第一太陽能 (FSLR) 2012 Q2 法說會逐字稿

Good day, everyone, and welcome to First Solar's second quarter 2012 earnings call.

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

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

As reminder, today's call is being recorded.

I would now like to turn the call over to David Brady, Vice President of Treasury and Investor Relations for First Solar, Inc.

Mr. Brady, you may begin.

Good afternoon, everyone, and thank you for joining us.

Today, the Company issued a press release announcing its financial results for the second quarter of 2012.

A copy of the press release and the presentation are available on the investors section of First Solar's website at FirstSolar.com.

A replay of the webcast will be available for 90 days under the investor section of our website, firstsolar.com.

With me today are Jim Hughes, Chief Executive Officer; Georges Antoun, Chief Operating Officer; and Mike Widner, Chief Financial Officer.

Jim will present an overview of market conditions and outline many of the developments we've made in sustainable markets.

Mark will review second-quarter financial results and update guidance for 2012.

We will then open up the call for questions.

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

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

Most of the financial numbers reported and discussed on today's call are based on US generally accepted accounting principles.

In a 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 make a brief statement regarding forward-looking remarks that you may hear on today's call.

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

The forward-looking statements in this call are based on current information and expectations, are subject to uncertainties and changes in circumstances and do not constitute guarantees of future performance.

Those statements involve a number of factors that could cause actual results to differ materially from those statements, including the risks as described in the Company's most recent annual report on Form 10-K 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 the announcements described herein.

It is now my pleasure to introduce Jim Hughes, Chief Executive Officer.

Jim?

Thanks, David, and welcome to our second-quarter 2012 earnings call.

I'd like to start by introducing Georges Antoun as our new Chief Operating Officer.

George joined First Solar on 1 July and is responsible for manufacturing, R&D, quality and product management.

George has almost 25 years of experience and has held senior management positions at global companies such as Ericsson, Cisco Systems and Verizon.

He brings us a depth of operational leadership experience that will help First Solar execute its strategy.

Let me invite George to say a few words.

Thanks, Jim.

I'm very excited to be here at First Solar supporting our mission and being part of a great team.

Over the past few weeks I have had the opportunity to meet the executive management team, middle management and individual contributors.

Actually I have been very impressed by the depth of First Solar's team, the strength of the organization and the passion everyone has shown.

While it is a tough environment, First Solar is uniquely position in the market.

I truly believe, with the proper execution, the opportunities are spectacular.

I'm looking forward to being part of a great team and helping the Company achieve its goals.

Thanks, George, and welcome to the team.

I'd like to begin a slide six by providing a brief summary on the solar market and industry environment.

The global market for solar modules remains in an oversupplied condition.

Despite the growing number of bankruptcies and some consolidation, leading manufacturers continue to maintain existing capacity and in some cases increase supply.

At the same time, subsidies are declining rapidly in traditional markets such as those in Europe, causing a decline in overall demand.

This is why First Solar decided to pursue a new strategy for delivering profitable, sustainable growth in new emerging markets, but that growth is nascent at present will take some time to develop.

As stated on the first quarter earnings call, we define sustainable markets as those with a fundamental need for energy and where public budgetary financing in the form of subsidies or other incentives are not required to create demand.

We have already begun to execute on our strategy to develop these markets.

The utility scale solar market in Australia is just starting to take off, but we have already been successful in the only two major competitive processes to date and believe we're positioned to capture at least 30% market share going forward.

In June we announced two new projects that we will be designing, constructing and maintaining for AGL Energy and Australia for a combined total of 159 megawatts AC.

This development will be almost 16 times larger than the next biggest site, a 10-megawatt plant in Geraldton, Western Australia, which is also being constructed by First Solar for Verve Energy and GE Energy Financial Services.

This is a significant step forward for the utility scale solar industry in Australia and testimony to the confidence their utility customers have and the performance of our technology in some of the hottest and harshest conditions in the world.

These projects demonstrate First Solar's ability to apply its vertically integrated capabilities to deliver competitive, comprehensive utility scale solar solutions internationally in future sustainable markets.

Furthermore, we are currently in negotiations for or actively bidding on other multi-megawatt projects in Australia.

In India, we have either contracted or are in late-stage negotiations on a number of projects, primarily for third-party modules sales, and we expect to win 20% of the market this year and on a go-forward basis.

For example, the US Export Import Bank just announced it approved loans to two Indian solar project developers totaling $57 million for the purchase of First Solar modules.

We continue to maintain a close working relationship with XM, which plays an important role by providing financing in challenging markets like India.

We are also gaining traction in our other target markets such as the Middle East, where independent studies confirm First Solar's superior performance in the hot climate conditions of our target markets relative to crystalline silicon and other solar technologies.

In the US, we are announcing the addition of the 139 megawatts AC Campo Verde solar project, which First Solar will construct in Imperial County, California.

The project is currently jointly owned by First Solar and a third party, but First Solar has contractual rights to acquire 100% ownership interest and is in the process of completing its acquisition.

Campo Verde is expected to start construction in the third quarter of 2012 and be completed by 2014.

San Diego Gas and Electric Company will purchase the project's output under a 20-year power purchase agreement.

We also signed a deal with enXco to deliver 61 megawatts of modules to their Catalina solar project in Kern County, California, starting in September.

Our strategy also includes establishing a deep local presence in each of our target markets.

We are trying to create new markets to do something that has not been done before, and this is impossible without a strong local presence.

Also, each market is unique, necessitating a market-specific organizational structure and customer strategy.

With this in mind, we have recently hired regional lead for India, Sujoy Ghosh, formerly of General Electric, who has over 20 years of industry experience in India and close ties within the local energy industry.

We already have regional leads in many of our target markets and are in the final stages of hiring for those open positions that remain.

Joint ventures and other business arrangements with strategic partners will also be a key part of our strategy, and we have already started having those discussions in several markets to expedite our penetration of those markets and quickly establish relationships with potential customers and policymakers.

Meantime, we continue to meet on an ongoing basis with policymakers, regulators and especially end customer such as IPPs, utilities, retail electric providers and commercial self-generators, which comprise our intended customer base.

This is all evidence of the significant progress we're making in these markets and we will continue to report back on our progress going forward.

If you turn to slide 8, operations overview.

In order to succeed we need to be prepared to price solar electricity at levels sufficient to generate new demand without the benefit of subsidies.

Module manufacturing costs per watt for the second quarter excluding our German plant were $0.72.

On a comparable basis, module manufacturing costs per watt was up $0.02 quarter over quarter.

The sequential increases due to higher plant underutilization cost and associated inefficiencies.

Had our plants run at full utilization, then our module manufacturing cost per watt would have been $0.64 per watt or $0.04 the Q1 2012 on a comparable basis.

Our best plant is manufacturing modules at a cost of $0.63 per watt at semi-full utilization.

The average line conversion efficiency for our modules was 12.6% in the second quarter, which is up 0.9 percentage points year-over-year and up 0.2 percentage points quarter over quarter.

The current efficiency rated modules produced on our best line was 13.1% last quarter compared to 13% this quarter.

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

Last month, we announced a collaboration and licensing agreement with Intermolecular, Inc.

and in accelerating our efficiency roadmap using their high productivity combinatorial platform which allows R&D experimentation to be performed at speeds up to 100 times faster than traditional methods.

If you look at slide 9, we break down the sum of the components of our module cost per watt to enable comparison on a like-for-like basis with our crystalline silicon peers.

Excluding the following costs which are not included in peers' costs underutilization, Germany's cost per watt end of life or recycling cost, freight and warranty, accelerated depreciation and share-based compensations for First Solar's core cost per watt for Q2 was $0.53.

As show on a comparable basis, our module cost compares favorably to crystalline silicon.

In addition, with the execution of our cost per watt and module efficiency roadmaps, we are confident in the long-term competitive position of our technology.

Slide 10 illustrates the progress we have made to reduce the BOS -- the balance of system -- penalty on our systems as compared to CSI Systems.

Historically, EPC installers have assumed that balance of system costs for a cadmium telluride system are about $0.15 higher than a tier 1 CSI system due to the lower efficiency of cad-tel modules, and therefore the need for more land and more BOS components to achieve a system of equivalent nameplate power.

We refer to this as the BOS penalty, and it's shown as the solid black line you see on slide 10.

In reality, over time, as you can see from the hashed and dotted lines, that $0.15 BOS penalty with respect to First Solar's modules is shrinking as our average module efficiency increases.

In addition, cad-tel systems have an added advantage due to the superior temperature coefficient of cad-tel as compared to CSI, which results in higher energy yields in the field.

This further reduces the balance of systems penalty.

Let me explain what we mean by superior temperature coefficient in a little more detail.

PV manufacturers tend to focus on the nameplate power ratings of modules, but investors look at total energy output.

All PV modules receive their nameplate power rating at standard test conditions, which is 25 degrees Celsius.

But most of the time, modules in the field don't operate at standard conditions.

In temperate climate conditions, module operating temperatures often reach 65 degrees C, which is 40 degrees C above the standard test conditions rating.

In hot climates, module operating temperatures can reach 85 degrees C, which is 60 degrees C above standard test conditions.

All PV semiconductors incur increasing resistive losses when module operating temperatures rise, but the losses in a per-solar module are about half what you would see in a CSI module.

For example, in a temperate climate, energy output of a multi-crystalline silica module may be reduced by up to 20%, whereas First Solar's module output would be reduced by only about 10%.

The lower resistive losses result in higher energy yields from a First Solar system for the same nameplate watts, and this further reduces the balance of systems penalty we experience relative to silicon modules.

In the hot climates of the new markets we are focused on, PV modules spend more hours operating at higher temperatures and First Solar's yield advantage becomes more pronounced.

Combining our cost-per-watt roadmap on a peer-to-peer basis, the declining balance of system costs we experience in the climate areas we are targeting and the speed with which we are increasing our conversion efficiency, we believe that we will be able to maintain and increase our system cost advantage relative to crystalline silicon for the foreseeable future.

Finally, turning to our systems business on slide 11, with the addition of the AGL Energy and Campo Verde projects, or pipeline now stands at 2.9 gigawatts AC, which represents the sum of the contracted megawatts of the projects in our pipeline, excluding those that have been delivered through Q2 2012.

As of the end of the second quarter, we have recognized revenue for approximately 387 megawatt equivalents.

The remaining pipeline will either be constructed in the future or is currently under construction, but all revenue recognition criteria have not yet been met.

Megawatt equivalents is calculated by taking total cumulative revenue recognized divided by total contracted revenue for each project multiplied by the megawatt AC for such project.

We have also added close to 1 gigawatt in additional new bookings in 2012, of which more than half are considered secured but subject to the closure of final documentation.

The remainder represents what we consider high potential deals that we believe have a 50% or greater probability of being realized.

This includes both systems and third-party module deals, most of which are expected to increase demand beginning in 2013 and onwards.

We began installation of our solar modules at the Antelope Valley Solar Ranch 1 power plant in LA County in June and continue to make solid progress on each of the four large projects, Agua, AVSR, Topaz and Desert Sunlight, in our pipeline.

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

In May, together with Enbridge, we announced the completion of the 50 megawatt Silver State North Nevada solar project.

In July, we have broken ground on the Maryland solar project.

This project has yet to be sold, but we anticipate that we will be able to sell this project in the second half of this year, given that we have more investors seeking to buy our projects than we have projects to sell them.

Furthermore, the confidence in our product and services being shown by investors in our projects is evidenced by the number of bidders.

We currently have more than 10 bidders vying to purchase the Campo Verde project.

In summary, the solar market remains challenging, given the supply/demand imbalance, but we are starting to gain traction in the new sustainable markets we are targeting, particularly with the announcement of the AGL Energy project in Australia.

We continue to add to our pipeline with the addition of the AGL Energy and Campo Verde project.

Progress on our big four projects in the US continues.

We continue to execute on our cost and efficiency roadmaps and believe we can maintain and increase our cost advantage at the system level relative to our peers for the foreseeable future.

Finally, we maintain our system cost target of between $1.15 to $1.20 per watt in 2016, which we believe will drive the creation of fundamental demand for solar power without subsidies and generate a return on invested capital for the full year 2016 of 13% to 17%.

Now I'd like to hand the call over to Mark Widmar, who will discuss or Q2 financial results and update our 2012 financial guidance.

Thanks, Jim, and good afternoon.

Before discuss the results of the quarter, I want to highlight a change to strength reporting.

Given recent changes in our business strategy, we have adjusted how we view, measure and report the profitability of our operating segments.

Prior to the second quarter of 2012, we historically have viewed the Systems segment as an enabler to drive module volumes from our Components segment.

That said, the primary objective of the Systems business was to breakeven -- to achieve breakeven results before taxes.

This resulted in net earnings of the business as a whole being attributed to the Components segment.

During the second quarter we finalized and announced the details related to our long-term strategic plan, and now strategically view the Systems segment differently.

Hence, forward, we won't be driving our Systems business to breakeven results.

We will record earnings on a standalone basis.

Prices for modules in the components business will be supported by market prices, including those used in the projects in our Systems business.

These changes will be reflected in the second quarter 10-Q filing we plan to do yet this week.

Now turning to the quarter, in Q2 we ran our plants at approximately 63% of capacity, down 27 percentage points quarter over quarter, producing 369 megawatts.

This was a plan reduction to align supply with demand and was driven primarily by the full quarter impact of the previously announced actions taken in Malaysia and Germany as well as down time for upgrades at several lines in Perrysburg and Malaysia.

Finally, in support of our efficiency roadmap we continue to idle and upgrade lines in Perrysburg and Malaysia.

For the second half of the year, in response to higher demand, we will increase production and plan to run our plants at approximately 90% capacity utilization.

The higher production rate will significantly reduced the underutilization penalty we incurred in Q2 and improve the second half cost per watt as compared to the second quarter.

Moving onto the P&L portion of the presentation on slide 13, net sales for the second quarter were $957 million, up from $497 million last quarter.

The increase was primarily due to an increase in the number and size of projects under construction, meeting revenue recognition criteria during the quarter, including AVSR and Silver State North.

Specific to AVSR, which began revenue recognition in Q2, the project began initial construction at the end of the third quarter of 2011 and has experienced an increasing build rate from the third quarter 2011 to Q2 of 2012.

Thus, effectively, the revenue recognized within the quarter represents the project activity to date, not just the current quarter.

Similarly, when we meet the revenue division criteria for Topaz, currently projected for the fourth quarter of 2012, the revenue recognized will represent the project activity to date.

Our Solar Power Systems revenue, which includes our EPC revenue and solar modules use in the Systems business, increased from 86% of sales in the first quarter to 94% of sales in the first quarter.

Third-party module ASPs decreased 22% quarter over quarter.

Gross margin in Q2 was 25.5%, up 10.1 percentage points from the prior quarter.

Q1 and Q2 both were impacted by helping LPM-related charges of $27 million and $13 million, respectively.

Prior to these charges, gross margin in Q1 an d Q3 were 20.9% and 26.8%, respectively.

The gross margin improvement was primarily reflective of higher sales volume and a favorable systems business mix.

The OPM charges taken in the quarter is associated with a small portion of the total claims to remediated, estimated to be less than 2%, which include commercial settlement terms that are inconsistent with the remediation required to be performed.

As a result, we have accrued the associated costs further commercial terms.

However, we will work to negotiate a more positive outcome with our customers.

The Q2 charge is not the result of new claims, nor based on our current understanding is it an issue with the quality or quantity of remediated modules.

Operating expenses were down $429 million quarter over quarter to $104 million.

As you may recall, operating expenses in the first quarter of 2012 were unfavorably impacted by LPM power compensation charges of $16 million and restructuring charges of $401 million.

The second quarter of 2012 operating expenses were unfavorably impacted by restructuring charges of $19 million.

However, this impact was offset by a stock-based compensation credit associated with a change in our estimated forfeiture rate for share-based compensation awards.

For the second half of 2012, we expect operating expenses excluding restructuring charges to be approximately $105 million a quarter.

Regarding our restructuring initiative, year-to-date we have incurred $425 million of charges.

As we have previously communicated, we anticipate that we could incur up to $510 million associated with our announced actions.

For the second half of the year, we anticipate we could incur an additional restructuring charge of $40 million to $50 million.

The balance of total anticipated program charges are estimated to be incurred in 2013.

We expect these initiatives to reduce our ongoing annualized costs by between $100 million to $120 million, split equally between cost of goods sold and SG&A.

For 2012, we have previously anticipated these initiatives will reduce our cost of goods sold and SG&A by between $30 million and $60 million.

However, we have extended operating rate for our German operations, given the stronger than anticipated market demand, which will push out a portion of the restructuring benefit.

We anticipate 2012 upper end of cost savings to be $50 million, or $10 million lower than originally communicated.

On a reported basis, the second quarter 2012 operating income was $140 million compared to an operating loss of $456 million in the first quarter of 2012.

Excluding restructuring and LPM charges, our first-quarter operating loss was $13 million and our second quarter operating income was $172 million.

The second quarter net income was $111 million or $1.27 per share versus a net loss of $5.20 per share in the first quarter.

Excluding restructuring charges of $0.25 EPS impact, an LPM $0.14 EPS impact, our second-quarter net income per share was $1.65, which compares to a net loss per share of $0.08 in the first quarter on a comparable basis.

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

Turning to slide 14, I will review the balance sheet and cash flow summary.

Cash and marketable securities were $744 million, down $6 million from $750 million at the end of the second quarter -- end of the first quarter, excuse me.

Accounts receivable trade balances decreased by $172 million quarter over quarter as we collect receivables due for the AVSR project.

Our unbilled accounts receivable increased by $30 million due to increased project activity and billing retainage, partially offset by a decrease in the Agua Caliente unbilled balance.

Inventories increased slightly, primarily due to higher inventories in our Systems business to support increased project activity for both modules and balance of Systems equipment.

Project assets increased by $26 million as we begin construction of our Amherstberg, Belmont, Walpole and Maryland projects.

Deferred project costs decreased by $152 million as we recognized revenue on AVSR and the sale of Silver State North to Enbridge, offset by an increase in construction of projects that we have sold but not yet which we can recognize revenue for.

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

Our net debt level decreased by $345 million from the end of the first quarter, primarily due to repaying the entire outstanding balance of our German facility agreement and repaying a portion of a revolving line of credit.

Operating cash flow for the quarter was $428 million and free cash flow was $328 million.

We spent $157 million for capital expenditures, an increase of $33 million from last quarter.

As we complete capital commitments related to previously planned capital expansions, we anticipate capital expenditures to decline in the second half of this year.

Depreciation and $64 million compared to $73 million last quarter.

Turning to slide 15, First Solar is in a strong financial position to navigate the current market turbulence.

At the end of Q2, we had a net cash position of $225 million excluding restricted cash and investments.

Furthermore, we expect to increase our net cash position by the end of the year due to positive free cash flow as we meet milestones for payments on our projects and we complete and sell other projects.

By contrast, most of our peers in the solar sector are in a net debt position and continue to generate losses, some at the gross margin level.

Given the current challenges facing the industry as a whole, we believe that our financial strength will enable us to not only survive the current transition but facilitate our development of sustainable markets with fundamental demand for solar energy, instill confidence in our customers that we will be around for the long-term to manage the solar plants we construct, generate additional demand for our products and services and ultimately create long-term value for our shareholders.

This brings me to our updated guidance for 2012, starting with the assumptions behind our guidance as shown on slide 16.

We expect 2012 demand to range between 1.8 gigawatts to 1.9 gigawatts DC.

The increase is due to higher than anticipated expected third-party demand in Europe and India.

Our average module manufacturing cost to range from $0.70-$0.72 per watt.

Our expectation for average module efficiency of 12.7% is unchanged from prior guidance.

We expect our effective tax rate in 2012 to be in the range of 15% to 17%, including the impact of any restructuring, impairment or LPM charges, which is down from our prior guidance due to the favorable jurisdictional mix of income.

Turning to slide 17, First Solar is increasing 2012 guidance as follows -- net sales of $3.6 billion to $3.8 billion (sic-see press release"$3.9 billion") compared to prior guidance of $3.5 billion to $3.8 billion; earnings per fully diluted share of $4.20 to $4.70 compared to prior guidance of $4.00 to $4.50, in each case excluding the charges related to restructuring and the manufacturing excursion from June 2008 June 2009.

We maintain our 2012 guidance for operating cash flow and CapEx.

Regarding anticipated restructuring charges, we expect to incur between $40 million to $50 million over the balance of 2012, which will result in full-year charges consistent with our previous announcements.

To summarize on slide 18, overall operating performance for the quarter was solid, given the challenging market conditions.

We continue to have one of the strongest balance sheets in the industry and we generated free cash flows of over $300 million in the second quarter.

Cash flow generation should accelerate in the second half of 2012 as working capital turns into cash inflows with the majority coming in the final quarter of the year.

We are executing on our module efficiency and cost reduction roadmaps and maintain our competitive advantage on a like-for-like basis relative to our peers.

Based on increased demand, we are increasing 2012 net sales and EPS guidance.

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

Operator?

(Operator instructions) Stephen Chin, UBS.

Okay, thank you.

Nice results.

Just a question on the new revenue guidance -- it looks like you raised production guidance by about 20%, but sales guidance only went up by about 3%.

Is that Q2 revenue recognition at Antelope Valley, or is it from expected pricing pressure?

Is that also leading to the no change in cash flow guidance for 2012?

Yes, so the guidance, if you remember what we had before from a revenue standpoint, we said the upper end of the range was about 1.7 gigawatts, and now we've taken that up between 100 megawatts and 200 megawatts.

A good portion of that is third-party modules, which, as you know, the ASPs on those is clearly lower than what we will see versus the system sales.

So it's reflective of what we are currently seeing in terms of the activity and pricing in the market.

From a cash standpoint, we haven't changed the operating cash flow profile at this point in time.

There are a few projects that sit out in the fourth quarter.

The timing of when those projects close will impact the operations for the year.

So at this point in time, we'll wait to see if the financing that is put in place on those project close.

We may have some upside in operating cash flow.

Sanjay Shrestha, Lazard Capital Markets.

Good afternoon, guys, good results.

Jim, one question to you -- when you talk about expansion into sustainable markets and getting that 13% to 17% ROIC, how should we track that?

Are we going to hear a partnership announcement or continued project win when you talk about things like 20% expected share in India?

So can you give us a sense of what are the (inaudible) that we should be tracking your to get a lot of (inaudible) happen here?

I think you've actually hit it right on the nose.

I think what you should expect to hear is as we build teams and presence in these countries you will hear both project wins, as we heard on the call today.

We are in discussions on a whole series of joint venture relationships.

And I think, over the remainder of the year, we will get to a point of public announcement on some of those.

You'll hear us describe the refinement of the strategy and the business model in some of these markets as we begin to make decisions and come to conclusions on how we are going to tackle them.

So I think what you should track is a steady stream of nothing spectacular in isolation but a steady stream of announcements that reflect us continuing to get our feet under us and gain traction and put points on the board in these markets as we move forward.

Amir Rozwadowski, Barclays.

When you think about -- your pipeline of business, obviously, has picked up a bit here this quarter.

And it sounds like you are optimistic about targeting opportunities in some of these new, sustainable markets.

I was wondering if you could give us an update or some color in terms of what you think the margin structure for these businesses or for these opportunities are, longer-term.

And I know that at one point you had provided a longer-term margin structure.

Do you feel more comfortable at this point, now that you are gaining traction with some of these sustainable opportunities, in terms of hitting that margin structure?

I've spent the better part of the last eight weeks personally visiting most of the major markets that we are targeting and spending time with our local teams, with potential customers, with stakeholders such as regulators, utilities, policymakers.

While I don't think we are in a position that we would want to outline specific margin expectations, particularly on a segmental basis, I think what I am gaining increased comfort with is that the ROIC, the total scope of the business and the ROIC expectations that we've set forth are achievable.

The returns will vary by market.

Obviously, they will be risk-adjusted so there will be some markets where we will see returns lower than those targeted and other markets where they are higher.

And where the returns are earned is going to vary on a market -- it's also clear that it's going to vary on a market-by-market basis.

So, unfortunately for those of you that try to model and track the Company, it's not going to be simple.

We will all learn how to think about it and forecast it with a greater degree of accuracy as we move forward, but my confidence level is higher than it was at the time of the last conference call, without question.

And the nature of the business model is beginning to take shape and unfold in certain of the markets.

And so I think we will gain a better understanding as we move forward.

But we are not there yet, that we could put out something with any sort of precision that would be worth relying upon.

Brian Lee, Goldman Sachs.

Mark, the new guidance implies EPS will be down somewhat significantly in the second half versus what you guys just put up for Q2.

I would have thought, given the better systems volume in the back half, that earnings would actually be finding some momentum through year-end.

Is the mix just skewed toward lower margin projects, or can you help me may be reconcile what I might be missing here?

Year-to-date, we are seeing a little bit less than $1.60.

We just guided to the numbers that has an upper end of 450, which implies $3 on the upper end of the range in the second half of the year.

So I don't see a significant disconnect between what we just posted this quarter versus what the implied second-half guidance would be.

Clearly, though, one of the things that I highlighted is when you have a triggering event like an AVSR, which we will have another one later in the year for Topaz, it is not just a discrete quarter that we are recognizing the revenue for.

AVSR, because you remember, had the condition of getting the funding of the DOE program, we had to start some amount of construction early -- or late in Q3 of last year.

So you have multiple quarters, and again, the project ramped between that initial point until where we are right now.

So it did ramp, but you have received that benefit.

So what you should see is second-half earnings will be consistent with -- if you run rate what we just posted, I don't see them being inconsistent.

But Q3 will be down and Q4 will be up again, because that's when we recognize revenue on Topaz.

Joe Osha, Bank of America Merrill Lynch.

I wanted to understand some of the cost-per-watt data a little better.

You've got a couple moving parts underutilization and then eliminating Germany.

If I look at your last quarter it shows up your best plant ex-utilization is the (inaudible) now 63.

I'm just trying to understand on an apples to apples basis if there has been any change in the cost per watt for your best process.

Clearly, there has.

If you look at the best plant in terms of where we are now sequentially, it has come down about $0.03, from Q1 to Q2.

So there's a $0.05 improvement in our best plant.

And that's one reason why we are trying to take some of the noise out for you because, look, we've shut down FFO for essentially the entire second quarter and a portion of KLM, which drove pretty significant underutilization impact.

We're trying to pull that out so you can understand that impact and that's what we ultimately scaled it down to what does the core look like.

When you look at the best plant from Q1 to Q2, it got better by about 5%.

We will be running at higher utilization in second half of the year, as indicated, close to 90%.

That will help drive some of that underutilization headwind away, so we won't have to deal with that in the second half of the year.

That's also reflected in our cost per watt guidance, targeting around $0.70 to $0.72, which implies that if we are around $0.72 or so for the first half we're going to have to be pretty competitive in the second half to get into that targeted range.

So, yes, we continue to make progress, not only on improvement of the efficiency, but we also started to see the benefits around our bill of material, so our variable costs are starting to come as well, which is another positive sign for us.

Vishal Shah, Deutsche Bank.

Mark, I wanted to just understand what your plan is for the cash that you are building for the year.

Are you looking to buy projects or to return all the cash back to the shareholders?

And then, as you think about the pipeline of projects that you have, or about -- you said -- I think you just said a gigawatt or so, are you winning some of those projects on cost or on balance sheet?

Because it sounds like some of your wins in India may be on the basis of better financing terms and balance sheet as opposed to real cost structure.

So I want to just understand that better.

Sure, I'll go and take the question.

First, with respect to the cash on the balance sheet and the plans we have for it, right now I think our plan is to continue to build a fairly robust and bulletproof balance sheet on a going forward basis.

Given the stress in the industry and the concern on the part of observers and customers and lenders and others, we think continuing to maintain a position where we have the best balance sheet in the business, bar none, is the right move.

Longer-term, as greater volumes of cash build up, we will look at redeployment of that cash into specific opportunities that may be available to us in some of these new markets or even in potentially our existing markets.

Nothing specific that we have identified or made any sort of an investment decision on to date.

And I don't think there will be any big announcements of deployments of capital in the near-term.

Longer-term, there are some things on the horizon we could see that potentially could be interesting.

But right now, I think Mark feels and I feel and the Board feels that continuing to maintain ourselves as a very, very strong and robust company from a balance sheet standpoint is our priority.

With respect to project wins, if you look at it on a global basis, we win sometimes on cost and we win sometimes on balance sheet and we win sometimes on execution capability, i.e., timing and deliverability capability.

There's not one -- the business is competitive enough now that there's not one universal factor that dictates wins and losses.

But you do point out an important element of the industry that we continue to focus on that we hear from customers about, which is the decisions are clearly not made on price alone.

The robustness of the vendor, of the counterparty, the confidence that you are going to be there for the entire useful life of the facility that you are delivering, that whatever warranty you are providing you are going to be able to stand behind, that you can facilitate financing because of that robustness of the financials that stand behind the product all become very important factors.

The other thing that we've tried to focus people on is that, as total system costs come down industry wide, cost of capital becomes an increasing component of the total cost of electricity.

And so, if you are the guy with the best balance sheet, the most robust financial standing, then you get to capture the benefit of that cost of capital advantage versus competitors.

That's one of the reasons we think maintaining a strong balance sheet is very important to the future of the Company.

Mark Bachman, Avian Securities.

Mark, real quick, you had given the mix of business or the solar power systems portion.

Can you also give us the mix on just the EPC revenue side?

I don't have that number in front of me at this point in time.

I can get back to you on that one.

We have -- given the majority of the business has been systems lately, we haven't been breaking out the EPC separately and the segment structure and how we are going to be reporting it going forward isn't necessarily going to be as transparent that way as it was before.

So let me get back to you on that one.

Okay, just to be clear, you had given it last quarter.

It was 53% compared to the 86% of the Solar Power Systems revenue.

That's why, giving it last quarter, I was looking for it again this quarter.

Is there any way that you can frame anything around megawatts that were actually installed on the EPC or the power systems side?

Yes, let me get back to you on that.

I've got an idea in my head, but I don't want to misspeak at this point in time, so let me get back to you on that one, too.

Smitti Srethapramote, Morgan Stanley.

You stated that there were over 10 bidders for the Campo Verde project.

Are you seeing new investors in the solar market, and what are you seeing as the required returns for further investments in solar projects?

Well, we're definitely seeing new investors into the solar sector.

I'm not sure I'm comfortable commenting on the returns we are seeing, but I will say that -- I can say that there has been no deterioration in the expected returns versus what we have seen historically.

Kelly Dougherty, Macquarie.

Just wondering if maybe you could help us think about working capital needs associated with the projects, especially as you move into new markets.

I don't know if there's any kind of metrics, a dollar amount per watt or percentage of sales or anything that you can use to help us think about working capital requirements?

I tell you, it's tough because it varies all over the place too.

Clearly, the working capital intensity that we have right now is inflated a little bit, and with some reasons we have made decisions, for example, to secure the 1603 cash grant.

As a result of that, we've allocated or we have procured inventory associated with particular projects.

So it's hard to look at the existing project profile and to try to extrapolate that going forward.

What I can say, though, is that our plan, especially whether it's here in the US or in new emerging markets, is to try to structure the contracts such that the majority of the working capital is funded through milestone payments on the front end to minimize the impact.

So it's hard to give you a rule of thumb, but I can tell you how we're going to try to manage and engage and structure the agreements with our customers to try to make sure that's funded as part of the milestone payments that we negotiate.

Mehdi Hosseini, Susquehanna.

I noticed the liability for recycling and collection went up by $8 million, which probably has more to do with the modules installing in 2008 time frame.

When are going to see an end to this?

Can you give me some qualitative assessment?

And I have a follow-up.

You referenced end of life.

Right?

Yes.

Well, the of end of life is an ongoing program.

So we have an ongoing obligation.

We currently have our offer in the market that we will recycle the modules that we sell, the activity in terms of the EOL and how it gets recognized that it's directly associated with revenue.

So as the revenue recognition is up $400 million or so quarter on quarter, you're going to see an increase in the end of life costs associated with it.

Chris Blansett, JPMorgan.

I wanted to ask about the number of projects you have under construction where you have received some sort of revenue on a percentage of completion basis.

I wasn't sure what that adds up to overall.

And then the second question was tied to, although you are running more production the second half, you are still not at 100% so I'm still trying to understand why you are keeping the Germany facility opened for a longer period of time.

I'll let Mark come back to the percentage of completion portion.

But with respect to production, the choice to meet that increased demand that we saw was to take an existing plant that's running but planned for shutdown and extend that production run versus restarting a line that was currently shut.

So the most efficient and most cost-effective way to meet that demand need was to run Germany for an extended period of time.

So it really was a decision just reflective of looking at all of the levers we could pull to match, to cause our production to match the anticipated demand.

It was the most efficient and effective way that we could do it.

And please repeat your question on the percentage of completion to make sure I got it correctly.

I just wanted to understand how much revenue you have recognized on a percentage of completion basis, because you are building a number of projects right now where you have received some form of revenue.

Right.

So the mix of revenue that was in the quarter clearly has gone up on a percentage of completion and it clearly ties into AVSR, as an example.

That revenue has been recognized on a percentage of completion basis once we have achieved the initial criteria for revenue recognition.

So it has gone up, but we still have, if you look at Silver State North within the quarter, that was essentially substantial completion when we recognize revenue.

The projects which we have still in the second half of the year that I referenced, some of them like Amherstberg, Belmont and Walpole, those will be substantial completion.

So we have a mix.

The larger projects, clearly we would want to and we prefer to negotiate and structure those deals such that we can recognize them on a percentage of completion or a milestone type of billing process.

We think that's prudent and the right way we should structure those transactions to ensure the timely revenue recognition.

The challenge you have if we don't, for example, is in Topaz, we will recognize that revenue in the fourth quarter once we meet the initial revenue criteria.

But you will have multiple quarters of activity and it creates lumpiness.

So that preference would be to try to smooth that out as much as possible and recognize that as the cash is received in the underlying economics of the project.

Satya Kumar, Credit Suisse.

First off, I wanted to say that the new change in accounting is something that I appreciate on the Systems and modules.

A few housekeeping questions for me.

What was the depreciation in the quarter?

And what would the run rate would be for CapEx and OpEx this year and the next few years?

And lastly, for 2012 revenue guidance, is Campo Verde included in that?

And if you manage to sell Campo Verde between now and end of the year, would that change your 2012 revenue?

So, from a depreciation standpoint, as we stated, it was in the mid-60s around depreciation expense for the quarter.

From an OpEx standpoint, we highlighted in the call that we expect the run rate to be about $105 million for the next couple quarters.

We still, as we indicated in our last call, to exit the year with a run rate that will drive us closer to 100 a quarter, and that's still line of site and what our objective is from that standpoint.

And then CapEx -- CapEx is coming down, you know.

If you look at what we've spent for the first half of the year, 60% plus, closer to 70% of the capital is already spent.

So all we have for the balance of the year is more sustaining capital, so we will see that come down.

And while we communicated in our long range plan -- we would expect capital to range from 150 to 250 per year, depending on the velocity of our efficiency, cost efficiency improvement roadmap.

So the timing could be some of that more on the front and, depending on improvements we make around improving the overall module efficiency.

But I think that's how you've got to think about the CapEx intensity going forward.

And, Satya, the depreciation of over $64 million -- it's primarily due to the impairment of FFO in Q2.

Rob Stone, Cowen and Company.

I'm wondering how you are thinking strategically about third party modules sales.

I think, prior call it was mentioned that you didn't think of that as per the long-term strategy, then the increment in what you are expecting to ship this year.

Is that something that is more opportunistic in order to fill up your available capacity?

It falls into several categories.

For instance, there are module sales in India.

We are in the process of building and developing our full EPC capability in the Indian market, and so we are conducting module sales on a transitional basis until we get to the point that we can have a more fulsome system type offer in that market.

Some of it is opportunistic against specific opportunities that arise.

I think the safe thing to say is what we are not going to do is we are not going to chase highly competitive, very, very low margin module-only opportunities.

We will pursue module opportunities that either are strategic because they are enabling our -- gaining a presence and establishing ourselves in one of the new strategic markets, or they are opportunistic in that for some variety of factors we have an ability to sell a module at an attractive margin.

So it's a combination of factors that accounts for those sales.

Chris Kovacs, Robert W. Baird.

One of your competitors, Sky Solar, is very active in Chile as a potential emerging market.

Do you have any comment on any of the work or evaluation you've done there, and maybe your expectations for when you feel that market could gain critical mass?

I was there last week, met with many of the senior government officials, met with many representatives of the mining industry, lots of the local players in terms of developers.

It's an extremely exciting and intriguing market.

As you probably know, it has the highest solar resource in the world.

The Atacama Desert will generate capacity factors for PV of around 40%.

In some parts of the grid, the prevailing price today is over $200 a megawatt hour.

It is a market that is undersupplied as to energy.

There is tremendous levels of diesel fuel or liquid fuel generation on the grid today.

The options they have available to them going forward, it's likely that LNG will be a big part of it.

Even if you assume very low-cost US LNG, you are still talking about anywhere from $10 to $15 gas delivered and regassified.

So it's a market that we believe PV is competitive, absolutely without subsidies.

There is a tremendous backlog of mining projects in the country that require energy to be executed.

So we've got boots on the ground working hard.

We have active bids and negotiations underway.

And we are also actively working as a developer and in partnership with other developers.

So the exact timing, I don't know, but it's one of the premier markets.

It's not as big as, say, an India in terms of its total size, but it's a very significant market.

The economics are compelling.

This is not a climate change story in Chile; this is a story of they absolutely need energy.

The cheapest way they can get a big chunk of that energy is going to be through PV.

And we are there and fully expect that we will meet with a very high degree of success.

Mark Heller, CLSA.

I just had a question back on the Germany side.

If I'm not mistaken, it has been written off.

But you are continuing to produce modules there, so I'm just wondering how much are margins and EPS benefiting from that?

So there was some impairment that was taken for those assets, but at the same time you essentially have to recognize the use of those assets and associate depreciation with the asset until it would actually be decommissioned.

So there is still ongoing depreciation expense on those assets, but the time line post that horizon would've been written off as part of the impairment.

Jesse Pichel, Jefferies.

The other advantage of the hot climate strategy is that 200 gigawatts of oil-driven electricity capacity comes from the Sun Belt, so that seems like a great strategy.

With that in mind, that 1 gigawatt you mentioned -- is that pipeline or potential pipeline?

And where in the world are those projects?

And based on your experience now as CEO and how the Company is performing, what else is needed for the Company to hit the five-year plan hitting the 3 gigawatt a year run rate?

Well, that 1 gigawatt number, part of it we have described as secured, meaning we have a fairly high degree of confidence in it.

And in part, it's an opportunity, a good portion of which we believe will get across the finish line, but there's obviously no guarantee.

We are not in a position or prepared to really discuss the geographies of that gigawatt.

In terms of what does the Company, what the Company needs is to execute according to the plan that we've laid out for the market.

And so that means we need to continue to build organization in these markets.

We need to continue to drive aggressively our cost roadmap, and we all need to work really hard.

There's a great deal of enthusiasm within the organization for the revised strategy.

After the initial shock of the market fundamentals that developed and challenged the industry, I think the organization is beginning to get its feedback under it and have a degree of confidence that we are well positioned to be a winner on a going forward basis.

So I think that it's up to me and the rest of the management team to execute.

There's no critical factor out there that we can identify, no one bellwether that's going to determine the ultimate success or failure of the Company.

We have efforts underway in all of these markets.

We don't need to bat 1.000 to be successful.

So we've just got to go do a really good job of executing, capturing opportunity that we've identified.

And I think that that will allow us to achieve the targets that we've set out in the plan.

Pavel Molchanov, Raymond James.

You focused a lot on India in your comments.

India is one of the countries where the domestic solar industry has been crying about foreign competition, mostly Chinese.

But are you potentially at risk of being the brunt of those, say, nationalistic policies?

There is certainly some nationalistic sentiment, and you've seen some policies implemented in the thermal sector.

There is a local content requirement in the national solar mission, but that does not apply to thin-film; it only applies to the crystalline silicon.

Of course it's a risk.

It's not a risk that we spend a lot of time worrying about because, if it were to manifest itself, it would likely manifest itself in the public sector programs like the National Solar Mission.

We actually believe the private self-generation market is the source of a great deal of opportunity, and you are not going to face those type of local content issues.

And then ultimately, if the kind of visible demand that we expect develops in that market, that is likely a market where we would look to put manufacturing in place.

And so obviously, at that point, any such policies would actually be an advantage, not a disadvantage.

Now, we don't support them.

Even if we were to manufacture, we believe that an open marketplace is in everybody's best interest.

But week before last, I spent six days in India -- a lot of discussion, a lot of analysis of that issue.

Frankly, it's just not something I lose a lot of sleep over.

If there were to be some sort of problem that developed against a very real opportunity, we see a path to working through it.

So it's just not -- of all the issues and challenges that are out there, it's not the one I worry about.

That does conclude the question and answer session and conclude today's conference.

We do thank you for your participation today.