第一太陽能 (FSLR) 2015 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to First Solar's first-quarter 2015 earnings call.

This call is being webcast live on the investor section of First Solar's website at 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 Steve Haymore, Investor Relations Manager for First Solar Incorporated.

Mr. Haymore, 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 of 2015.

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

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

Jim will provide a business and technology update.

Then Mark will discuss our first-quarter financial results in detail and provide guidance for the second quarter of 2015.

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.

Please note this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations.

We encourage you to review the Safe Harbor statements contained in the press release and the slides published today for a more complete description.

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

Jim?

Thanks, Steve.

Good afternoon, and thank you for joining us for our first-quarter 2015 earnings call.

Let me begin by providing a brief update on our prior announcement regarding our intent to form a joint yieldco vehicle with SunPower.

Since our last earnings call the two parties have filed a public S-1 registration statement with the SEC for an initial public offering of 8point3 Energy Partners.

Completion of the IPO is still subject to market factors and regulatory approval, but we continue to move forward through the process.

Again, we cannot say any more about the transaction at this time outside of what is in the public S-1 documents.

Any questions on the subject in our Q&A session will be directed to the public S-1 filing for answers.

Now for an update on our technology and manufacturing -- our module conversion efficiency continued to improve in the first quarter, with our full fleet averaging 14.7% efficiency, an improvement of 30 basis points from Q4.

Our lead line efficiency averaged 15.6% for the quarter, an 80-basis-point improvement quarter over quarter, and 140-basis-point improvement versus Q1 of 2014.

This improvement is the largest sequential and year-over-year increase in our lead line efficiency in the history of the Company.

Even more impressive is the recent performance of our lead line, which has reached a new milestone for module efficiency of 16.3%.

This is truly a remarkable achievement which demonstrates the ability of our research and manufacturing organizations to execute to our road map.

By late Q3, we will have rolled out these latest improvement programs across the majority of our fleet.

Slide 4 provides an update to our energy density road map, which we first showed at our analyst day last year, and puts into context the advances in our efficiency.

As we have discussed in the past, conversion efficiency is a narrow measure of overall module performance, while energy yield produced is a more comprehensive and superior metric.

Energy density, which is energy yield per meter squared, incorporates several other factors beyond efficiency alone.

These other factors include temperature, humidity and shade tolerance.

CdTe technology has advantages in each of these areas over our multi-crystalline competitors.

As shown in the metric, our Q1 end-of-quarter lead line efficiency achieved parity with multi-crystalline silicon on an energy density basis.

In the space of only a month, our late line has now achieved an energy density advantage to multi-crystalline silicon.

To put this achievement in perspective, when we first introduced this metric a year ago at our analyst day, we had a significant disadvantage.

But in the space of little over a year we have now erased that deficit.

During the remainder of 2015, while our lead line will improve only modestly, our overall fleet average efficiency will increase significantly as the improvements are rolled out across the fleet.

In coming years, we expect to further increase our relative advantage based on the strength of our technology road map.

Compared to our prior energy density road map, our expectations of relative advantage in future years has been updated.

The updates to the road map are primarily due to revised timing of our new technology implementations, which have been adjusted to minimize downtime from technology upgrades in order to maximize output, particularly in 2016.

Most importantly, the metric highlights the favorable competitive position we anticipate as we execute on our technology roadmap.

Given that all new module efficiency announcements are not created equal, let me make a few points related to our 16.3% production lead line efficiency as it relates to recent crystalline silicon record modules.

First, crystalline silicon competitors typically calculate record efficiencies using the aperture area of the module.

We calculate efficiency on a whole-area basis.

Our 16.3% efficiency announced today would equate to a 16.9% aperture-area efficiency.

Likewise, our 17% record module, which we announced last year, would be 17.5% on a similar aperture-area basis.

It's also important to understand that our 16.9% aperture efficiency is in high-volume commercial production and not in a laboratory.

This new record also reflects materials and processes that are cost competitive and allow us to continue to lower our costs per watt.

It is important to keep these facts in mind and, based on our technology achievements, we feel that we are well positioned to compete with any commercial crystalline silicon technology available.

Turning to slide 5, let me discuss our capacity and demand outlook for 2015.

This slide, besides illustrating our production capacity for 2015, more importantly highlights the profound impact efficiency improvements have on output.

Since 2013, the year our production levels were at a low point, efficiency and throughput improvements have contributed to over 450 megawatts of capacity, or the equivalent of five new lines.

This is a key point to understand that our investment in efficiency improvements not only improves our competitiveness but also results in significant incremental capacity without building new factories.

As a result of the improving competitiveness of our module and the continued demand we see ahead of the potential ITC step-down after 2016, we are ramping our factories to full utilization.

Also, as we indicated previously, we are adding two additional lines at our Ohio location.

We are virtually sold out for 2015, and we are increasing our contracted volumes for next year.

We expect to ship between 2.6 to 2.8 gigawatts for the year, including shipments to self-developed projects.

In the first quarter, we have shipped 690 megawatts, a new record for a single quarter.

We are encouraged by the continuing bookings momentum, as highlighted on slide 6. Total bookings for the first quarter of 2015 were 422 megawatts DC against shipments of 690 megawatts DC.

In the month of April, we have booked an additional 483 megawatts.

As a result, our ending outstanding bookings are now at 3.9 gigawatt DC, an increase of 200 megawatts from where we ended 2014.

Achieving a book-to-bill ratio of at least 1 to 1 remains our objective for the year, but it will be more challenging in 2015 as some inventory was carried over from the prior year due to minor delays in shipments of projects.

The single largest booking since our last earnings call was a module-plus agreement that we signed with Strata Solar for 300 megawatts DC of deliveries in 2016.

Through this deal we continue to strengthen our relationship with Strata as well as extend our leadership in the Southeastern United States.

Also in the South, we signed an EPC agreement to construct a 100-megawatt AC solar project, and in a separate transaction signed a module-plus agreement with Silicon Ranch to supply a 17-megawatt DC on-site commercial and industrial solar power installation.

This latter project highlights the value that First Solar technology provides to the growing number of commercial and industrial customers seeking clean and affordable power.

Internationally, we continue to make strides in India, where we booked another 75-megawatt (inaudible) of self-developed project.

This brings our captive project total in India to 200 megawatts AC and demonstrates the progress we are making in this rapidly growing market.

Finally, our utility-scale solar development activities in Japan continue to progress, as demonstrated by our first bookings this month.

We expect to commence construction on our first round of projects under the mega solar program in Q3 this year.

While the cumulative volume of these initial projects is relatively small, it represents an important evolution from supplying modules to third parties in Japan to now successfully developing and realizing our own pipeline.

It also demonstrates that our thin-film technology has achieved adoption and acceptance in this important market.

Turning to slide 7, our bookings in terms of expected revenue now stands at $7.6 billion, an increase of approximately $300 million compared to the beginning of the year.

The balance increased primarily due to lower revenue recognized in the first quarter resulting from constructing more balance projects on balance sheet.

While we don't provide details related to the gross margin on our bookings, we are seeing improving trends as we continue to lower our costs and see some stability in pricing.

Turning to slide 8, I will now cover our potential bookings opportunities, which have grown to 14 gigawatts DC, an increase of approximately 500 megawatts from the prior quarter.

Note also that the total potential bookings increased despite a strong year-to-date booking.

We are also pleased that the size of our mid- to late-stage opportunities has nearly doubled from the prior period to 3 gigawatts.

This increases our confidence in our ability to hit our one-to-one book-to-bill ratio for the year.

Slide 9 shows the breakdown of demand by geography.

Our opportunity set outside of North America stands at 8.3 gigawatts, or 59% of the total.

Our transition to sustainable markets outside the US is gaining traction, as we are increasingly seeing the results of our investments in developing regions.

More than half of our mid- and late-stage opportunities are now in international markets.

Finally, as announced earlier today, we have entered into a strategic alliance with Caterpillar to provide integrated turnkey photovoltaic solutions for distributed generation micro-grid applications.

As part of this announcement, First Solar will provide a pre-engineered solutions package including our advanced module technology, which will be sold under the CAT brand and through CAT's dealer network.

First Solar's technology, which will be combined with Caterpillar's generator set and energy storage offering, will initially be marketed in the Asia-Pacific, Africa and Latin American regions beginning in the second half of 2015.

Micro-grids provide value to prime power, diesel and gas customers by integrating renewable energy such as solar power with generator sets.

The targeted opportunity includes micro-grids in the 1 to 2 megawatt range in locations such as mines or remote towns and villages.

This alliance further highlights the ongoing global energy transition.

First Solar's cost competitiveness allows it to complement conventional generation and is an exciting opportunity to continue First Solar's growth outside of our core utility scale business.

Now I will turn it over to Mark, who will provide detail on our first-quarter financial results and discuss guidance for the second quarter.

Thanks, Jim, and good afternoon.

Turning to slide 12, I will begin by discussing the first-quarter operational performance.

Production in the quarter was 540 megawatts DC, an increase of 6% from the prior quarter due to higher module efficiency and improved factory utilization.

Production was 22% higher year over year due to the aforementioned factors and the restart of four manufacturing lines in Malaysia.

Our factory utilization was 87%, up 3 percentage points from the fourth quarter.

The higher factory utilization in Q1 was primarily due to less downtime related to upgrades.

In the first quarter, the average conversion efficiency of our modules was 14.7%, which is up 30 basis points quarter over quarter and 120 basis points higher year over year.

Our best line average, 15.6% efficiency during the quarter, an impressive increase of 80 basis points from the prior quarter and 140 basis points year over year.

Also, as Jim indicated, our lead line continues to make remarkable progress, as we are now running at 16.3% efficiency.

To put this into perspective, a module produced in our Malaysia facility at 16.3% efficiency has a cost per watt below $0.40 including sales-related cost.

Turning to slide 13, I will discuss the P&L.

Net sales for the first quarter were $469 million compared to sales of $1 billion last quarter.

The lower net sales is due to constructing more projects on balance sheet following our decision to pursue a yieldco.

In addition, the sale of Solar Gen in the prior quarter, the higher mix of module-only sales in Q1 and delays on several projects in the current quarter resulted in a substantial revenue decline.

Relative to our expectations for the quarter, net sales were lower due to several factors.

First, the sale of the partial interest in our Lost Hills-Blackwell project did not close in the first quarter as anticipated due to delays in coordinating with the utility to complete the required commissioning test.

The sale closed in early April and will be reflected in our Q2 results.

In addition, revenue on several system projects was impacted by a combination of permitting delays and the West Coast port strike.

It is important to note that while these project issues resulted in a delay of revenue recognition in Q1, we anticipate recovering the revenue and earnings in the balance of the year.

As we have communicated previously, our system business can be lumpy from one quarter to the next.

Therefore, it is important to look at the business through a lens that spans multiple quarters.

As a percentage of total net sales, our systems revenue, which includes both our EPC revenue and solar modules used in the systems projects, was 78%, a decrease of 14 percentage points from the prior quarter.

The higher mix of third-party module sales was primarily related to shipments to India and the aforementioned project delays.

Gross margin in the first quarter was 8.3% compared to 30.6% in the fourth quarter.

The lower gross margin is due to constructing more projects on balance sheet in preparation for a yieldco, unfavorable absorption of fixed cost against the lower sales volume, higher module-only sales and a higher mix of lower-margin system projects.

In addition, the sale of Solar Gen in the prior quarter contributed to the sequential decline.

First-quarter operating expenses were approximately flat at $109 million.

SG&A expenses were lower but offset by an increase in start-up expense associated with restarting capacity.

Also note, Q1 operating expenses included approximately $4 million of expenses associated with the launch of 8point3 Energy Partners.

The first-quarter operating loss was $70 million compared to an operating income of $199 million in Q4.

The decrease was due to sequentially lower sales and gross margin.

The net loss in the first quarter was $62 million, or $0.62 per fully diluted share compared to net income of $1.89 per fully diluted share in the fourth quarter.

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

Cash and marketable securities decreased by $506 million to $1.5 billion.

Our net cash position now stands at $1.2 billion, a decrease from $1.8 billion in the prior quarter.

As indicated on last quarter's earnings call, the decrease in cash was expected, as we are constructing several large projects on balance sheet in conjunction with our yieldco strategy.

Increased construction activities and holding interest and assets on balance sheet ahead of our planned yieldco IPO will continue through the second quarter of the year and place additional requirements on liquidity.

Our net working capital including the change in non-current project assets and excluding cash and marketable securities increased by $516 million from the prior quarter.

The increase was primarily due to an increase in project assets and related activities and an increase in accounts receivable.

Total debt increased from the prior quarter by $26 million to $243 million.

The increase is related to additional drawdowns on project-level debt associated with our Luz del Norte(inaudible) project in Chile, partially offset by scheduled payments on our Malaysia loan.

Cash flow used in operations was $418 million compared to cash flow from operations of $928 million in Q4.

Free cash flow was a negative $466 million compared to positive free cash flow of $858 million in the prior quarter.

Capital expenditures totaled $55 million, a decrease of $18 million from the prior quarter.

Depreciation for the quarter was $62 million, unchanged from the prior quarter.

Turning to slide 15, I will now discuss our guidance for the second quarter of 2015.

As indicated on last quarter's earnings call, given the announcement regarding the proposed yieldco formation, we are holding off on providing full-year guidance until after 8point3 Energy Partners' IPO.

Similar to the first quarter, our expected financial results for Q2 will be influenced by constructing project on balance sheet, a mix of lower-margin EPC projects and third-party module sales.

In the near term, this will continue to contribute to lower earnings, as can be seen in our future guidance.

In the second half of the year we anticipate a stronger financial result than the first half as we return to a more normal course of business.

Our abbreviated financial guidance for the second quarter is as follows -- net sales in the range of $750 million to $850 million, earnings of $0.45 to $0.55 per fully diluted share, cash used in operations expected to be between $250 million and $350 million.

Note our earnings per share estimate includes a non-recurring tax benefit of approximately $0.40.

This week, we received a favorable ruling from the Malaysian tax authorities which resulted in discrete Q2 tax benefits.

Finally, one last point relative to the guidance, the Q2 earnings guidance does not reflect any potential impact to our financial results from the IPO of 8point3 Energy Partners, should that occur in Q2.

Turning to the next slide, I will summarize our progress during the past quarter.

First, we continue to demonstrate impressive improvements in our technology.

Our lead line average efficiency improved to 15.6% in the first quarter and is currently running at 16.3%, which creates a 3% energy density advantage relative to multi-crystalline silicon.

Our improved competitiveness continues to manifest in our new bookings.

We have booked 905 megawatts DC so far to date.

And with over 3 gigawatts of mid- to late-stage opportunities, we are seeing continued strong momentum in our business.

Finally, with the filing of S-1 for 8point3 Energy Partners, our plan for our joint yieldco with SunPower remains on track.

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

Operator?

(Operator Instructions) Patrick Jobin.

(Operator Instructions)

A few questions here -- first, on gross margins, 8.3% -- just trying to better understand the mix impacts of the module business versus system business.

I would have thought costs incurred for projects you are holding wouldn't be flown through P&L at this stage.

So I'm just trying to understand that in context with the efficiency improvements.

And I have a follow-up.

Thanks.

Yes, so the margin for the projects -- our self-developed projects that will be contributed to 8.3 -- correct, those are held on balance sheet and all the costs associated with that are on balance sheet.

What still does flow through in the systems business is our third-party EPC business.

So -- which generally has been lower margin than self developed as anticipated.

Again, we are stepping in an EPC contractor versus actual developer of the projects.

So the margin realization will be lower on that, and then the balance of it obviously is a margin that we realize today on our module-only sales are lower than, obviously, the future bookings would represent, given the improved competitiveness of our technology.

Two megawatts of bookings.

How many were systems versus modules?

And then, any update on TetraSun and ramping that?

Yes.

We don't have a breakout of the module versus third-party.

But you can tell that the Strata booking you would envision is mainly a module only, so that was a big chunk of it.

So if you approximate something, 40% to 50% of the total is probably a reasonable assumption in module only.

The balance would EPC.

I will let Jim talk to TetraSun.

In TetraSun, we continue to ramp production and complete the qualification and certification of the product.

And we will start to have a product available in the marketplace over the next several quarters.

So it's -- for the most part we are proceeding exactly as we anticipated and we are very happy with the results of the product that's coming off the production line.

Ben Kallo, Robert W. Baird.

Good progress on the technology.

I guess the question that comes up quite a bit is there's the thought out there that a solar panel is a solar panel and it's all a commodity.

So how do you guys look at your technology improvement in differentiating yourself?

And how does that show through to the financials and evaluation for First Solar?

So there are certain aspects of the business that are clearly commoditized.

And you can say a panel is a panel.

But in reality, what it all comes down to is your customers buying the energy that the panel generates.

And that's why we focused in this call and in general we focus our R&D and in our sales efforts to focus people on the superior energy generation that you are going to get out of the product.

The standard face-value wattage of the panel actually tells you very little about what the panel is actually going to do in the field and the amount of energy that you are actually going to get from the panel.

So in the real world of day-to-day, hand-to-hand combat in sales, it's all about the energy generation of your panel.

And the cost effectiveness of our product as compared with our competitors is very, very strong.

So not only do we now have a product that has greater energy density than our competition, but we have a lower cost structure than our competition.

So that allows us to be profitable and competitive in the marketplace.

And that's how we think about it and that's what we focus on in terms of our research and development, and that's what we focus on when talking to and selling to customers.

Vishal Shah, Deutsche Bank.

Jim, I think you mentioned your costs have come down to $0.40 a watt, at least from the lead efficiency panels.

Can you maybe talk about how that is allowing you to win business, especially with some of the utilities in the US, what kind of forward pricing you see in the marketplace today and how competitive you are with some of the other players out there?

Or maybe some of the other technologies as well, which is wind and coal.

Well, so let's talk about solar-on-solar competition first.

Quite simply, the lowest cost structure allows you to compete for business, capture that business at a more attractive margin than your competitors.

It's a fairly straightforward analysis and formula.

It also gives us pricing power to break up the new markets.

It also gives us pricing power to trigger new demand.

The overwhelming impact on continuing reduction of prices on a global basis is increasingly utilities and commercial and industrial customers are seeing solar power as an attractive value proposition simply on its own.

In the US, you have utilities that are increasingly moving towards natural gas as a large portion of their generation fleet.

As they do their forward resource planning, fuel diversity, generation diversity is an important part of the formula.

When you look at the prevailing prices in the market today, which, depending upon what region of the country, can be from anywhere from as low as $0.04 or just under that to as high as $0.06 a kilowatt hour.

When they look at that on a flat basis for 20 years and compare that to additional natural gas exposure even at today's low gas prices, the general view is that makes sense as a portion of our total generation mix.

So what you have seen in terms of this fairly large explosion of demand in the Southeastern United States is a result of that calculus, is a result of the marketplace understanding where pricing has gotten to and recognizing the value that it represents.

We are seeing the same thing internationally.

Just as one example, Dubai originally had planned to carry out a 1-gigawatt program over a three- to four-year time frame.

The first phase of that program, they were so enamored of the pricing that they received that they doubled the size of that round and have accelerated the remaining 1 gigawatt to this year.

So we have clearly -- both in the US and elsewhere, we have reached a price point where, as compared with other sources of generation, both just on an absolute cost basis, on an absence of commodity price risk basis and on a generation diversity basis, it's a very attractive offering.

Julien Dumoulin-Smith, UBS.

I wanted to ask very briefly here -- when you think about the contracting cycle to get utility-scale deals done in time for the IPC, in the US what is the last day, if you will, to get those contracts (inaudible)?

Is it the second, third or fourth quarter of 2015 as you think about getting that full cycle to completion here and work backwards from that?

I think it's pretty hard to generalize is it's going to depend upon the size of the facility.

It's going to depend upon the jurisdiction in which the facility is located.

That's the permitting and code requirements that you are going to have to meet.

So I fully expect that on small, utility-scale plants, let's say sub-20 megawatts in size, we're likely to see opportunities to contract volume well into 2016.

On the very large, multi-100-megawatt projects, I would think that we are -- over the course of the second and third quarter of 2015, we are probably seeing the end of the opportunity to contract those assets.

And it will be a pretty linear relationship in between those two extremes.

So it all depends.

Obviously, permitting a facility in one of the counties close to population centers in California is a more daunting task than permitting a facility in rural West Texas.

So there's a whole host of variables that are going to impact when that cutoff starts hitting in terms of the last opportunity to contract and complete the construction within the IPC deadline.

Krish Sankar, Bank of America Merrill Lynch.

Thanks for taking my question; I had two of them.

First one, Jim, can you talk a little bit about how you see the PPA prices for utility commercial kind of trend either in Q1 or over the last six months?

How has that trend been?

If you can give some color based on the different geographies, that will be very helpful.

So the trends have continued to be down.

It depends a lot on installation.

So if you're talking about contract in the Western region of the United States with high levels of insulation, we have seen prices between, let's say, $0.04 or just under up to $0.05.

In the Southeastern United States, they are a little bit higher due to the insulation levels.

But broadly, you are seeing overall power prices below $60 a megawatt hour for new generation of any reasonable scale.

And everybody in the value chain is still making reasonable money at those price levels.

It just reflects that we have all continued to drive costs out of the integrated plant on the module side, on the fixed balance system side, on the variable balance system side and on the capital cost side.

So we have continued to see those prices come down.

Brian Lee, Goldman Sachs.

Thanks for taking the questions; I have two of them.

I will try to squeeze both of them in quickly.

First on the conversion efficiency, what is the expected timeline for the lead line to become fleet average?

Is it something to expect to materialize within a 12-month window?

Maybe related to that, any reason why the lead line starts to moderate, per your comments, Jim, off these recent levels?

And then the second question I had was on Caterpillar, the announcement there.

Will the economics on those sales resemble module-only margins?

Is there any potential recurring revenue from those sales?

And then any potential quantification of what this could represent in terms of additional volume opportunity for you guys in 2016, in its first full year?

Sure.

I'll let Mark tackle your first question.

Yes, so the conversion efficiency, where we basically said is that the vast majority of the lead line improvements will be rolled out over the next couple quarters.

So you will see that happening here over the next couple quarters, which is consistent with how we saw the announcement we made last quarter on our [2015] 8% lead line efficiency.

As you can see, that is starting to impact the current fleet average pretty well.

As it relates to the next-step function change in the lead line efficiency, there will be a step function by the end of the year.

But as most of these initiatives are, we generally roll out a change.

We then try to stabilize it across the fleets and then we look to the next steps along the road map.

So we will see a little bit of the lead lines, but it will be towards Q4, end of the year, before we see a dramatic shift in lead lines.

And then on the Caterpillar transaction I think you can expect that on this particular transaction the margins, certainly initially, will look like module-only sales.

It's possible that as we get into the partnership and the business that could morph over time and we could have greater scope for participation.

But to keep it simple and get the transaction papered, the focus has been more along those lines.

In terms of the size, the potential market is huge.

And the Caterpillar dealer network is vast.

And I think for us to provide any sort of prediction or guidance as to what the volume could look like, I just don't think we have enough visibility yet.

We've got to get out in the field and provide training and materials to the network of dealers.

And then, once they begin to engage with their customers, we will have greater visibility.

But I think -- don't think we have at this point but the potential addressable market that it represents is vast.

Sven Eenmaa, Stifel Nicolaus.

First, I wanted to ask in terms of your 3-gigawatt mid- to late-stage project pipeline, how much of that is for COD dates beyond 2016?

I don't think we have broken that out and provided that information.

There is some of it that is beyond 2016.

A fair bit of it is, not the majority.

But I don't think we can provide any greater specificity than that.

Edwin Mok, Needham & Company.

Thanks for taking my question.

I'll squeeze two in as well.

So first is on the incremental 0.9 gigawatts of project that you guys spoke or shipment that you guys spoke since last quarter on your presentation.

How much of that is planned to go into your balance sheet as project versus things that you have signed to sell?

And then my follow-up question is on your expense side.

With the plan (inaudible) [actually] mentioned, should we expect expense to go up as those projects get underway?

So if I understand your first question correctly, it's how much of the year-to-date bookings will actually be associated with projects that we will construct and then dropped down into the yieldco.

So the best thing, the only thing I could say right now is that we, in our public filings that we have identified the additio.

Nal portfolio of assets and we have identified a potential ROFO portfolio.

We can't comment on anything beyond that but the current period bookings are not reflective of either the initial portfolio or the ROFO portfolio.

So we have yet to determine based off of the opportunity set that we have in the bookings for the first quarter what the ultimate monetization will be.

We will evaluate that over time and make the appropriate decision when it comes.

The expense question is -- we have incurred more transaction expenses in Q1, as you can imagine -- legal, tax, accounting, other one-off type of transactions.

We will continue to to incur those cost up until the IPO.

Once the IPO launches, you shouldn't think of any incremental expenses being incurred by First Solar.

There will be expenses and management service agreements that will be provided to 8point3 Energy Partners, but those will be compensated appropriately by 8point3 Energy Partners.

Paul Coster, JPMorgan .

Just a quick question.

As we move forward I'm expecting the pipeline to shift to maybe emerging markets a little bit more.

As that happens and you build a pipeline of projects outside of North America, in particular, and outside of OECD countries, are you going to start to hold back projects there as well?

Or are those all built to sell for the time being?

If you look at the S-1 filing we did, there are definitions of qualified assets, primarily relate to OECD type countries that could be evaluated.

And we will make those decisions over time.

If the economics look attractive and it'scompelling to include into 8.3, we will do that.

If we think can capture better economics by monetizing them with local cost of capital available then we potentially will take that path.

At this point in time we have the optionality.

We will continue to evaluate it what makes the most sense for First Solar.

Mahesh Sanganeria, RBC Capital Markets.

A question on gross margin.

I think it implied guidance, [just like metal], slightly below that gross margin.

I just have a general question on gross margin going forward.

I think industrywide we see something like 15% to 20% gross margin on the projects.

And you probably have some headwind from the module So is low to mid-double-digit -- is that a good place to model?

And also if you can comment on where are you targeting gross margin on the drop-downs?

So on gross margin the gross margin is up sequentially.

We don't provide the actual gross margin.

If you back in what we've stated historically is that we anticipate that the normalized margins for the business over time will be in that 15% to 20%.

So that's not anything that s inconsistent with what we've said.

Now, as the module cost continues to improve we see the module-only level.

But I think it's probably safe to say that 15% to 20% is how we are currently envisioning business to evolve over time.

Margins that are outside of that range Into it you will show that relative to Q1 we will see a sequential increase in gross margin.

If you go back and what we stated historically is that we anticipate that the normalized margins for the business over time will be in that 15%-20%.

So that's not anything that is inconsistent with what we've said.

Now, as the module cost continues to improve we may see margins that are outside of that range at the module-only level.

But I think it's probably safe to say that 15% to 20% is how we are currently envisioning the business to evolve over time.

As it relates to expectations around drop-down of assets into a yieldco and expected returns on that, we have not made any comments in that regard, nor will we at this point in time.

The other comment I would have is you have to bear in mind if you compare us to other industry participants that don't have an engineering procurement and construction business, you're not going to be able to do a direct comparison.

We could take 100 megawatts of modules and sell them module-only at what looks like a very attractive gross margin.

We can package those same modules into an engineering procurement and construction contract that is at a much lower gross margin percentage but a much higher total gross margin dollars.

And so it's very hard to look at our results in the aggregate and make a direct comparison to the other participants that are largely module-only sales as opposed to having a significant engineering, procurement and construction component.

Colin Rusch, Northland Capital Markets.

Can you talk a little bit about the opportunity to sell into the emerging market with a number of project as you go forward with this yieldco?

Are you seeing opportunities in your pipeline?

And how should we think about that layering into the percentage of business going forward?

When you say sell into the merchant market, are you talking about sell uncontracted power plant on an contracted basis, sell the power merchant?

Or are you referring to something else?

I thought he may have said emerging.

Did you say emerging?

Sorry, my mistake.

I'll let you address it.

So this lack of optionality as we continue to address the best use of 8point3 Energy Partners, and we will look at emerging markets.

As you know, we have merchant plants in Chile right now and looking at the best path to monetize that asset.

That clearly could be a path that says that 8.3 is the best ultimate position of where we would want to monetize that asset We've got assets in Japan that we're developing.

We will be looking at those as well in terms of what is the right answer to do that.

So what I would say is that it has given a significant optionality.

It creates somewhat of a competitive tension so that others, when we get into a point of having to sell down an asset, there's a competitive tension and there's a fallback position in the negotiations, which obviously is advantageous to us because if we don't believe the market is willing to pay the proper returns for the value that they are getting for that asset, then we obviously have a different path to choose.

So that optionality would be very helpful in our negotiations.

So I do see it will evolve over time.

Again, if you look at what we have included in the S-1, it's mainly US assets initially.

However, over time, I think you will start to see some diversification winto international markets.

Ladies and gentlemen, that does conclude the question and answer session and that does conclude today's conference.

We thank you for your participation.