第一太陽能 (FSLR) 2013 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to the First Solar' s first quarter 2013 earnings call.

This call is being webcast live on our 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 of Treasury and Investor Relations for First Solar Incorporated.

Mr. Brady, you may begin.

Thank you.

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

Today, the Company issued a press release announcing its financial results for the first quarter.

A copy of the press release and the presentation are available on the Investors section of First Solar's website, at www.firstsolar.com.

With me today are Jim Hughes, Chief Executive Officer, and Mark Widmar, Chief Financial Officer.

Jim will provide a review of our project pipeline and bookings year-to-date, and then Mark will discuss our first quarter results.

We will then open up the call for questions.

Most of the financial numbers reported and discussed on today's call are based on US Generally Accepted Accounting Principles.

In the few cases where we report non-GAAP measures, we have provided a reconciliation to GAAP equivalents at the back of our presentation.

Please note that 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.

First off, I would like to thank everyone who attended our Analyst Day last month, be it in person or via webcast.

We appreciated the opportunity to share with you our outlook for the Company and the industry at large, and particularly the tremendous response the event received.

We plan to repeat the process periodically, when we have information that justifies the required time and resources.

Now turning to our book-to-bill performance in Q1, slide 4 shows the total anticipated demand and the change in that demand that occurred during the quarter.

This data represents our total business, which includes a relatively small percentage of third-party module sales, in addition to our advanced systems projects pipeline.

We have booked an additional 328 megawatts of demand year-to-date, including Solar Gen 2, Macho Springs and North Star.

Shipments in Q1 were slightly higher than these new bookings, for an ending balance of 2.5 gigawatts DC of future demand.

However, on slide 5, based on first quarter revenue figures and bookings year-to-date, we achieved a 1-to-1 book-to-bill ratio, due in part to a higher proportion of systems sales in the future revenue booked compared to that recorded.

In the near-term, we have good visibility to maintain this ratio, with specific potential opportunities that we are currently working to close by Q4, which would result in booking higher than 1-to-1 for the year.

Slide 6, turning to future demand opportunities, we announced on the Analyst Day that we had approximately 4 gigawatts DC of potential bookings this year alone.

This figure excluded project development activities, including much of the Solar Chile pipeline, which, when added, brings total to 5.5 gigawatts DC.

You can see the breakdown on slide 6 based on each prospective booking's current stage of completion.

This also includes approximately 200 megawatts of module-only sales.

We have over 700 megawatts of mid- and late-stage deals with a moderate to high probability of success.

The largest portion, about 4.8 gigawatts, is early-stage, which means that the majority of these projects will have a development cycle of 12 to 24 months, and consists primarily of our own captive project assets, such as Solar Chile.

This reflects the fact that we have lower demand requirements in the short-term and that we are focusing on replenishing our pipeline, primarily in 2014 and beyond.

As a matter of fact, we are sold out until late Q3 of this year.

Slide 7 shows the breakdown of demand by geography, with a large portion of it continuing to come from North America, but an increasing portion from the sustainable markets that we are targeting.

This is a tremendous improvement upon this time a year ago, when our bookings outside the US were restricted to Canada, India, Europe and Australia.

Now South America is 1.8 gigawatts, and the Middle East, China and Asia-Pacific account for an additional 1.3 gigawatts combined.

We are also working on sizable opportunities in North and sub-Saharan Africa.

This is perhaps the best illustration of the progress that we are making in creating demand in sustainable markets today, and gives us confidence in our ability to replenish our pipeline going out to 2016 and beyond.

With this in mind, and included in the aforementioned 5.5 gigawatts, I am delighted to announce that we have executed an MOU with the Ordos Municipal People's City government for Phase II of that project, which amounts to 300 megawatts to 500 megawatts AP of capacity.

The pre-feasibility study of Phase II is already underway.

Our target is to secure project approval of Phase II and commence construction during the second half of 2014.

In addition, regarding the Phase I demonstration plant, which is 30 megawatts in size, construction is planned to commence in the third quarter of this year, pending the receipt of all regulatory approvals.

This is further evidence of the tangible progress we are making in China, one of the largest sustainable markets going forward.

In summary, our anticipated demand, to which we have good visibility, gives us a solid foundation to weather the current challenges facing the industry; and our pipeline of potential bookings gives us confidence in our ability to replenish our pipeline for the foreseeable future.

Now I'll turn it over to Mark, who will provide detail on our Q1 financial results.

Thanks, Jim, and good afternoon.

Turning to slide 9, I will begin by highlighting the first quarter operational performance.

In Q1, our production was 370 megawatts, which excluded our German plant, and was down approximately 11% sequentially and down 6% year-over-year.

The decrease is reflective of the planned reductions to align supply and demand and accelerate efforts to upgrade production lines, which is expected to enhance the achievement of near-term targets on our module cost and efficiency improvement road maps.

In the first quarter, we ran our factories at approximately 75% capacity utilization, down 9 percentage points from the prior quarter, and down 10 percentage points compared to the first quarter of 2012.

Our module manufacturing cost per watt for the first quarter was $0.69.

On a comparable basis, the cost per watt increased $0.01 quarter-over-quarter, due to lower utilization, which was partially offset by improvements in efficiency and core manufacturing cost.

Excluding the impact of underutilization, our core manufacturing cost per watt fell to $0.64, a $0.03 improvement compared to the prior quarter.

During Q1, our best plant's manufacturing cost at full utilization decreased to $0.62 per watt.

Conversion efficiency for the quarter was up only slightly compared to prior quarters, as we began the progress of making and testing line upgrades; and consequently, the full impact of these improvements has not yet been reflected in our entire fleet and manufacturing line.

As a point of reference to emphasize this, our best line is currently running 13.3% efficiency versus the Q1 average of 12.9%.

Moreover, as noted during Analyst Day, the nature of our efficiency improvement programs are nonlinear and rather modular in nature.

For example, during this year, as part of our communicated efficiency improvement road map, we are rolling out two major efficiency improvement programs.

The first was commenced in Q1 and is expected to be completed in August.

And then a second program will commence in the second half of this year, and is expected to be completed by the first half of 2014.

The impact of the first program is expected to move our current best line efficiency of 13.3% to the fleet average efficiency by August.

In Q3, we expect to complete and install the qualification of our first high volume tool on our lead line, which will enable our new, improved back content manufacturing process, which is expected to increase our lead line efficiency to approximately 14% by year-end.

Now moving to the P&L portion of the presentation on slide 10, first quarter net sales were $755 million compared to $1.1 billion in the prior quarter.

On a year-over-year basis, net sales increased 52%.

The sequential decrease in net sales was primarily driven by lower revenue for Topaz and AVSR, which was adversely impacted by weather-related construction delays in Q1, while the increase over the first quarter of 2012 was primarily due to higher sales volume and revenue recognition for both systems project and third-party module sales.

As a percentage of total net sales, our solar power systems, which include both our EPC revenue and solar modules used in the systems projects, decreased from 87% of total net sales in the prior quarter to 74% in the first quarter.

The sequential mix shift in net sales was primarily driven by higher module-only sales, including 128 megawatt AC of module volume used in the construction of the largest thin-film photovoltaic power plant in Europe.

Gross margin in the first quarter was 22.4%, down from 27.3% in the prior quarter.

The gross margin decline is reflective of the following factors.

Higher portion of project margin mix percentage coming from Topaz in the fourth quarter of 2012, temporary construction delays at AVSR, higher mix of third-party module sales, and lower manufacturing utilization as we accelerate efforts to upgrade production lines.

Additionally, the prior quarter benefited from a credit related to lower estimated future collection and recycling costs.

When compared to the guidance range we provided, first quarter gross margin was slightly below the low end of our range, primarily due to temporary construction delays we experienced at AVSR, and due to the lower utilization and throughput at our plants.

Regarding the delay at AVSR, we are working collaboratively with the LA County and the Antelope Valley Air Quality Management District and have reached a resolution related to dust conditions at the site.

We remain on track to reach complete the project on time, according to the guaranteed commercial operation date.

The temporary delay did not materially impact our annual guidance forecast.

However, we now anticipate completion of AVSR in the fourth quarter, versus our previous second quarter expectation.

This schedule change resulted in an increase in the project's estimated cost to complete which, under percentage of completion accounting, we recognize the material portion of these additional costs in the first quarter, as the project is approximately 80% complete.

Regarding factory utilization, when we set the guidance range in February, we were still evaluating a level when timing of production upgrades, which drove, in part, the relatively large guidance range.

Consequently, we are in progress -- as we progressed through the quarter, we decided to accelerate the aforementioned production line upgrades in the quarter, which led to higher underutilization charges in the quarter, when compared to the original guidance assumptions.

Now continuing on Q1, operating expenses, including restructuring, decreased $13 million quarter-over-quarter, to $108 million, and is reflective of lower restructuring charges partially offset by higher project development expenses.

The first quarter was also negatively impacted by project acquisition and TetraSun transaction-related expenses.

Finally, the fourth quarter benefited from a credit related to the change in estimated future collection and recycling costs.

Consistent with our stated strategy, we will continue to focus on lowering general and administrative expenses in order to prioritize and internally fund R&D and sales and marketing activities to facilitate market enabling growth.

To that end, management has improved a reduction in force that is anticipated to be rolled out over the next couple of weeks, which, when completed, is expected to result in annual labor savings of approximately $30 million.

These savings are expected to reduce both cost of sales and selling, general and administrative expenses in approximately equal amounts.

As part of the reduction in force, First Solar will reduce its workforce, primarily in North America, by approximately 150 associates.

On a reported basis, first quarter operating income was $61 million, compared to the operating income of $172 million in the fourth quarter.

The decrease was primarily reflective of lower revenue and gross margin as just described, partially offset by lower restructuring charges.

Excluding restructuring, Q1 operating income was $64 million, compared to $197 million in the prior quarter.

Looking at net income, first quarter GAAP net income was $59 million, or $0.66 per fully diluted share, including $0.03 of restructuring charges, compared to $1.74 per fully diluted share in the fourth quarter.

Excluding the restructuring charges of $0.03, our Q1 non-GAAP earnings per fully diluted share was $0.69.

Turning to slide 11, I'll review the balance sheet and cash flow summary.

We maintain a cash and marketable securities balance of just over $1 billion.

Accounts receivable trade balance decreased by 50%, or $275 million quarter-over-quarter, to $279 million, and is primarily due to the collection of the module sale for the 128 megawatt AC European project and collections related to several of our systems projects.

Unbilled accounts receivables decreased by $79 million, primarily due to the Agua Caliente retainage being reclassified from non current to current, and was partially offset by a decrease in AVSR and Alpine unbilled balances.

Inventories, including balance of system parts, decreased $10 million sequentially, due to a higher third-party module sales and greater installations of modules in the systems business and lower production volume.

Project assets increased by $190 million, primarily due to project acquisitions, including Solar Gen 2, and due to the increased construction activities on our portfolio of systems projects.

Deferred project costs increased by $135 million, principally due to the continued ramp of construction on Desert Sunlight.

To date, we have not recognized any revenue on Desert Sunlight.

However, as disclosed during our Analyst Day event, we currently anticipate revenue recognition criteria under GAAP to be met initially in 2013, and to begin recognizing revenue for Desert Sunlight project over the second half of 2013 through the 2014 timeframe.

First Solar expects substantial completion of the project to occur by the end of 2014.

We also have approximately $189 million of non current retainage, which decreased sequentially by $82 million, as the retainage for Agua Caliente project was reclassified to current during the quarter, as we will complete this project within the next 12 months.

Note as a reminder, retainage represents a portion of a system project contract earned by us for work performed, but held for payments by customers as a form of security until we reach certain construction milestones.

Such retainage amounts relate to construction work already performed.

Quarter-over-quarter, total debt remained essentially flat, at $562 million.

Operating cash flow for the quarter was $66 million and free cash flow was $20 million.

Capital expenditures totaled approximately $72 million for the quarter and were primarily related to production upgrades which were expected to increase module efficiency and throughput.

Depreciation for the quarter was $58 million, compared to $61 million last quarter.

Now moving to slide 12 and guidance, this slide should look familiar to everyone, as it was provided just a few short weeks ago at our 2013 Analyst Day event.

As the slide reflects, we are maintaining our full year 2013 guidance, which now includes the expected impact of today's announced reduction in force initiative, as well as expected incremental operating expenses of approximately $8 million, including $2 million of non-cash purchase price accounting amortization related to the completed TetraSun acquisition.

Regarding the impact of the reduction in force, as mentioned, we expect the labor base savings on an annual basis to be approximately $30 million, of which we expect to realize up to half of this in the current year.

These savings, however, are essentially offset by the severance-related cost of the reduction in force and the increased operating expenses related to TetraSun.

So effectively, the current year benefit of the reduction in force is offset by the severance-related costs and incremental expenses associated with TetraSun.

However, on annualized basis, excluding severance costs, the reduction in force net of the TetraSun cost will lower our cost structure by approximately $20 million.

During the Analyst Day, you will recall that we reverted back to our normal business practice of providing only full-year financial guidance.

A reminder to you, due to the lumpy nature of the project business, which can result in a wide range of quarterly profile of earnings.

Previously, we indicated that we expect the first half results to be stronger than the second half results, and further, that Q2 results will be stronger than Q1.

However, since February, we updated guidance during the Analyst Day, which fundamentally changed that profile due to the change in assumptions for Desert Sunlight.

Additionally, due to the temporary delays at AVSR and the potential push out of the recognition of ABW, and the added reduction in forced severance costs anticipated in the second quarter, the quarterly earnings profile for the year progresses differently than previously communicated, and the second half of the year is expected to be materially higher than the first-half.

Specific to the second quarter, we are finalizing the sale of ABW.

If these projects close in the second quarter, the results will be relatively flat sequentially.

If the close moves to Q3, we will see a sequential decline.

So, the important thing to stay focused on is the full-year guidance, as we believe this is the best indicator of our performance.

Regarding all other assumptions under our guidance, they remain unchanged at this time.

Now moving to slide 13, I'd like to summarize the quarter.

As Jim noted earlier, we continue to show progress in developing our strategy in new sustainable markets, and are focused on increasing our book-to-bill ratio.

We continue to strengthen our balance sheet and resulting bankability, with the intent of developing a well-balanced foundation that ensures our customers have a reliable, long-term solar PV solution provider.

We remain on track for the year, maintaining our outlook and our focus on executing to our road map and the strategic imperatives outlined during the April Analyst Day event.

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

Operator?

(Operator Instructions)

Satya Kumar, Credit Suisse.

A question on the pipeline and the profits on the margins on the new business.

I think you had said earlier on that the new potential bookings were going to finish mostly in 2014, but you also reiterated a 1-to-1 book-to-bill.

So I was wondering if the rest of the bookings for this year predominantly come from purchased versus undeveloped projects that convert.

And if I look at the guidance that you gave at the Analyst Day for the implied ASPs on the non-contracted systems, most of us on the Street are coming up with a number that's fairly low, around $1.35 a watt.

So I was wondering if you could also talk a bit about the profit margins on the newly booked business, so we have a sense of that?

Thanks.

Satya, I guess I'll take the last one first, and then I'll let Jim talk a little bit more about the pipeline.

In terms of the implied guidance around ASPs, obviously that's a difficult number to back into.

What I would prefer you'd stay focused on is what we indicated in the Analyst Day, is we're driving towards a system road map that ultimately drives down to a [tracker full] system cost of around $1.00.

And we believe that market clearing prices will be somewhere in that range, as we had indicated previously, of about $1.40 to $1.60, depending on market, depending on radiance and other factors.

So when you take that installed cost of around $1.00 and include the nonstandard, and you model that on ASP, in that $1.40 to $1.60, it models back to the gross margin numbers that we've been communicating for a while now, that we believe, on a sustainable basis, we'll achieve gross margins in the range of 15% to 20%.

And then on the composition of the pipeline, I didn't completely understand the question, Satya.

Would you remind mind repeating the first half?

Brian Lee, Goldman Sachs.

I was wondering, could you quickly provide some more color on the exact timing of the AVSR construction delays?

How much of the quarter it did impact, and if you're able to quantify the loss of volume in the quarter relative to original expectations?

And then I had a quick follow-up.

Yes.

So we were -- during the quarter, AVSR really impacted us, starting early then continuing through most of the quarter.

And I would say the impact was heavier as we exited the quarter than when we began the quarter.

So it feathered throughout the quarter.

It impacted revenue by a material amount specific to that project.

In aggregate, relative to our guidance, as you saw, we achieved the revenue guidance.

So it didn't have a dramatic impact from that perspective.

But we've been struggling with that for a period of time.

And as a result of that, and plus the corrective actions that we now will have to undertake, we've moved the anticipated completion date from the end of Q2 into the Q4 timeframe.

So a lot of work still to be done.

We will complete the project on time.

It has resulted in an incremental cost.

And the one point I was trying to make in the script was that because of the accounting methodology that we use, the percentage completion, any cost overrun, essentially, you have to recognize a certain percentage of that relative to how much of the contract is complete at that point in time.

So if you have a-- throw out a number -- a $10 million cost overrun.

If the project is 80% complete, you'll recognize that in the current quarter.

So it did have an impact on earnings, more so than revenue, in the current quarter.

But from a full-year perspective, we'll maintain the guidance and cover any of the additional cost overruns associated with AVSR.

-- it looked like it'd be moving lower by year end.

How should we think about the cadence now, given Desert Sunlight recognition in the back half, and also Q1 starting more in the low 20s?

Thank you.

We missed the first half of your question.

I don't know if the rest of the call -- could you repeat it?

The prior guidance implied you guys would be somewhere in the mid-20s for Q1, and then moving lower by year-end to hit that 20% to 22% range for the full year.

But how should we be thinking about the cadence, now that you have the Desert Sunlight recognition in the back half, and also with Q1 having started more in the low 20s here?

Yes.

So as we indicated, look, with the impact of Desert Sunlight now impacting the second half of the year, you'll see stronger revenue in the second half than you will in the first half.

And you'll see the gross margin trend accordingly.

So you'll see a little bit stronger gross margin through the second half of the year than you will have seen in the first half of the year.

Thanks, guys.

Sanjay Shrestha, Lazard Capital Markets.

My first question, I guess it is to you, Jim.

When I look at this pie in slide 6, the early-stage, total 5.5 gigawatts, given the change that the industry has gone through, who are you guys mostly competing against during the bidding process?

And what are the pluses and minuses and bias of the project for talking about you guys versus the competition that they see out in the market?

And I have one follow-up.

It's very difficult to generalize who we're competing against.

That varies quite dramatically from market to market.

But the compelling value proposition that seems to be the winning combination, no matter who the competition is, is the combination of track record, balance sheet and bank-ability.

And so it is customers that either have a quality bias or projects that have a need for project financing, and accordingly need a technology solution and/or need PC provider that have track record and clear bank-ability is where we consistently seem to have the strongest competitive advantage.

The set of competitors in the US is one set.

The set of competitors in Chile is different.

The competitors in India are different.

The competitors in Australia are different.

So we can't generalize across all of the markets.

But the consistent competitive advantage seems to be those factors that I've outlined.

Got it.

One follow-up on that then.

So I'm looking at the pie here about North America, which actually does make up a pretty big chunk of that 5.5 gigawatt, along with Latin America.

And the school of thought is that the large-scale projects in North America are behind us, and mostly it's a smaller 10- to 20-megawatt kind of a project.

Is that what makes up that pie?

Or how should we think about that, in terms of all the opportunity set that you were going after in North America here?

I think that the large sized projects in North America, while there's been a continued trend downward, there hasn't been the complete elimination of large projects.

And when we look through the 2014, 2015, 2016 time frame, there's still a fair number of large projects that are in that pipeline, as well as we've put a lot of time and effort into increasing our competitiveness on the smaller end of the scale, which has allowed us to fill or book a number of projects in that smaller size and scale.

So I think it's a combination of those two factors that really make up that slice of the pie, as you look at it.

Okay.

That's all I had.

Thank you so much, guys.

Shahriar Pourreza, Citigroup.

Most of my questions have been answered.

Just two questions on the pie, which is slide 7. Is there a status on the Chilean projects, the 1.5 gigawatts?

When we consummated that acquisition, we identified all of that portfolio as being in the early to mid-stage, which means they're in the 12- to 24-month timeframe.

So they have some degree of permitting ahead of them, as well as power purchase agreement negotiations ahead of them.

So we don't see them being a near-term contributor in 2013.

We would hope that we'd begin to convert some of those opportunities to bookings as we move forward into 2014.

Got it.

Got it.

Okay.

Great.

And then shifting to North America real quick, are you seeing how many stranded projects out there that you guys can go ahead and purchase from developers that just can't complete?

We see a steady diet of those types of opportunities, yes.

Okay.

Is it focused more in California, or are you seeing it all over?

There's a fair number in California.

But to be honest, we're seeing it throughout the southwestern region.

Perfect.

Perfect.

And just one last question on the Middle East.

So are we making any traction in Saudi Arabia, or any more in Qatar or Abu Dhabi?

We have lots of people on the ground.

We're building out our organization.

We have a significant number of opportunities that we are pursuing at this point in time.

That market is a certainty, in terms of it will be a large and significant market.

I've consistently said that timing is less certain.

Many of the authorities that will kick off those programs are very deliberative in their decision-making, highly technical in their decision-making.

So we feel like we're making good progress, but I don't want to create too much anticipation that something's imminent.

It will build slowly over time.

Great.

All right.

Thanks so much.

Scott Reynolds, Jefferies.

Congratulations on moving Ordos, the second phase, closer to completion, at least.

The first part of that, if I remember correctly, Phase I was under a memorandum of understanding on module sale.

Is that what Phase II is moving towards?

And also, can you talk a little bit about pricing on that project relative to some of your North American projects?

Well, we haven't disclosed or discussed any specific pricing on projects, and that's not something we do.

The Phase II is in the pre-feasibility study phase.

The key regulatory event in the Chinese process is approval of your feasibility study.

So we've got two major regulatory steps ahead of us, whereas the initial 30-megawatt phase is through those.

So we're now into the heart of the central approval process, and that is the key focus.

Once you have that approval under the Chinese system, that entitles you to a PPA and a tariff.

So those negotiations are rather pro forma, once you have your central governmental approval.

Would you expect, as you move through Phase II, would we get line of sight on the 870 megawatts for Phase III sooner rather than later?

I think it's difficult for us to commit to or give much guidance on when we get visibility to that.

We're focused on the approval for Phase II, and we'll start thinking about moving Phase III forward once we have visibility into that final approval.

All right.

Thank you.

Stephen Chin, UBS.

Jim, on the 5.5 gigawatt pipeline that you shared, and you've also shared your long-term gross margin goal of 15% to 20%, can you give us some color on what profitability are you seeing on these pipelines?

Is it higher than what your long-term goal is?

And as a follow-up question, can you give us some sense of what percentage of this pipeline do you expect to convert into your bookings?

Thank you.

I don't think we can give you any sense on what percentage we expect to convert into bookings.

It's future opportunities.

It's not really capable of that kind of analysis, certainly not at this stage.

In terms of profitability, we don't have visibility to profitability on the entire 5.5 gigawatts.

Some of it's not mature enough that you could take a look at it.

I did say at the Analyst Day that we are seeing pricing activity in our negotiations, particularly in the 2015-2016 time frame, that validates the margin expectations that underlie our guidance and our business plan.

So I think broadly, we are seeing a mix of pricing across our product line that averages to the kind of numbers we've guided the investors to.

Thank you.

(Operator Instructions)

Vishal Shah, Deutsche Bank.

Jim, I just wanted to clarify the slides.

You've mentioned 5.5 gigawatts of bookings opportunity, and then there's also some mention of 3.1 gigawatts of advanced pipelines, so just wanted to clarify if those are two different sets of numbers.

Yes.

The 3.1 is reflective of our pipeline that is booked.

The 5.5 is actually new bookings opportunities.

So if you think about the way we look at that 5.5, that's our funnel of opportunities that we're going to, that we have, that effectively sets us up to address the non-contracted portion of our business that we highlighted in the Analyst Day.

If you remember, what we tried to do between '13, '14, and '15, we gave you the profile of what was contracted, which essentially relates to that 3.1.

And then we gave you non-contracted business.

And this is really what the opportunity set is that we have today.

There's 5.5 gigawatts of opportunity to fill in against that non-contracted pipeline or non-contracted business over the long-range plan that we gave you through '15.

And what I would say is that relative to booking that business with the pipeline and the funnel that we have right now, we're pretty happy with the position that we have.

We like the diversity of the pipeline and we like the aggregate size of the pipeline, relative to filling in that non-contracted business that we need over '14 and '15.

Just with respect to your comments on book-to-bill for 1.1, or greater than 1.1 for this year, if 4.8 gigawatts of pipeline is early-stage, is the assumption that you're going to do some more acquisitions to hit your book-to-bill target of greater than 1.1 for 2013?

Yes.

Again, you've got to remember there's 700 or so megawatts that's in late stage development.

We really need very little volume.

As Jim indicated in his comments, we're effectively sold out through the end of Q3.

So we don't need a lot of volume to fill in this year.

It's really filling in for next year.

And that's a 12-month rolling horizon.

So if you really look at it, that carries you into the first quarter of next year, of the 700 megawatts.

And then beyond that, we have to then -- we'll start eating into that 4.8 gigawatts or so of opportunity that starts to fill in into '14.

So everything we see right now, our level of comfort of building and delivering against a 1-to-1 or greater book-to-bill ratio.

We feel very confident with where the aggregate funnel is at this point in time.

Ben Schuman, Pacific Crest Securities.

What are some key upcoming proof points in the new sustainable markets, in terms of major project awards or national level tenders in specific geographies that we can be watching over the next few quarters to make sure the strategy is really on track in terms of bookings, rather than early- to mid-stage pipeline?

I think, frankly, that the opportunity set has grown to a level of robustness that there's not one particular project or process that I would point to.

I think it's just to look at that we are steadily making progress toward that goal, on a quarter-by-quarter basis, from the broad portfolio.

We think we will get contributions from across all of the geographies and contributions across all of the product lines, and there's very few single projects that we're pointing to.

There are a couple in North America that are of significant size, but most of it is pretty broadly distributed.

And we feel like we have -- we're not counting on 100% hit rate against the opportunity set that we're chasing.

So we don't really -- I can't -- I don't really have specific ones that I can say that's the critical one.

Okay.

Thanks.

And then quickly in China, how do you guys think about payment terms and creditworthiness for your customer there?

We've heard some pretty rough terms for the local vendors.

And how do you make yourselves immune from that type of thing?

Well, you can't make yourselves immune from local conditions.

However, I've been developing power assets in the Chinese environment since the early '90s.

You sometimes end up with delay issues.

But there have not been broad creditworthiness issues from the Chinese power grid.

So to the extent you have been prudent in getting the appropriate approvals, and you've not done anything, you've not overlooked any steps in your development process, getting paid has not been a significant issue in the Chinese environment.

Curtailment is much more of an issue, and I think our focus is to make sure that we structure the projects such that we are handing the project over to a long-term equity owner that can manage those risks.

We're not going to get out over our skis in the Chinese market with respect to payment terms.

If you look at it in general, relative to our ability to manage credit risk, I think we've done a much better job than most of our competitors.

And we will also, in any particular market, require LCs or other forms of security to ensure we will ultimately be paid.

And we will avoid trying to do business directly with a thinly capitalized EPC provider and try to do business directly with the Gen Co or the off-taker, or hold security in the asset to protect our interest.

So we obviously are aware of the challenges, but I think our track record indicates we've managed that risk pretty well.

Chris Kovacs, Robert Baird.

Just wanted to dig a little bit into the cost cutting initiative you spoke about.

Is that all going to happen in Q2?

Can you maybe comment on where the headcount reductions are occurring, in terms of employee function?

I'll take the headcount questions, and I'll let Mark address the other.

In terms of where it's occurring, the focus for this has been on, I'd say, the administrative side of the organization.

There have been modest reductions on the R&D side, but not significant.

There's not been a lot of reduction on the business development or sales side.

It's mainly been on the core administrative functions, where we've tried to right-size the administrative portion of the organization to match the smaller size of the Company.

There's been a little bit in manufacturing.

So it's been fairly broad-based.

And these actions should be all communicated, I would say, 99% of all the actions will be communicated in the second quarter and people will be off role, and we'll take the charge for the associated severance in the second quarter.

Okay.

And then, I think I missed it -- you talked about future results on a project close.

Can you just repeat what the project was?

I missed it earlier.

I'm sorry.

Can you say that one more time?

We didn't catch the question.

I think you mentioned that Q2 results could be down from Q1, but certain projects have been closed.

What was the project again?

So we have three assets up in Canada, which we refer to as ABW, which is Amherstburg, Belmont and Walpole.

So we're in the process of finalizing that transaction.

And given the current negotiations, there's a chance it may not happen within the quarter.

We're just trying to give you some indication around the magnitude of those three projects on our earnings in the second quarter.

If they do happen and close, we will then have a relatively flat earnings for the quarter.

If not, we'll see earnings decline sequentially.

Colin Rusch, Northland Capital Markets.

Can you talk exactly what the expenses are for AVSR and what you have to pay for each of the line items?

What the expense is for AVSR.

The mitigation expenses with the --

We're not going to get into that level of detail.

There's various things that will impact actions that we need to take, and the schedule will be impacted.

And as a result of that, there is some additional cost that will be reflected in the estimates to complete for that project.

But we're not going to get into details of the items.

And a second question is on the Middle East pipeline.

I know you're talking about, I guess, it seems like a relatively small number that you're quoting there, relative to what the opportunities are that we're hearing.

Is there a filter on that on things that you don't think are going to hit in the next few years?

Or how should we think about that number?

Well, most of the large opportunities you're talking about are -- they've been talked about and they have been reflected in white papers, but they are not part of an official program yet.

And so as such, we would not include them in a visible bookings projection until such time as they became part of an official program.

So we think that over the next year to 18 months, we will see the contribution or the potential from the Middle East grow quite significantly.

Most of the large programs, which you're likely referring to, are not reflected in that current number, because they're not yet official programs.

Rob Stone, Cowen and Company.

I wonder if you could take another minute on the linearity of operating expenses, with the puts and takes of the RIF, the severance and so forth.

How we should think about that folding into your $300 million to $400 million guidance?

Thanks.

So the benefit of the reduction in force will happen in the second half of the year.

So the communications to the associates will go out this month.

Some will actually stay on roll to through the end of June.

So we won't have any real benefit in the second quarter.

So think of that, call it, $15 million or so of benefit flowing through in the second half, and pretty evenly split between the two quarters.

And as I indicated as well, we're going to have a charge in the second quarter in the range of $6 million to $7 million that will impact the second quarter, as well.

So you'll see the charge, and then you'll see the associated benefit equally over the third and fourth quarter of the year.

Stephen Simko, Morningstar Equity Research.

I only had one brief question, and that was regarding the TetraSun acquisition.

When it was talked about at the Analyst Day, I only remember it being discussed about in terms of the market opportunity in Japan.

And I wondered if as that potentially becomes commercial scale in 2014 or in the back half of 2014, if there are other markets you're thinking about that could be penetrated or targeted meaningfully and relatively quickly thereafter Japan?

Thanks.

There's certainly no shortage of markets that we could think about or talk about, in terms of being suitable for the TetraSun product.

The reality is within certainly the 2014 and 2015 kind of timeframe, assuming even a fairly aggressive ramp of production, even modest success in the Japanese market would consume almost all of the available production.

While there's lots to talk about, I think we are constrained by the reality of ramping that production.

And so Japan will likely be the focus.

I do think we will move some of that product to begin to capture opportunities in new markets, but I think it will likely flow into last half of '15, 2016 and beyond before we can have aggregate production at a point where we would be looking out for significant volumes outside the Japanese market.

That concludes today's question-and-answer session.

At this time, I'd like to turn the conference back over to today's speakers for any additional or closing remarks.

We'd like to thank everybody.

We again appreciate your time and attention, and we'll look forward to speaking to you in the second quarter -- I mean, third quarter.

Ladies and gentlemen, this concludes today's conference.

We thank you for your participation.