability to design and install.

If we do the installation directly or through others with our processes, but to design and install turnkey systems that are engineered for cost and reliability, that's what we have demonstrated the ability to do.

And combine that with an O&M capability, and a set of assurances to our customers that would be very difficult for competitors to match.

So we see this as a holistic offering.

And that's -- it gives us the competitive advantage.

It's also needed to open new markets, and to move large volumes of systems.

That's the strategy, going forward.

And we'll take our next question from Mehdi Hosseini with Susquehanna International.

Yes, thank you for taking my question.

I'm confused about the goodwill impairment charge of $390-some million.

How is that going to chance the economics of OptiSolar, assuming that that is where the charges are related to?

It actually won't have any impact on any of our projects.

We tried to highlight that in the script.

The underlying economics and the value associated with those projects, primarily the main four large projects that everybody is very familiar with, we're very comfortable with those projects, and the economics.

The goodwill impact will have no impact any of the returns anticipated from those projects.

It's purely an accounting non-cash item that we had to recognize within the quarter.

But again no impact -- I want to make sure that's clear -- no impact associated with any of the projects that we have acquired via the acquisitions of either NextLight or Opti.

And we'll take our next question from Chris Blansett with JPMorgan.

Hi, Mike.

Quick question about R&D expenses and potentially accelerating them, in order to bring down your product costs, whether it's BOS or modules, at a faster rate, given the declining subsidies -- because you are still running at a pretty low R&D to revenue ratio.

This is Mark, actually.

That is one of the things we are doing.

We highlighted that a little bit, is our strategy when we -- in order to align our production to market demand, we will be taking some outages in KLM, sequentially, across each of the 24 lines there.

And what we'll be doing is upgrading those lines, leveraging the capability that we highlighted in our best-performing line today, which is around 13.1%.

R&D efforts have been instrumental in the progress that we have made in driving our efficiency.

We made a commitment last year to a go-fast road map.

And I think you're seeing the benefit of that.

We're making some pretty significant step-function changes in the efficiency of our modules.

We'll take our next question from Vishal Shah with Deutsche Bank.

(Inaudible - sounds muffled).

Sorry, can you please speak up?We're unable to hear your question.

Can you hear me?

That sounds a little better.

Yes, Mike can you talk about the exposure to the Indian market in 2012, what percent of your non cad-tell modules would be to the Indian market?

And how should we think about your captive pipeline in 2012?

Thank you.

Oh, yes.

We do have module sales going into India in 2012.

They are typically being sold into projects that are being subsidized, either under the Federal program, the National Solar Mission, or under state programs.

And it -- strategically, we're viewing that as a way to get product into the market, demonstrate the performance, acquaint some of the players in the market with our technology.

And begin to, on our part, understand some of the dynamics of the Indian market.

So that will continue in 2012 and perhaps beyond.

In parallel, we want to increasingly start to have discussions around moving, in a non-subsidized way, into utility-scale projects.

So we started those discussions at the same time.

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

Hi, sorry, I just wanted to follow-up on my prior question, Mike.

Do any of the warranty expenses relate to the new high-efficiency module?

Or is every dollar of this warranty related to the old warranty?It is one thing if it's the old modules, but it is another thing if it relates to the new higher-efficiency modules.

And I just want to clarify that none of them relates to the new, higher-efficiency modules.

Yes, the total -- the total charge is $163.6 million, you have $125.8 million of that is related to the manufacturing excursion, to the June 2008 to June 2009 time period.

$37.8 million of that is related to the change in the warranty accrual rate that Mark mentioned, which is really driven principally by our view that the returns would be higher in hot climates.

So the higher efficiency -- if you are referring -- there were a set of changes made for production from approximately June of 2011, forward.

That would -- to the extent there are warranty returns there would be picked up in the increased warranty accrual rate, which Mark mentioned, we increased by 1%.

Yes, Tim, the other thing I would just say is that, again, the changeover to our Series 3 module happened midyear 2011, so our experience at this point in time from the field return is somewhat limited.

But what I can tell you is the data that we have internally, as we look to T metrics, that it would be an indication of field performance.

Those metrics are at a level of -- some of the best we have seen since we began production.

So the indicators would say that the Series 3 modules, which I think maybe the ones you were referring to as higher-efficiency modules, should have above-average fill performance, relative to the legacy Series 2.

We just don't have enough data yet to really assess and conclude on that.

But the indicators we have are very positive from that perspective.

The other thing I wanted to make sure that is clear, is on the charge that we took -- the manufacturing excursion of $125 million, again, $70 million of that was related to the module-related costs, which under the original program, when we started to accrue charges, it -- the assumption was our standard warranty rate would be sufficient to allow for those returned modules.

Given the volume of modules that we now have and given the number of claims that we had to process, we had to make an adjustment from that standpoint.

Of that $125 million, $70 million is just really the module-related costs.

Above and beyond is the other $45 million or $50 million or so.

We'll take our next question from Mark Bachman from Avian Securities.

Hi, gentlemen, thanks for taking my question.

Can you discuss, in some detail, the construction delays that were associated with both Topaz and Desert Sunlight?

My understanding here is that some workers were furloughed and sent off the project in both San Luis Obispo and that the results of the delay in Desert Center.

And in your explanation, if these delays are related to the balance of systems portion, how should investors think about this, given your advances that you've reported in past quarters on the balance of systems side?

I don't know what that is referring to, to be honest to you.

I'm not aware of any construction delays.

I'm not sure where you got that information.

That would be new to us.

So I had sent a couple e-mails down during a quiet period to your investor relations department, and given that I couldn't get a response back, but I also sent them links to San Obispo newspapers talking about the furloughing of workers down there.

So I would be surprised that your firm wouldn't know about that, Mike.

At our level, we're not experiencing any delays in any of the projects beyond what is -- they are proceeding on our plan.

We didn't see any deviations from plans.

It could be that -- I'm speculating -- maybe some resources were scheduled that had to be adjusted.

But from our planning point of view, we're on plan on all of these projects, or ahead, in some cases.

So I honestly don't know.

We can certainly research that and get back to you, offline, and answer that question.

And we'll take our next question from Chris Blansett with JPMorgan.

Mike, just to follow-up on -- can you provide any updated thoughts on the CEO search and how that is going?

Yes, it's going well.

We have had a number of candidates go through the process with pretty significant interest.

We -- we're making progress, in terms of narrowing that down.

And I feel like we're entering a phase where we'll start to down select and maybe start working through some negotiations here in fairly short order.

So all in all, it seems to be going pretty well.

We'll take our next question from Mahesh Sanganeria with RBC Capital Markets.

Thank you very much.

I just wanted to follow-up on the warranty charge, I wasn't familiar with the excursion you had in 2008.

Have you narrowed down the excursion to certain -- the module you sold into certain projects and your estimates, you think are -- were reflective of what future claims you will get?

Or there could be a lot of variability in your estimation?

We did, we narrowed it -- the excursion itself was related to a process change that was made in June of 2008, that was addressed in June of 2009.

So we had a 12-month time period.

Based on that, we were able to isolate a year's worth of production and estimate, at various times over this remediation program, what the exposure might be.

At this point, after the large volume of claims in the fourth quarter -- we processed, I think, over 95% of the total claims.

So we basically looked at almost everything that is there.

And we're reporting, as opposed to estimates like in the past, this is actual data.

So our confidence level is a lot higher.

There are about, I think, 200 claims that were submitted that still need to be analyzed.

So there's 200 left.

And we gave an outside estimate, what we think is an outside estimate, that there could be another $44 million, $43 million, if all of those were determined to have FPM related issues.

But at this point, we're in the final stages of the program.

And what we're reporting today is largely actual results as opposed to estimates.

Okay.

Thank you.

One thing back on the discussion on Topaz, in particular, we just followed up with some additional information that we did have a short period of time where we did stop activity on-site, mainly for some evaluation of some post lane and drilling, that we had to do.

At the end of the day, it was nominal effect.

That's why it didn't hit either Mike or my radar screen.

When we look at our key metrics associated with all of our projects, everything is on schedule, no underlying performance issues.

With a temporary delay it lasted a matter of a few days, and then we were back full running in production.

And everything is still building according to schedule.

So the project is in great shape, and same statement as related to where we are with Desert.

We'll take our next question from Edwin Mok with Needham & Company.

Hi, thanks for taking my question.

On the guidance for 1.2 GW of installation in the coming year, that seems like a pretty big jump from the current year.

I was wondering how much of that is with discounted and -- of the big projects that you are constructing, which one of them do you think you have the biggest risk of doing?

Again, the good thing about those projects, other than we have got to finalize some activity with AVSR, those projects largely have been -- financing has been completed, they are closed and they are actively in construction at this time.

And as you know, AVSR, we have final approval here, through the issues that were raised, as it relates to environmental impact studies that were being done -- updated studies were being done.

And we anticipate that to be -- activity to move forward here over the next 30 or so days.

So those projects were all in good shape and moving ahead.

What I would say, though, is with any of those types of projects, there is always risk.

Timing can impact them, there can be unforeseen events that we, obviously, don't know at this point in time that could delay them.

Fortunately, what we have seen so far with our EPC team has been world-class execution, as you can see with our Agua accomplishments that we have made -- in the first six months or so since we've closed that deal, the project has gone extremely well.

And as Mike mentioned, we have 60% or so of the BOS already completed.

So, there's obviously risks.

Those projects are large and complex.

There are issues that will have to be addressed.

We feel very confident in our team and our capabilities to execute according to schedules.

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

Just a quick follow-up.

The goodwill charges that you are taking, will that help earnings in 2012 on the non-GAAP EPS guidance?

If it does in future periods, will that be disclosed?

And also, have you looked at possibly using [crystalline flake-in] panels in the systems division?

Would you be open to doing that in the future?

Thanks.

On the discussion around goodwill -- you do not amortize goodwill.

So goodwill is more of an event that gets evaluated from an impairment standpoint.

So to the extent that we nod and bear the goodwill, there's no potential impact on ongoing earnings stream, at least for that component of the goodwill.

We do have about $60 million or so of goodwill associated with our systems business.

But the discreet event, the $390 million that we took the impairment for, will have no impact on future earnings, either positive or negative.

Our modules cost less and perform better than crystalline silicon.

So it wouldn't make any sense for us to use crystalline silicon modules.

A significant part of our competitive advantage is in our manufacturing costs.

And where we intend to be three years from now would be substantially below even a cash cost of a silicon module to our estimate.

So that really wouldn't be part of our game plan.

The ability to integrate modules into an engineered system that optimizes all-in performance, is something a module manufacturer like us is uniquely capable of doing.

And to be able to wrap that with a data set and a monitoring capability and provide assurance to a utility that the manufacturer stands behind the entire result, that's pretty significant.

And I don't see us ever being able to do that with some third-party product.

So we're going to continue to be integrated and drive our technology into these markets.

We'll take our next question from Mehdi Hosseini with Susquehanna International.

Just a follow-up on the difference between GAAP and non-GAAP; how would we think about the impact or the distribution of the difference between COGS and OpEx?

How should you think about it?

We -- the charges that we have taken, the only thing that will show up in OpEx related to the manufacturing excursion would be the loss power compensation, which, in the fourth was $31.8 million.

So that will show up in the OpEx.

The other items would all, of $163 million or so -- all of the other charges would show up in cost of goods sold.

And then for the restructuring and goodwill items, they are discreet items on the P&L, and you can see where they show up -- they do show up above the OpEx line, but not in the R&D or SG&A line items.

And we'll take our final question for today from Chris Kettenmann with Miller Tabak.

Hi, thank you for taking my question.

Just wondering if you could tell us -- you mentioned that the hot climate affected panel performance.

Wondering if you could give us a quantitative idea of the level of degradation?

And geographically, where you saw most of the warranty claims come from?

At this point, we don't have a lot of data.

We have enough -- we know there's a natural physical acceleration of degradation modes in a hot climate.

In fact, our accelerated reliability test exposes them to intense temperatures, so that's just the way they behave, from a physics point of view.

And we have enough to know -- to feel that it is prudent to raise the rate until we get more data.

But we're pretty early.

We just started really shifting the mix into hotter climates in the last couple of years.

So we'll have to continue to reevaluate it, as we see results -- get more data.

But for now, we thought it was prudent to increase the rate by a point, because of the mix change and what we have seen, to date.

Thank you.

That does conclude our question-and-answer session.

At this time, I would like to turn the call back over to Management for any additional or closing remarks.

No additional remarks on our side.

Thanks, everybody.

And if you have any follow-up questions, please contact David and I, or our team, and we'll make sure we respond back, with any response we have, as quickly as possible.

Thank you.

And that does conclude today's conference.

We do thank you for your participation.