SunPower Corporation (SPWR) 2011 Q2 法說會逐字稿

Good afternoon and welcome to the SunPower Corporation's second quarter 2011 earnings conference call.

I'd like to inform you that your lines are in a listen-only mode at this time until the question-and-answer session.

(Operator Instructions)

Today's call is being recorded.

If you have any objections you may now disconnect.

I'd now like to turn the call over to Mr Bob Okunski, Senior Director of Investor Relations at SunPower Corporation.

Sir, you may begin.

Thank you, Ed.

I would like to welcome everyone to our second quarter 2011 earnings conference call.

On the call today we will start off with Tom Werner, our CEO citing an overview of our second quarter performance followed by Dennis Arriola, our CFO who will review our second quarter financial results and discuss our Q3 and 2011 guidance.

We will then open up the call for questions.

We have allotted approximately 30 minutes for today's call and a replay will be available later today on the Investor Relations page of our website.

During today's call we will make forward-looking statements that are subject to various risks and uncertainties that are described in our 2010 10-K, our quarterly reports on Form 10-Q as well as in today's press release.

Please see those documents for additional information regarding those factors which may compact these forward-looking statements.

To enhance this call we have also posted a set of PowerPoint slide which we will reference during this call on the Event and Presentations page of our Investor Relations website.

In the same location we have posted a supplemental data sheet detailing some of our historical metrics and on slide two of our PowerPoint presentation you will find our Safe Harbor statement.

Our prepared remarks will run approximately 20 minutes and then we will take questions for 15 minutes.

With that I'd like to turn the call over to Tom Werner, CEO of SunPower who will begin on slide 3.

Thanks, Bob and thank you for joining us today.

On today's call we will discuss our Q2 performance and cost road map, our demand visibility for the second half of 2011, update our progress with Total and review our second quarter financials and outlook for the year.

Please turn to slide 4.

We grew revenue more than 30% sequentially as demand for our high efficiency systems remained strong.

However, our results were impacted by the following factors.

First accelerated sales in UPP power plants in Italy as a risk mitigation measure.

Second, we delayed our residential and commercial sales due to the modest pickup in demand in Germany and a slower than expected recovery in the Italian market.

Fourth, we took a $5 million residential and light commercial bad debt expense and a $7 million Malaysian foreign exchange expense.

Lastly, we took a $32.5 million charge for the write-down of third-party inventory to self-contract term nation.

These results are unacceptable.

In response we've taken the following steps to improve our performance.

First we significantly restructured our European organization to focus on residential and commercial segments.

Second, we've accelerated our cost reduction program for panel and balance of systems.

And third, we are tightly managing our working capital with strong progress on inventory management.

Additionally we've made the strategic decisions to exit our third-party sell contracts during the quarter as we now have sufficient capacity in the cost structure to meet the needs of our customers with our high efficiency E18, E19 and world record E20 panels.

We may continue to buy third-party panels in the future as the opportunity presents itself to accelerate our project development business ahead of our fab brands.

We remain on track to meet our year-end 2011 cost reduction commitments of $1.48 per watt or $1.08 per watt on an efficiency adjusted basis.

If fabs 1 and 2 are yield solar cell output cost per watt met our exceeded plan and at fab 3 we now have 10 lines in production.

We are operating a demand driven supply chain while maintaining high fab utilization rates in the second half of the year.

With our JV partner AUO we are evaluating the best timing to begin the ramp the second phase of fab 3 as we consider how to incorporate our next round of step reductions.

With the success of fab 3, we have accelerated our 2012 through 2014 cost reduction road maps for cells, panels and balance of system.

For example, our program to simplify our cell manufacturing process has made strong progress.

Starting in Q4 of 2011 we will begin implementing a step reduction plan which will ultimately eliminate 40% of our total cell manufacturing steps.

By the end of 2012 we expect to complete a 15% step reduction in all three of our fabs accelerating our prior plan by 6 months.

This step reduction will result in materially lower costs in 2012 pulling our dollar watt panel cost road map to the beginning of 2014.

We are also executing on our inventory improvement program, with Q2 inventory turns increased significantly and overall inventory declined 15% sequentially.

This decline is a result of higher system shipment on strong demand as well as further implementation of our demand driven supply chain.

In addition, as part of our continuing focus on cost reduction, we made a strategic decision to reintegrate panel manufacturing for North American demand.

We will build a meaningful panel manufacturing facility in Mexicali, Mexico, to complement our Silicon Valley manufacturing investment.

We expect to address Europe in a similar fashion.

Lastly, we are on track with our BOS cost reduction plan and customer response to our turnkey power plant systems.

It's been very positive.

Turning to slide 5, we also remain confident in our second half 2011 and 2012 outlook as our backlog, pipeline visibility continue to grow in both our UPP Americas and North American commercial businesses.

Our UPPA pipeline exceeds 4 gigawatts in both UPPA Americas, North American commercial are wholly allocated for the balance of the year.

We are adding dealers to our residential and light commercial channel in both Europe and the US as demand for our high efficiency systems is strong.

We remain on track to reach our goal of 2,000 dealers by the end of the year.

We continue to benefit from our ability to scale rapidly within emerging markets as well.

For example, in Belgium we launched our dealer network in Q4 of 2010 and achieved in excess of 5% market share by the end of the second quarter.

Germany, where we have a modest market share we see a significant opportunity for growth.

We are making investments in brand awareness enabling us to increase the amount of SunPower products sold per partner throughout our global dealer base.

The combination of our industry leading high efficiency panels, proprietary tracking technology enables us to offer our customers full systems costs that are competitive with traditional energy generation.

As a result, we have the widest utility and commercial footprint in the US with systems operating from Illinois to Florida to Colorado to California.

We are winning bids this year that are priced to compete with new natural gas plants like our 711 megawatt contract with Southern California Edison.

We also remain confident in our second half 2011 financial goals given the visibility of both our UPP Americas and North American commercial business.

As you can see in this chart, we have made significant progress executing our backlog in both businesses this year.

First in Italy we have completed our 2 remaining power plant projects and are on track to monetize both of those this quarter.

We also announced a supply agreement with Mahindra in India for 15 megawatts which will serve multiple ground mount projects.

In North America we have installed more than 70 megawatts in UPP Americas so far this year, 5 North American markets including Arizona, Colorado, Delaware, North Carolina and Ontario, Canada.

Our projects in the Permian phase are moving along as well.

Just last week we received the results of our Federal Environmental Assessment through CVSR.

We are pleased to report that they made a finding of no significant impact for the project.

This was the last environmental review needed to secure our DOE loan guarantee.

In addition, this morning we announced a comprehensive settlement agreement with the set of national environmental groups related to CVSR that will prevent expected litigation on our state and federal permits.

We are also making significant progress related to permitting for our other California power plant projects.

We have a substantial opportunity to add to that success as our UPPA pipeline has increased more than 4 gigawatts.

This summer we submitted a variety of projects into the California utilities RFO process at prices that are very competitive with new natural gas generation.

We also have excellent visibility in our commercial segment where we are well positioned for growth in the US as we leverage our competitive advantage to technology.

We expect to complete construction of more than 60 megawatts of North American commercial business by the end of the year.

We are also expanding our North American commercial business model to Europe as those markets increasingly favor rooftop systems.

(inaudible) our Total relationship we expect to gain share in Europe.

Let me finish my comments by updating everyone on the status of our partnership with Total on slide 6.

July we completed our first Board of Directors meeting as well as multi-day strategy session.

I'm very excited about the alignment of the teams and the actions coming out of these meetings.

We agreed to a number of strategic initiatives in the areas such as balance sheet improvement, R&D collaboration, expanding key markets, as well as leveraging both Company's vertical integration activities.

With regard to balance sheet improvement, we have just signed our first letter of credit facility guaranteeing our $1 billion credit support agreement with Total which has improved our liquidity by making available approximately $200 million of previously restricted cash.

Research and Development we have established a joint collaboration team to identify opportunities to leverage Total's Solar R&D investment.

We expect to benefit from this work in both technology and upstream capabilities beginning in 2012.

For new markets we have opened discussions about a number of large scale projects in new and emerging markets which we expect to have a sale cycle commensurate with our UPP Americas business.

Finally we are working closely together in order to leverage Total's other Solar investments including their ownership of Tenesol.

As we mentioned last quarter, we expect to start formal due diligence related to the potential acquisition once the European commission has approved Total's full acquisition of Tenesol.

In summary, we remain confident for the second half of this year given our restructured European organization and project visibility.

We believe our technology has significant cost reduction potential and we pulled in our step reduction plans.

Looking forward we are well positioned for future growth as we continue to invest in our business during the industry transition phase to expand our channels, reduce costs, leverage our Research and Developing successes and ramp capacity.

With that I would like to turn the call over to Dennis who will discuss our Q2 financial performance in greater detail, provide our outlook for Q3 in 2011.

Dennis?

Thanks, Tom.

Please turn to slide 7.

Our second quarter results reflected continued strength in product demand and overall shipments rose sequentially quarter-over-quarter and year-over-year.

However, we were disappointed with our overall margins and bottom line performance in the quarter as the Italian market did not bounce back as quickly as we'd expected after the announced feed-in tariff changes earlier this year.

We reported consolidated revenue of $592 million, a 31% increase over the first quarter and a 51% increase compared to Q2 of 2010.

Megawatts recognized in revenue for the quarter increased 43% to 190 megawatts from 133 megawatts in Q1 of 2011 with SunPower modules making up nearly 94% of the Total megawatts.

The US was our most active market in terms of both revenue and megawatts sold followed by Italy and Germany.

By business segment our Utility and Power Plant group or UPP recorded revenues of $302 million in the quarter up nearly 23% over the first quarter of 2011.

North America was our strongest market for UPP followed by Italy and France.

In our residential commercial business revenue were up significantly to $290 million compared to $206 million last quarter, an increase of 41%.

We experienced strong growth in terms of both megawatts and revenues in the US primarily fueled by our growing backlog of business in our North American commercial group.

We expect our North American commercial group to deliver growing and predictable revenue and margins in the second half of 2011 based on its growing backlog of business.

Non-GAAP gross margin on a consolidated basis was 12.5% for the quarter and was significantly impacted by the following factors.

First as a result of the change in feed-in tariffs in Italy overall demand in that country was lower than expected.

We reacted by modifying our mix of revenues and by shifting product from previously expected higher margin sales to lower margin demand in other markets.

In addition, we monetized several self-developed projects earlier than planned in Italy in order to reduce our risk in the future.

While these project did generate cash flow, the margins were lower than originally planned.

Our Q2 results also included the completion of 2 engineering procurement and construction projects in Europe which ended up with lower margins than expected.

Lastly, gross margin was also impacted by a $7 million foreign exchange expense related to the fab 3 JV in Malaysia.

While the environment remains challenging, as Tom mentioned we've taken steps and refocused our business in order to improve our gross margins going forward.

UPPs non-GAAP gross margin for the quarter was 8.5% and was heavily impacted by the European activities I just detailed.

We did, however, have solid performance in UPP North America as we completed a 20 megawatt project in Ontario, Canada, and continued to build out of projects for LS Power and Iberdrola in the United States.

In the residential commercial segment non-GAAP gross margin was 16.7% in the quarter versus 23.1% in the first quarter as our Italian business was impacted by a slower than expected recovery and a challenging pricing environment.

Non-GAAP operating expenses increased quarter-over-quarter but grew at the slower pace because of growth in revenue.

Our operating expenses of $78 million in the quarter included a $5 million bad debt expense related to our residential dealer business.

The full year 2011 we are managing our operating expenses to be less than 11% of total revenues and are continuing to take steps to reduce the amount of fixed expenses in our business.

These steps include the restructuring plan we executed in Europe in the second quarter.

Additionally as Tom mentioned, we're working with Total to find ways to leverage off of their existing investment in solar Research and Development so that we can increase the overall scale of our Research and Development program without necessarily negatively impacting our bottom line results in the future.

This coordination between our 2 companies is expected to help us further accelerate our cost reduction activities in the short term.

We ended the quarter with a non-GAAP loss before taxes of $23 million and recorded a $4.7 million tax benefit in the period.

We now expect our 2011 full year effective tax rate to be in the range of 26% to 28% due to both our first half results and from our expectations that a higher portion of our second half profits will be generated in the US which has a higher tax rate than most European countries.

Our second quarter non-GAAP net loss per diluted share was $0.19.

Turning to our GAAP results for the quarter, we recorded a loss of $1.51 per diluted share which included our previously announced one time pre-tax charges totaling approximately $75 million.

The components of the pre-tax charges include $29.3 million related to the Company's analac reallocation strategy, $13.1 million in expenses related to the Total tender offer and $32.5 million related to the write-down of third-party inventory and costs associated with the termination of third-party sell contracts.

While the second quarter bottom line results were disappointing we have made some constructive progress on continuing to improve the quality of our balance sheet and our overall liquidity position.

Please turn to slide 8.

We ended the second quarter with approximately $470 million in cash and cash equivalents of which $225 million was restricted due to the terms of our financing agreement.

And as Tom mentioned, as a direct result of our credit support agreement with Total and newly announced $771 million letter of credit facility approximately $200 million of previously restricted cash on our balance sheet is now fully available to the Company for investments, operations and general corporate purposes.

In addition, we're currently working with Total and several banks to establish additional sources of liquidity which we expect will contain more flexible and favorable financial terms than SunPower could achieve on its own.

These are some of the short term benefits of our new relationship with Total.

From an inventory perspective we did a good job of reducing overall levels in the second quarter despite the challenging environment.

Overall inventory was reduced from $487 million in Q1 to $413 million at the end of the second quarter, a 15% reduction.

We plan on further improving our working capital efficiency throughout the remainder of the year as we expect inventory turns to grow from 4.6 turns in the second quarter to 8.8 turns in the fourth quarter of 2011.

Part of that improvement will come from our newly announced Modco in Mexicali, Mexico which will allow to us reduce the amount of finished panels on the water and instead transport cells more quickly and economically.

Capital expenditures in the second quarter were $23 million, and contributed $30 million of capital to fund our share of fab 3 Malaysian JV with AU Optronics.

Finally there's been a lot of questions recently concerning our intention to combine our A and B share classes.

Both SunPower and Total as the majority holder of both classes of stock remain committed to combining our A and B shares by the end of this year and we will provide additional details concerning the final process later in the year.

Now let me turn to our 2011 guidance on slide 9.

As a result of the changes in the feed-in tariff in Italy we've reallocated human and financial resources from our UPP group in Europe to our residential and commercial business.

In addition we've increased our marketing resources in certain markets like Germany where our high efficiency technology is highly valued and where we currently have a low percentage of the overall market share.

With a large backlog of booked contracts we expect growing revenue and stronger margins from our UPP group in the United States and our North American commercial group in the second half of the year.

Our residential business in the US also remains strong and we expect to expand our base of rooftop business in Europe.

For full year 2011 we expect revenues to be in our previous range of $2.8 billion to $2.95 billion.

Gross margins should improve in the second half of the year driven by our strong backlog of North American commercial business and key contracts in our UPP group.

As a result of our second quarter results, the continuing competitive pricing environment and our higher forecasted tax rates for the remainder of the year, we are adjusting our full year 2011 non-GAAP earnings per share guidance to a range of $0.75 to $1.25 per share.

On a GAAP basis we expect earnings per share to be in the range of a loss of $0.50 to $1 per share which includes the $75 million in pre-tax charges from the second quarter.

Slide 9 provides you with additional information on our guidance for the third quarter and full year 2011.

With that I'll turn it back to Tom.

Thanks, Dennis.

We'll now open the call to questions.

In addition to Dennis, we also have Howard Wenger, President of Our Utility and Power Plant Group, Jim Pape, President of Our Residential and Commercial Segment, Julie Blunden, our EVP of Public Policy and Corporate Communications, Chuck Boynton, Vice President of Finance and Corporate Development and Bob Okunski, our Senior Director of Investor Relations.

They will help me answer the questions.

We'll have a short time for questions, so please keep it to one question or one and a very brief follow-up.

(Operator Instructions)

Satya Kumar.

Credit Suisse.

Thanks for taking my question.

Couple of questions.

One, on panel costs I think you mentioned in Q4 efficiency, you just said costs will get to $1.08, which seems to be approximately where the crystalline prices are headed at the moment.

I was wondering if you had sufficiently deduced that in the R&C business in terms of gross margins in the back half.

The UPP gross margins, I was just doing a back of the envelope, in Q4 I get something like 18% gross margins up from maybe about 11% in Q3.

I was wondering if you could add a bit of color on what drives the gross margin expansion in UPP in Q4.

Okay.

I'll take the first question and Dennis can take the second question.

So, the first question about our costs per watt of $1.08 and that's where pricing is heading, of course, the predictions on pricing varied.

We think the $1.08 crystalline pricing is probably on the aggressive side for what's going to happen in the back half of the year.

And, by virtue of the way we service our RLC channel, which is beyond just the efficiency advantage, it's also the services that we offer which, as you know, Satya, included supply chain, marketing co-op, financing and things of that nature, we've compressed our -- to a small degree we've compressed our premiums and expectations for the rest of the year, so we think our plan is on track.

Having said that, as we look to '12 we saw the need to accelerate cost reductions, we also saw success in our R&D programs that we've invested in over a year ago and we've moved in by 6 months our step reduction plan for our fabs -- our first step reduction plan for our fabs, which will reduce costs by at least 15% and will simplify our process.

Broadly speaking, what we're pursuing is what all companies are pursuing, which is high efficiency at low cost, in our case low complexity, and we think we're in a unique position to get there first because we already have high efficiency and we're rapidly simplifying our processes.

So, we're addressing costs by pulling them in fab -- or cost reduction by pulling the step reduction in sooner and we think we've adjusted our premiums and our pricing for the rest of this year in a way that matches the market reality set.

Dennis, can you take the second?

Yes, gross margin on UPP, I'd say your back of the envelope reengineering is pretty much on track on what we're looking at, maybe a little bit north depending upon how much CVSR project we do in the fourth quarter.

Thanks.

Vishal Shah.

Deutsche Bank.

Tom, can you maybe talk about your expectations for the growth in the US market in 2012 given the pipeline that you have and also can you comment on what kind of costs you expect to achieve once you reduce your steps by 15% in 2012?

Thank you.

Let me comment on both and then ask Howard to comment a bit further on pipeline for next year, and, Jim, we may ask you to talk about North American commercial as well.

So, I'll be brief.

Our UPP Americas business started 2 years ago -- or was formed 2 years ago.

We started any meaningful revenue in the first quarter of this year and like, it was one of our peers that is ramping quite rapidly and next year we'll hit full stride in that business.

The core project, as everybody on the phone realizes, is CVSR, which will be materially in production next year.

I'll let Howard comment a little bit more in a moment.

Regarding costs, Vishal, I appreciate the question.

What I can tell you on this call -- and, of course, we're going to give you a significant update between now and the year-end in terms of our targeted exit costs Q4 of next year -- is that the step reduction that we communicated in the prepared remarks is new, and it will pull that in 6 months, and that alone is 15%.

So, that's where we start and, of course, we're going to do more than that and so I can't give you a number yet.

We can confirm Q4, so you can do the math on where we expect to start our cost reduction for Q4 of next year and we'll go from there.

Want to talk more about pipeline, Howard?

Sure.

So, we noted on the call that we've got a 4-gigawatt pipeline for UPP Americas.

So, it continues to strengthen in size and in quality as we progress the pipeline through the development phases.

We've announced the 711 megawatts with Southern California Edison primarily in the Antelope Valley, we've achieved some great milestones there in terms of approvals for the permitting and the environmental aspects of those projects.

The keys for 2012, as Tom mentioned -- California Valley Solar Ranch 250 megawatts -- we're a green light to begin construction from a permit perspective in this third quarter, which we plan to do, and that project will be a very core part for 2012.

We have other projects with Southern California Edison -- a rooftop project there that we continue to ship; and we've also announced the Modesto irrigation district 25 megawatts, also important for 2012, where we've received the go ahead green light on the permit for MID as well.

So, that gives you flavor.

We think the market, in summary, is -- for UPP Utility in North America -- strengthening as we go into 2012.

Jesse Pichel.

Jefferies.

Can you tell us a little bit more about the new Mexican manufacturing plant and what that does for the business model?

Sure.

We are -- reached agreement on a facility in Mexicali, Mexico, which as you know is just adjacent to California's southern border.

It's a very large facility that will allow us to have a very significant module manufacturing presence there that will complement our Silicon Valley module manufacturing.

We'll start production -- actually start production quite soon on our key by-product and not long after we'll start production on modules by the end of this year.

So, I think it will move along quite quickly.

That volume will be materially taken out of our production in other parts of Mexico with other partners, and that partner will ramp down in that facility over the course of the next 6 months or year.

So it will become a completely vertical integrated source of supply for North America and have the opportunity to become quite significant in terms of size.

The last thing I'd say, Jesse, is we expect the cost structure -- landed cost structure that's competitive or better than our operations in the Far East.

And, if I could follow up, you thought that $1.08 was perhaps a bit aggressive.

Are you seeing some price stability in the market, have these Chinese gone as low as they can given where poly prices are?

Yes.

We are seeing prices stabilize.

I think we have saw at the end of Q2 I'll call it 90%, 20% inventory clearing pricing and we are seeing things come back.

I think you're seeing in separation of the market also between tiering of supply where Tier 1 suppliers are definitely coming back to a stable pricing model, whereas you might not see as predictable or rational behavior below that; and I think that this is the beginning of the process of separating maybe a permanent tiering of suppliers in this market.

Thank you very much.

Tim Arcuri.

Citi.

I just wanted to check and see where you guys stand in terms of balance and systems costs for a utility scale versus commercial rooftop.

I'll give you, Tim -- why don't I give you a sense of that.

My gut feels we may have to keep going and see if we want to add anything in a few minutes, but utility balance the system is going to be efficiency adjusted lower than what you heard a significant thin film manufacturer announce recently and it's because, of course, you need less BOS because you have higher efficiency -- so, comparable efficiency adjusted.

When you look at a rooftop system, you could be, at best case, comparable numbers and as much as 3 times as much, because, in the extreme, a carport.

So, the variation in our rooftop BOS is quite significant.

In the best case it's comparable which would be, of course, a large flat roof and then the other extreme would be a carport which could be 3 times as much.

Hopefully that gives you enough color.

Anybody have -- okay, that's where we are going to go with Tim and, if we could, go to the next question.

Kelly Dougherty.

Macquarie.

Tom, I think you mentioned something about compressing your premium expectations for the rest of the year.

Just wondering if maybe you can give us an idea of a percentage basis or whatever you can give us on how you're thinking about pricing, what happened in the second quarter; and then maybe where you're going in the second half and how that's relating to where your peers are selling.

Yes, Kelly, this is Jim Pape.

I'm just going to jump in front of Tom and take it.

First half, we've gone down -- kind of call it middle single digits is what we've gone down in the first half going into Q3.

We pushed prices down relatively further than we historically have.

We're down starting Q3 we dropped down, call it all in blended mid-teens, in decline of price.

So, part of that is following the market and part of that is, indeed, a little premium compression.

That premium compression is -- you're looking for range, I think in the past we've talked about a 20% to high 30% and maybe 40% premium.

We're talking about taking 5% to 10% out of that premium in a few select countries.

If you wanted to pick one, you'd probably say Germany is the place where it's the most competitive and interesting for the back half of this year.

So we're -- we definitely have done a little bit of work on our premium.

Keep in mind our rate of return -- what we manage is rate of return to the customer and that has an efficiency and an LCOE aspect to it that's part of our selling and our value proposition; and, you have to also recall that we sell systems, not always just modules.

In fact, we try hard not to do just modules.

So we get the benefit of blending in the full balance.

So, we are a crossroad map and kind of the visibility that we have we think we're priced in about the right spot, a little bigger move than SunPower traditionally has made, but still premiums that are -- around the globe that still show up in the 20% to 40% range.

And I'd say, Kelly, top that off with as we look in to 2012 we're pulling in our cost reduction.

We're able to engineer a simplified manufacturing process, which is going to make a materials difference in our cost structure.

And, the Total transaction that we did 6 weeks ago gives us the strength of balance sheet that we're going into '12 decidedly on the offense and our pricing posture during the beginning of the third quarter is consistent with that.

So, it's sort of a view towards the next 18 months as well.

Great.

Just a quick follow-up on that.

You said you were mid-teens down starting in the third quarter.

Is that from the second quarter or that would be for the first, 3 months -- I'm sorry, for the first 3 quarters of this year?

Yes.

Just keep this going.

We're cumulatively near 20%.

Okay, great.

Thanks very much.

Sanjay Shrestha.

Hi, it's [Arvita] here from Lazard Capital Markets.

2 questions, please.

Could you give us a bit more color about your product allocation strategy between the European market and into new and emerging markets, especially as seen by your recent order with Mahindra.

Can you give me your second question.

I'll try to keep track of them?

I'll go ahead and answer it.

So, product allocation is driven by the visibility that we have, given our project pipeline in the UPP business and in the North American commercial business which, as we said in our prepared remarks, we're extending the same channel in Europe, which we'll, in the future calls, refer to as EUC.

So, obviously, the projects we have visibility for, that's already allocated and that takes us deep into 2012.

From there, we're balancing how much turns business we're going to assume in our residential and commercial versus new and emerging markets.

I think your question is a really good one because, as you saw what we did in Japan a few years ago, you have to be present in the market long before it becomes obvious and large; and so, we are seeding new markets that we think are going to be big in the future -- and Japan and India would be 2 that I would give you as an example.

So it's a balance of new markets that we expect to be big in the future versus the turns business in our LC.

That's really where the allocation decision is mostly made.

Did you have a second question?

Ask it quickly, please, so we can take --

A quick follow-up here, in terms of factory expansion, I noticed that on your supplemental slides you have the factory expansion dependent upon meeting sort of step reduction plans.

Could you elaborate what that means?

Sure.

As we look specifically to 3B, the second 550 megawatts -- 560 megawatts of plant capacity in Malaysia, as we look at the timing effect, our R&D investment is providing further step reduction opportunities and, depending when we put that capacity online, it will have more or less reduction of steps -- and, of course, reduction of steps is directly proportional to cost.

So, the longer we wait to add that capacity -- within a reasonable time frame, of course -- we will have more cost reduction; however, we won't grow as fast.

So, we're evaluating the balance of those two and, of course, the probability that, that next set of cost reductions will happen when we think it will.

So, that's basically it.

The next call we'll give you specific numbers.

We will, of course, sorted it out by then.

All right, thank you.

Smitti Srethapramote.

Morgan Stanley.

2 quick questions.

First, can you go into more detail about why the Italian UPP market has not picked up yet despite passage of the new renewable energy law in May?

And, second one is, given the turmoil in the financial markets over the past several weeks, have you or your customers detected any disruption to financing availability or have seen meaningful changes to financing costs for the rooftop or ground mounted project markets in Europe?

Yes.

I'll come in at both and maybe Dennis can add a little bit of color.

On the first, the Italian market has been, particularly in the back part of Q2, slow to respond to the new policy because the policy frequency change is more rapid and the mechanisms for the Italian government to implement those changes were not transparent enough for the banks to be comfortable to be lending at the same rate that they had previously.

That is being sorted out and things are picking up.

But not nearly as fast -- we all -- I think the solar industry in general sort of said, once we have clarity, which I believe was on May 5, the good news is the market's just going to come right back -- the rooftop market, and that didn't happen.

It took more like 4 or 5 weeks for that to come around.

It's not quite there yet.

In terms of the overall world economy, and maybe even specifically things happening in parts of Europe, it's still too early to see a direct impact on financing costs; and so I don't think we can give you any particular color there.

We have not seen an effect yet, would be my closing comment.

I'm going to close on that.

Smitti, thanks very much for the question.

Thank you all very much for joining us today.

Along the way here I hope you heard the progress we're making on costs, visibility we have in the back half of year and our excitement over our relationship with Total.

We look forward to telling you more about these things on our next call.

Thank you.

At this time, that concludes today's conference.

You may disconnect and thank you for your attendance.