第一太陽能 (FSLR) 2015 Q2 法說會逐字稿

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

This call is being webcast live on the Investors section of the First Solar website, at firstsolar.com.

(Operator Instructions)

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

I would now like to turn the call over to Steve Haymore from First Solar Investor Relations.

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 second 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 second quarter financial results in detail and provide guidance for 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 second quarter 2015 earnings call.

This past quarter was marked with great execution across multiple aspects of our business.

From the successful launch of 8point3 Energy Partners to the achievement of a new technology milestone, and with strong financial results for the quarter, I am very pleased with the progress we are making.

I want to recognize the tremendous efforts of the entire First Solar team to achieve these results.

Turning to slide 4, I will discuss in more detail the benefits of the newly formed 8point3 Energy Partners, which we launched in conjunction with SunPower.

The creation of this yieldco vehicle benefits First Solar and its shareholders in several ways.

First, it lowers our cost of capital even further.

Next, ownership in 8point3 allows First Solar to retain a residual interest in high-quality solar assets, while providing stable future cash flows through IDR rights and dividends.

Additionally, the creation of 8point3 provides another competitive buyer for our future projects.

Lastly, the $284 million in proceeds received from 8point3 subsequent to the IPO provides capital for further investment and project development.

Mark will discuss more details related to the specifics of the transaction later in the call.

We also achieved a significant milestone this past quarter related to our technology roadmap.

As announced last month, First Solar achieved yet another new Cad Tel full-size module record of 18.6% aperture area conversion efficiency, which has been certified and recorded by NREL.

This equates to a full area efficiency of 18.2%, which exceeds the record multicrystalline perk module full area conversion efficiency of approximately 17.7%.

Our new module record demonstrates our ability to scale our research cell technologies to full production form factor, and is indicative of future production capability we will be deploying in the coming few years.

With this latest achievement, we are clearly demonstrating that our Cad Tel technology is both a high efficiency and low cost offering.

We continue to see our ability to execute on our technology roadmap as a key strength and a differentiating factor between First Solar and the competition.

Slides 6 and 7 provide a slightly different view of our technology roadmap and expected energy density advantage relative to multicrystalline silicon in the United States.

While the energy density slides we have shown in the past have focused on a typical desert Southwest environment, this map shows the advantages across the country.

As a reminder, energy density takes into account not only module efficiency, but also temperature, humidity and shade tolerance advantages inherent in our technology relative to multicrystalline silicon.

As we transition from the end of 2015 to the end of 2017, we continue to expect that our module technology advantage over multicrystalline competitors will grow dramatically.

As shown on slide 7, our advantage is expected to be especially strong in the more humid and hot parts of the country.

With 1.3 gigawatts of volume either supplied or under contract in the Southeastern United States, we are already beginning to see the market appreciate the performance advantages of our technology.

Finally, while the maps shown are specific to the United States, the same fundamental energy density advantage is present internationally and especially in those hot and humid regions that are best suited to solar.

Turning to our current modules in production.

Our fleet average efficiency improved in the second quarter to 15.4%, a 70 basis point improvement from the first quarter.

Our lead line efficiency averaged 16.2% for the quarter, a 60 basis point improvement quarter-over-quarter and a remarkable 210 basis point improvement versus Q2 2014.

The year-over-year increase in our lead line efficiency puts into perspective the astounding pace of our technological improvements.

During the second half of 2015 and into 2016, efficiency improvements on our lead line will not be as dramatic as the first half of this year.

This is due both to the need to prioritize full production utilization in 2016, as well as the timing of when new programs roll out.

The efficiency improvements will accelerate again into 2017, as highlighted on the energy density map.

Lastly, we still expect to see significant improvement in our full fleet average during the second half of this year, as our lead line technology is rolled out across our production fleet.

We are encouraged by the progress that we continues to see in our bookings, as highlighted on slide 8. Bookings for the first two quarters of the year now total 1.3 gigawatts DC against shipments of 1.3 gigawatts DC during this same time period.

Since the end of Q2, we have contracted an additional 80 megawatts of volume, to bring our year-to-date bookings to 1.4 gigawatts.

We are pleased with our year-to-date bookings and our 1-to-1 book-to-bill ratio and have visibility into a large number of late stage booking opportunities.

As we indicated previously, we are sold out for the remainder of 2015.

As we look to 2016, we have already contracted most of our available supply for the first half of the year; and based on a probabilistic analysis of our pipeline, we have only a few hundred megawatts of supply remaining for the entire year.

This could lead to foregoing some bookings and pipeline opportunities due to supply constraints.

We see this as a positive result of our improving module technology, as well as the ongoing development of our global sales teams.

Our recent bookings in late stage opportunities that are in final negotiations highlight our strengths both in product development and in continued growth internationally.

First, in the United States, we were awarded a 100 megawatts PPA by MV Energy for our Playa project, which has a COD of 2016.

This project award highlights both the competitiveness of solar power with conventional fuel sources and the strength of our cost reduction roadmap.

The project, as with other such awards is subject to final approval by the state public utility commission.

In addition, we expect to sign in the near future PPAs for several additional projects totaling hundreds of megawatts.

While we are not able to discuss these in full detail today, the CODs on these projects are several years in the future.

The delivery timing for these projects is a strong indication that solar power will remain an important part of the energy mix for utilities in the future, irrespective of the ITC expiration.

We also see this as a positive indication of how our efficiency and cost roadmap positions us to have an extremely competitive product offering for projects with COD several years away.

As we continue to execute on our roadmaps, we expect to be in a situation where we can capture a significant share of the market opportunity.

Lastly, each of these projects are candidates for an eventual drop-down to 8point3.

Internationally, we had tremendous success during the quarter, as highlighted by the signing of our largest non-US module supply agreement for a single project in the history of the Company.

We have signed an agreement with Aqua Power and TSK to supply 200 megawatts AC of modules to the second phase of the Mohammed Bin Rashid Al Maktoum solar park in Dubai.

This brings our total of completed or contracted projects to over 260 megawatts AC in the Middle East region and further strengthens the leadership role we are establishing in this key growth market.

In addition, the selection of First Solar technology highlights the competitive advantages of our Cad Tel technology in hot climates and locations with adverse soiling conditions.

In Honduras, we are nearing completion of a 26 megawatts AC power plant that we are constructing for Grupo Terra.

Central America is an emerging region for solar power and this project represents a sign of progress in a growing region for solar.

Elsewhere, we added additional bookings in other international locations, such as India, Turkey and Japan.

Turning to slide 9, our bookings in terms of expected revenue now stands at $7 billion, compared to $7.3 billion at the beginning of the year.

The decrease is primarily a result of the higher mix of module or module-plus deals in our year-to-date bookings.

Turning to slide10, I will now cover our potential bookings opportunities, which have further increased to 16.7 gigawatts DC, an increase of approximately 2.7 gigawatts from the prior quarter.

Despite over 500 megawatts of bookings, our late stage opportunities stayed flat, at about 3 gigawatts, with the increase coming from early stage projects.

Nearly half of our late stage opportunities, which we define as projects with a greater than 50% likelihood of converting to a booking, are international projects.

On slide 11, we are providing an update to our potential bookings opportunities by geography.

Our opportunity set outside of North America increased significantly to 10.4 gigawatts, or 62% of the total.

The latest growth in bookings opportunities since the prior quarter are from the Latin America, India and the Middle East regions.

These development are encouraging signs of our efforts to diversify outside of the US.

Turning to slide 12, we have recently announced some internal organization changes in support of our new Vision 2020 strategy.

Vision 2020 is a long-term roadmap to achieve significant growth objectives and further establish our technology and cost leadership.

As part of this strategy, we will focus on key geographic regions that have a market driven need for utility scale solar power and where we can compete effectively with fossil fuel generation sources.

Executing this plan will require prioritizing global market opportunities based on our core strengths and allocating resources appropriately.

While we will have more details of our Vision 2020 at a later date, I do want to address some of the leadership changes that have occurred in support of this plan.

First, we have appointed Georges Antoun as President, US and Joe Kishkill as President, International.

This organizational change will improve our focus on key markets while driving sales growth.

Joe will also take on new responsibilities as he joins me and Mark Widmar as members of the newly formed Office of the CEO.

The Office of the CEO has been created to facilitate a distributed decision-making architecture for the Company.

While Mark will also take on additional responsibilities, his role as CFO remains unchanged.

As a result of Georges moving to the US leadership role, Tymen de Jong will assume the role of Chief Operating Officer.

Tymen has already been an instrumental part of implementing the technology improvements across our module manufacturing operations, and he will now be able to leverage his experience to achieve even greater cost improvements across all of our operation and execution functions.

Tim Rebhorn has been named Senior Vice President, Corporate Development and Strategic Marketing, with responsibility for competitive positioning of our products and services, institutional development and management of global key account relationships.

Lastly, Raffi Garabedian will now report directly to me, and his role as CTO is unchanged.

I am very confident that these changes will better align the organization, in order to further drive sales and operational excellence.

Finally, as an update, our next analyst day will be in 2016.

We will provide more specifics around the timing later this year.

Now I'll turn it over to Mark, who will provide detail on our second quarter financial results and discuss guidance for 2015.

Thanks, Jim, and good afternoon.

Let me begin on slide 14 by discussing our second quarter operational performance.

Production in the quarter was 563 megawatts DC, an increase of 4% from the prior quarter, due to higher module efficiency and increased manufacturing capacity.

Production was 26% higher year-over-year, due primarily to the restart of manufacturing lines, higher efficiency and new capacity.

Our factory capacity utilization declined by 2 percentage points from the first quarter to 85%, due to an increase in upgrade activities across the fleet.

As Jim noted, our second quarter average module efficiency for our entire fleet was 15.4%, an increase of 70 basis points quarter-over-quarter and 140 basis points higher year-over-year.

Our best line averaged 16.2% efficiency during the quarter, an increase of 60 basis points from the prior quarter and 210 basis points year-over-year.

Putting the year-over-year improvement into perspective, the 210 basis points improvement results in a 15% increase in nameplate watts per module.

We are pleased with the rollout of our new module technology across the entire fleet, and we expect the fleet average to approach the best line efficiency later this year.

I'll now turn to slide 15 to discuss the P&L.

Net sales in the second quarter were $896 million, nearly double the prior quarter sales of $469 million.

The sharply higher sales resulted primarily from the sale of our majority interest in the North Star and Lost Hills products through the Southern Company, as well as increased revenue recognized from our Silver State South project.

Note that Silver State South revenue recognition is on a percentage of completion basis, while North Star and Lost Hills were sold to Southern near the end of construction, resulting in nearly all of the revenue recognized in Q2.

Overall, construction activity and revenue recognition was higher across various EPC projects, which was partially offset by lower third-party module sales.

As a percent of total sales, our systems revenue, which includes both our EPC revenue and solar modules used in our systems projects, was 98%, an increase of 20 percentage points from the prior quarter.

Note, module-plus sales, which include the modules in addition to other components, such as mounting structures, is a growing part of our business and is included in our systems revenue.

Module-plus revenue totaled approximately $100 million in the second quarter.

The decrease in third-party module sales reflects lower shipments to India as compared to the prior quarter.

Gross margin in the second quarter was 18.4%, compared to 8.3% in the first quarter.

The improved gross margin percent benefited from higher volume and improved sales mix, led by the sale of the majority increase in Lost Hills and North Star.

In addition, gross margin improved from cost reductions across multiple systems projects.

Operating expenses for the second quarter, which includes plant start-up, decreased sequentially by $2 million, to $107 million.

The decrease was driven by lower R&D expenses, partially offset by higher SG&A expenses associated with higher project development spending that was not able to be capitalized against projects.

In Q2, operating expenses included an additional $4 million of expenses associated with the launch of 8point3.

The second quarter operating profit was $57 million, compared to an operating loss of $70 million in Q1.

The increase in profit was due to higher sales and improved gross margin.

There was an overall tax benefit of $33 million in the quarter.

This primarily resulted from a $42 million anticipated discrete tax benefit associated with a favorable ruling from a foreign tax authority, which we noted in last quarter's earning call and included in our guidance for the quarter.

Net income in the second quarter was $94 million, or $0.93 per fully diluted share, compared to a net loss of $0.62 in the prior quarter.

Relative to our guidance for the quarter, our actual earnings were above the high end of our EPS range, primarily due to strong cost savings across multiple domestic and international projects.

In addition, the percentage of completion on our Silver State South project was higher than forecasted for the quarter, resulting in additional revenue and earnings.

Turning to slide 16, I'll now discuss the balance sheet and cash flow summary.

Cash and marketable securities increased by $291 million, to $1.8 billion.

Our net cash position now stands at $1.5 billion, an increase from $1.2 billion in the prior quarter.

The increase in cash in the quarter resulted from the sale of the majority interest in North Star and Lost Hills, as well as the $284 million received from the 8point3 IPO.

Our net working capital, including changes in non current project assets and excluding cash and marketable securities, increased slightly by $28 million from the prior quarter.

Deferred project costs decreased from the prior quarter, due to the North Star and Lost Hill sales, but was offset by increases in non current project assets related to projects under construction.

Stateline, [Milafa], and Luz de Norte, which were, respectively, 26%, 32%, and 72% completed at the end of the second quarter, are the major products that fall into the non current project asset category.

Total debt increased from the prior quarter by $57 million, to $300 million.

The increase is from an additional draw down on the project level debt associated with our Luz de Norte project in Chile, partially offset by scheduled payments on our Malaysian debt.

Cash flow used in operations was $17, compared to cash flow used in operations of $418 million in Q1.

Of the $284 million cash received from 8point3, $239 million was treated as investing proceeds and $45 million was treated as financing proceeds.

Free cash flow was a negative $ 47 million, compared to negative free cash flow of $466 million in the prior quarter.

Capital expenditures totaled approximately $39 million, a decrease of $17 million from the prior quarter.

Depreciation for the quarter was $63 million, a slight increase from the prior quarter.

Turning to slide 17, I will now address the accounting impact to First Solar's financials in the second quarter related to the 8point3 IPO transaction.

As part of the initial portfolio, First Solar contributed four projects in return for a 31% ownership interest in 8point3.

Projects contributed included minority interests in Solar Gen, Lost Hills, and North Star, along with 100% interest of Maryland Solar.

Note for clarity and as a reminder, when the sale of the majority interest in Solar Gen, Lost Hills and North Star occurred, these transactions were recognized through the P&L as revenue cost of sales and gross margin.

Specific to Maryland Solar, the project was leased back to 8point3 in order to preserve the IPC benefit to First Solar and was accounted for as a financing transaction, due to our continuing involvement in that project.

Subsequent to the IPO, First Solar received $284 million in cash from 8point3.

Again, approximately $239 million of this amount was accounted for as reduction of First Solar's investment in 8point3, and the remaining $45 million associated with Maryland Solar was recorded in other liabilities.

It should be noted that this transaction was treated as a contribution of assets in return for an equity interest and there was no P&L impact during the quarter.

Additionally, in Q2 First Solar did not receive any earnings related to our 31% ownership share in 8point3; however, any future 8point3 earnings we recognize in our equity and earnings and our P&L.

Next, let me address the accounting for future drop downs of assets to 8point3.

Note that we do not plan to drop any additional assets to 8point3 during the remainder of this year, but we wanted to provide some guidance on this subject.

First, it is important to understand that the GAAP accounting will vary depending on the specific structure of each transaction.

However in general, when we sell an interest in one of our projects to 8point3, there will be a P&L impact.

The impact could be to revenue gross margin or it could be to a gain, depending on the timing and circumstances of that transaction.

The key point to remember is that while the classification on the P&L may vary, the bottom line's earnings impact is comparable in either situation.

In the future, we may also sell projects to 8point3 that follow a traditional tax equity structure.

In these situations, the accounting may take an even different form.

In the case where we do have different accounting arrangements on future drop downs, we will evaluate what measures are necessary to provide clarity to the investors.

Generally, regardless of the structure of the drop-down, the economic substance of the transaction, which is what is most meaningful, is the same.

We will monetize 100% of the value of the project, either through A, a sale of the majority of interest to a third party and the minority interest to 8point3, or B, through a sale of tax attributes to a tax equity partner and the residual value to 8point3.

Regarding the project portion sold to 8point3, our expectation, for at least the initial drop downs, is that we will receive 100% of the value in cash from 8point3.

Over time, this might change and the consideration may be a combination of cash and 8point3 shares.

Turning to slide 18, I will discuss our full-year 2015 guidance.

First, we expect net sales in the range of $3.5 billion to $3.6 billion.

As a percentage of our total revenue for the year, we expect systems revenue, which includes both EPC and solar modules used in our systems projects, in the range of 90% to 95%.

Next, we expect gross margin in the range of 21% to 22%.

This implies a higher gross margin in the second half of the year as compared to the first.

This is the result of both a favorable mix of systems projects and continuing module and BOS cost improvements.

Operating expenses, including plant start-ups, are expected to range between $415 million and $425 million.

As a reminder, the full-year guidance includes 8point3 transaction-related expenses of $8 million which we incurred in the first half of the year.

Our projected effective tax rate is between 2% to 5%.

Note that this rate incorporates the $42 million discrete tax benefit recorded in the second quarter results.

Excluding this benefit, the tax rate would be approximately 12 percentage points higher.

Earnings per share is expected to be between $3.30 and $3.60 per fully diluted share.

Included in the earnings per share is approximately $0.16 of equity and earnings, net of tax, which is comprised mainly of our First Solar ownership interest in 8point3.

Our net cash balance is projected to range between $1.2 billion and $1.4 billion.

In the second half of the year, we do expect to raise project level debt for the construction of our foreign assets in India and Japan.

The loan balance to construct our Luz de Norte project is also anticipated to increase by year-end.

As a result, we expect our year-end total debt to be approximately $400 million.

Capital expenditures are expected to be between $175 million and $200 million.

Working capital increase from the end of 2014 is projected at $1.1 billion to $1.3 billion.

The large increase in working capital for the year is a result of continuing to construct projects on balance sheet, primarily in support of the 8point3 identified [Ro Fo] projects.

In addition, in some emerging markets where we are constructing development assets, we may be required to hold projects on balance sheet even after construction is completed.

Lastly, we expect shipments to range between 2.8 gigawatts and 2.9 gigawatts for the full year.

In regards to the guidance for the second half of the year, we anticipate a higher percentage of the remaining revenue and earnings to fall in the third quarter of the year, as a result of the timing of expected projects sales.

It should also be noted that our guidance for the remainder of the year does not include any further drop-down of assets to 8point3.

Moving on to slide 19, we will provide some of the parts valuation framework to illustrate our view of how the investor community should consider valuing First Solar following the yieldco launch.

First, we see our core business continuing to be valued on an EPS multiple or discounted cash flow basis.

The strong guidance for this year, one of the largest contracted pipelines in the industry, and rapid technology improvements, we continue to see this as the growth engine of our business.

Next, we add in our $1.5 billion of net cash, which equates to approximately $15 per share as of Q2.

Further, we add the value of 8point3 to First Solar through our 31% ownership interest.

Finally, our GP ownership in 8point3 should be taken in consideration through future rights to IDRs.

Turning to the next slide, I'll summarize our progress during this past quarter.

First, we believe we delivered strong financial results for the quarter, with sales of $896 million, gross margin of over 18%, and earnings of $0.93 per share.

Our balance sheet remains strong, with a net cash balance of $1.5 billion, and our recent amendment and extension of our revolving credit agreement, which has been increased from $600 million to $700 million, with a maturity date of July, 2018.

The high end of our guidance range is $3.6 billion of revenue and $3.60 of earnings per share.

Our technology continues to improve rapidly, with our record module of 18.6% average share area conversion efficiency.

Our pipeline continues to grow, with 1.4 gigawatts of year-to-date bookings and several projects in late stage negotiations.

Our potential bookings now stand at 16.7 gigawatts, with 3 gigawatts of mid- to late stage opportunities.

And lastly, we have successfully launched 8point3 Energy Partners in conjunction with SunPower.

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

Operator?

(Operator Instructions)

Ben Kallo, Robert W. Baird.

Congrats on the quarter and the guidance.

First, can you talk about your high-level thoughts looking ahead for 2016 and especially 2017, there's a lot of concern around there out in the investment community.

And then also tying that in, could you talk about your efficiency gains during the quarter and for the rest of the year and how that positions you versus your Chinese competitors from a cost perspective, because there's also this perception that you're losing your cost advantage?

Thanks.

First, let's talk a bit about what we see going into 2016 and 2017.

As I said in my comments, we're rapidly approaching a point where we don't have a lot to sell in 2016.

That doesn't mean we lose the opportunity to create value.

What we've found over the course of 2015 is that as we get into a fully allocated position, we begin to identify opportunities to move volume around, move projects around, and change timing and optimize the value creation out of the full production capability of the fleet.

2016, I think as we roll through the next couple of quarters, we will book the remainder of the year.

And then we'll spend a lot of the following year optimizing the deliveries and optimizing the timing of our projects.

The final resolution of ITC, and specifically the commence construction language for ITC, could throw some curve balls after the industry and cause everybody to relook at timing of projects and timing of deliveries.

But we'll just deliver those issues as they play out in Washington, DC.

That's for 2017.

We've got a fairly good book of business post-2016.

It is still early as we come to understand the rhythm and timing of the industry.

We're still a couple of quarters away from one projects that are slated for 2017.

We'll begin to aggressively engage on their module and EPC acquisition process.

So I think we'll begin to get some visibility.

I think our view, as we've stated before, is there will be some significant softness in the US market.

I don't think it disappears to a zero, but it will clearly be softer than in 2016.

The effect of the expiration of the ITC has clearly been to accelerate demand from 2017 into 2016 on the North America front.

Having said that, there's no impact on international demand as a result of the ITC.

So all of our growing activity outside the US continues to build on the solid base that we have.

And we expect that that will grow on fairly nice basis through 2017.

As you all may have noticed over the last couple of years, some markets, India in particular, the bookings in that market tend to come very close to deliveries.

We don't have a lot of advance visibility.

We can predict based on the programs and our customers' activities.

But in terms of them coming in as an actual booking, they tend to come relatively close to the deliveries.

We're still a ways away from beginning to reflect that activity in our books.

Some of the other markets are looking promising, but it's still a little too early to be able to tell.

But generally, we expect a little bit of softness in North America, but we think we're going to see good at activity elsewhere in the world.

On the technology road map, there's been some recent commentary that is almost like a deja vu.

I feel like I've been magically transported back to 2012 and reading about a fading cost advantage, et cetera.

I have absolutely no idea, Ben, where that commentary is coming from.

The modules that we are producing today are higher efficiency, higher quality and lower cost than anything we've ever produced.

And as we laid out and showed everybody over the last two or three years in analyst days, we have a committed technology road map that we continue to deliver on.

We have occasionally made adjustments to that road map, but they're primarily to accommodate our need to produce product.

They're not because we've had any sort of difficulty at any point in converting our technology road map into actual production and performance of the product.

We are as confident today as we have ever been in terms of our ability to compete in the marketplace.

And I think the gross margins we're seeing out of all aspects of our business reflect the impact of that technology in the marketplace.

I don't know, Mark, if you have anything you wanted to add.

The only thing that I will add on to that is just to remind everyone what we said on the last call.

We said with our lead line at that point in time north of 16% that we were -- our cost per module for those products were below $0.40 a lot.

So we basically said, at 16.3%, 16.2%, the cost of the module was below $0.40 a lot.

We also just said that we now have a new module that's certified north of 18%.

As we indicated, the 200 basis points improvement that we saw year-on-year from our lead line represents an increase of 15% watts in nameplate label capacity.

When you take that all into consideration, and our efficiency road map is in such a way that we're able to drive to a higher efficiency and it scales the cost down.

So it's not incremental to the cost structure of the module on a cost per watt basis.

So it's hard for me to get my head around how that could all translate into a disadvantage.

Being below $0.40 a watt today and having a road map to get us north of 18% just on a pure cost basis, I can't see how that can create a disadvantage.

Then when you couple that with the slide that we're showing on an energy density that we're 18-plus% advantage in some parts of the US on an energy basis in 2017, the combination to a higher energy and lower cost, I don't know how you conclude otherwise than we have an advantage.

Paul Coster, JPMorgan.

I have two questions.

Maybe the first one is for Jim.

And that is, with this quite amazing energy efficiency road map that you seem to be executing against, how do you actually price projects for delivery in 2017 or 2018?

Do you do so with the future vector efficiency in mind or is it some kind of comprise between today and that future state?

And the question for Mark is the yields have spiked in the yieldco space, and just wondering what, if anything, this does to your 12% to 15% growth commitment for 8point3 and what, if anything, you have by way of wiggle room?

Thank you.

On the future efficiency of the product, we have a very, very involved and sophisticated management process whereby we continuously evaluate the technology road map on a multi-functional, cross-functional basis within the organization.

We make decisions against the degree of confidence and statistical analysis that allows us to decide what we're willing to commit on a forward basis further out in time.

Obviously, within that, you're going to use a greater degree of conservatism versus your road map the further out in time you are.

But we are continuously applying in the marketplace our view of the road map.

And we do so through extremely rigorous processes and only commit technology to the promise that we're willing to make in the marketplace, once we feel like we have a high degree of confidence that we have moved from any sort of R&D type of circumstance to where it is simply a matter of executing on the production side.

And that's essentially the methodology that we apply.

On the discussion around what's happening with the yield and the general curve market and environment and then what our assumptions are relative to our 12% to 15%, as we said when we were on the road show is we're clearly looking at this as a sustainable long-term vehicle that positions us for success.

And in particular, we're trying to make sure that we're positioning ourselves for success beyond the 2016 horizon in the US.

And we believe we've done that by putting together a [Ro Fo] and an IPO portfolio that effectively enables us to us deliver against that growth through 2018 time frame.

Now we also said on the road show that we've left ourselves significant degrees of freedom to make decisions over time, if rates did increase or the environment change.

We could look at the growth rate.

We could look at the payout ratio.

We could look at the leverage.

So we will continue to evaluate all of those levers and try to make then informed decision of what makes the most sense to enable both First Solar and SunPower's business model.

As you can tell by recent announcements, both by SunPower and First Solar, we continue to both be successful in the marketplace, not only with TUD dates in the 2016 horizon, which both of us won 100 megawatts with MV Energy with CODs in 2016, but as Jim indicated, we are in negotiations with opportunities for hundreds of megawatts that sit beyond the 2016 horizon, which is the combination of enabling the strength of 8point3 with our advantage technology road map will continue to position us to gain share in that horizon.

And when we do that, we'll make a decision around what's the right way to monetize those assets.

And it may mean to drop those assets down into 8point3, and it may mean we'll evaluate the growth rate over time.

We'll do whatever is in the best interests of not only 8point3 shareholders, but each of the respective sponsors.

No deviation from the 12% to 15% commitment?

Not at this point in time.

Thank you.

Vishal Shah, Deutsche Bank.

Hello.

Can you hear me?

Yes.

Jim, I guess when you think about the efficiency and the cost road map, what kind of pricing environment do you need in order to justify the yieldco economics in 2017 in the US?

And also, if you think about international markets, such as India, has your strategy changed around projects in those markets?

Are you looking to acquire projects or develop projects, hold them on balance sheet, and potentially dropped down into a yieldco?

Thank you.

First, terms of the forward pricing environment.

We generally don't comment on that in these calls.

So I'll kind of leave that for now.

In terms of what we're looking at in India, we're continuously evaluating the markets in which we operate and we're continuously and aggressively evaluating the capital markets as they relate to that specific market.

Obviously, with a lot of the focus and attention on the Terraform global offering, there's been lots of discussion about yieldcos being applicable to international markets.

I think Mark and I have taken -- and the entire First Solar team -- we've taken a fairly conservative and cautious wait and see approach.

We think that it is entirely possible that over time, you will see yields type vehicle development that may relate to one or more markets outside of the United States.

I think it is a product and an offering that will take investors a while to digest and understand.

And I do think there are very real risks inherent in those products that will need a lot of thought and analysis as we move forward.

So we don't have any immediate plans to do anything like that.

We're taking fairly traditional approaches to the monetization of assets that we're creating in markets like India.

But we also continuously look at new developments in the capital markets and the viewpoint and appetites that investors have for various things.

And we will keep evaluating those things as we move forward.

Sven Eenmaa, Stifel.

I wanted to ask about reports in the media regarding the Company's targets on getting full system costs down below $1.00 a watt on a fully installed basis in the Western US.

Where do you stand in that cost reduction curve currently, and what are the key levers you have here, let's say, over the next 12 to 18 months?

The target of getting down to $1.00 per watt is a target that we announced a long time ago in one of our analyst day meetings, and we continue to make good progress.

We, as of the last year-and-a-half or so, have not really broken down the details of that, as we believe that it's competitive information.

But we can continue to make good progress.

And you will hit that target at different times in different markets.

Each market has its own cost structure, its own cost of labor, its own specific requirements in terms of site conditions, and even with end markets, you have a high degree of variability.

So safe to say there are certain places in the world today that you can build for something close to or even slightly below $1.00 per watt.

There are other parts of the world where is it substantially higher than that.

It's not a universal, simple, single answer.

But we continue, as you have seen on the module side, make tremendous progress.

And we've made exciting and significant progress on the balance of systems side and we continue to have a relentless, almost religious focus on cost reduction as core to the Company's success.

Patrick Jobin, Credit Suisse.

Two quick questions.

First, just trying to reconcile running at 85% utilization, given the efficiency improvements, $0.40 per watt cost structure with lead line, and the commentary about being sold out, with just a little bit of volume for 2016.

What would be a realistic upgrade time frame and when would we see that lead line thought the rest of the fleet in utilization?

And then just last question on TetraSun, if there's any update there?

Thanks.

I'll take the first one and then Jim can do the TetraSun.

First off, just to make sure, the comment was made during the call, if you caught it, is that we envision that we will be running the entire fleet at the current lead line efficiency by the end of the year.

So the 16.2% in the lead line, you would expect the entire fleet, as we exit the year, to be at that 16.2%, from that perspective.

The comments around the utilization and the sold out and the $0.40, try to put that all in perspective.

We effectively are running, adjusted for downtime, to realize upgrades that we need to do to try to those efficiency improvements.

We effectively are running full out right now.

We have no real available capacity.

We have some discretionary capacity as it relates to the timing of doing the upgrade.

And that's why you will see, not this year, we're going to continue to roll out the fleet, the lead line efficiency across the entire fleet.

But as we enter into 2016, we're making some informed decisions to delay some of the road map enhancements in order to capture as much utilization as we can, given the current demand profiles.

So it's one of those things that's a delicate balance.

You have to look at where you're at with the efficiency road map, where you are from your relative competitiveness.

And while we do believe, obviously, there's significant advantages that we'll gain as we continue to roll out our road map, but as we look at it today and as demonstrated in the slide that we presented during the discussion today is that at our current 16% efficiency as we exit 2015, we will be advantaged in a number of key markets.

So now we've captured the advantage and we're trying to make sure that we can monetize that efficiently in 2016 and limit the amount of downtime.

So you'll see a little bit of a delay in the road map and you'll see more of that activity happening in 2017.

So again, it's a delicate balance between what do we run for utilization, how do we think through the efficiency road map, and where are we at in the relative competitiveness of our technology at that point in time.

On TetraSun, we continue to ramp the initial line.

We've also been taking the product through both the qualification processes with the international qualification bureaus, as well as a very rigorous qualification process for the initial customer.

We're close to completing all of those activities.

We will produce something on the order of 25 megawatts this year, and then we'll continue to run that line next year.

We have a number of conversations with a variety of customers underway about the destination for that production.

And our goal is to successfully operate that line, have very high yields, very high quality and deliver that product to a handful of customers over the course of next year.

Julien Dumoulin-Smith, UBS.

Question here, just around 8point3 and the positioning of your development activities.

Obviously, very successful abroad in more EM-oriented countries or perhaps more specifically, non-CAFC-oriented countries.

Can you talk about how you think about development and perhaps optimizing between going towards attractive EM opportunities versus pursuing development opportunities in developed markets which could be eligible for 8point3?

I don't really think it's an either/or, given the balance sheet that the Company has.

As long as the activities are well diversified and at appropriate risk levels, we really aren't particularly constrained in terms of our ability to pursue development activities.

And the resources that pursue emerging market activities or activities outside the US versus the resources that pursue US activities, they are really not common resources.

There is a little bit of overlap on the engineering side.

But by and large, those are independent skill sets and independently staffed teams and organizations.

We have a fairly regional structure on the development side.

We further committed to a regional focus with the reorganization and the appointment of Georges as the US President and Joe as the International President.

So it doesn't really present us with an either/or.

We're going to pursue development in both the US, other OECD countries, as well as emerging market countries, based on the market specifics, the ability to create value out of the development process, the availability of a liquid market to monetize those activities on the back end.

And it's not -- we really have not found ourselves in a position where we've had to think or talk about an either/or in terms of evaluating those opportunities.

Krish Sankar, Bank of America Merrill Lynch.

Thanks for taking my question.

I had two of them.

One is, if I look at your 16.7 gigawatts booking opportunity, looks like there's about 3 to 4 gigawatts of mid- to late stage.

Is there a way you can quantify how many have COD dates before and after 2016?

And a follow-up would be, given your global footprint, I'm wondering how has FX impacted your numbers?

What was the last question again?

FX, the impact of FX on your projects.

So first in terms of the 16.7, we don't provide specifics.

But generally I can tell you that when you consider where we sit with respect to our production in 2016, there's going to be a significant volume of that that is post 2016, because we don't have a lot with which to chase opportunities, in terms of available volumes.

And that's probably all the detail that we can provide on that, other than the numbers that are in the release.

In terms of FX, the near-term specific FX exposures we try to identify and hedge, and we don't see a great deal of volatility.

I think we have a belief that there is some competitiveness elements that flow through FX.

We have probably a slightly more dollarized supply chain that some of our competitors.

But I tend to take a reversion to the mean approach to that.

And we don't spend a lot of focus on those types of issues.

Mark, any --

I think that's right.

We have seen a little bit of FX benefit out of the Malaysian [ringate].

It hasn't been significant.

But to Jim's point, largely where we hedge most of our exposure, so we haven't really seen a net benefit or a net adverse impact for FX so far this year.

Brian Lee, Goldman Sachs.

Just a couple of policy-related ones.

First, if you could share your latest visibility into the proceedings around the 50% RPS proposal in California and what you think the timing for progress on that might be?

And then secondly, Jim, you alluded to it earlier in the call, but with respect to the 30% ITC, if you could share any thoughts around the chances for a safe harbor provision to be implemented, to the extent that you have any visibility into the proceedings in DC?

Thank you.

Sure.

I think I have less visibility on California and the 50% RPS.

I think there's a tremendous amount of political will to get it done.

I think that at that level, you are beginning to push the horizon to the point that there are practical issues associated with that level of penetration into the grid.

They're not unsolvable.

I just think it requires thoughtful analysis and dialogue.

And I think the resource planning process combined with the political process are kind of tied up and trying to figure those types of things out.

And to be honest, I don't spend a ton of my time focused on it.

We certainly have people within the organization that do, but I wouldn't feel comfortable providing a lot of commentary.

On the ITC, there has been a lot of activity and a lot of discussion in Washington.

As everybody knows, the fact that we're now in the heat of the 2016 Presidential race kind of leaves us at a difficult time, in terms of making progress on issues that require a lot of bipartisan support.

There's been a lot of dialogue in the Senate about conforming the ITC to the same standard that applies to the PTC and providing commence construction determination for solar projects or alternatively, to allow the solar projects to proceed under the same part as wind, which the net effect of that would actually be the same thing.

The House has not taken it up specifically.

It would be unlikely to be included in any House legislation.

It would get resolved to the extent a tax package moves ahead later this year in conference.

And I do not consider myself enough of an expert that I can provide much insight into what the results of those conference negotiations would be.

I will tell you that there's lots of effort and activity on the part of the industry, and what we're really seeking, what First Solar is specifically seeking is a smooth glide path with no sharp alterations in policy.

We're not focused on long-term extensions of the ITC.

We're just focus on trying to create a smooth transition, and that's where most of our effort is.

But I'm not one to provide a lot of prognostication as to what's going to happen or not going to happen in Washington.

Edwin Mok, Needham and Company.

Hello.

This is Arthur filling in for Edwin Mok.

Just a real quick question.

As you guys start to execute on your efficiency road map and achieve a higher level of efficiency, do you see yourself potentially entering the small commercial or residential market space?

Thanks.

I think our answer to that will be the same as it has been historically, which is if we have meaningful customers that are interested in cooperating with us and pursuing that market, we will be more than happy to work with those customers.

We're not going to go directly chase those customers ourselves.

That has never been our business model or our expertise.

Our deal sizes tend to be much larger than that.

Certainly, we have a technology that's going to be increasingly applicable.

And we do have aggregators of demand that have spoken to us about those markets.

And I think you will see us move some volumes into those markets.

But that will be more in terms of module supply and less in terms of as a developer.

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

At this time, I'd like to turn the conference back to our presenters for any additional or closing remarks.

Thanks, guys, for the time.

We feel like it was a good quarter and we have a very attractive and interesting future ahead, and so we will talk to you all next quarter.

This does conclude today's presentation.

We thank you for your participation.