First Solar, Inc.
Q2 2010 Earnings Call Transcript

Published: 30 Jul 2010

[Operator:]

Good day, everyone, and welcome to the First Solar Second Quarter 2010 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Larry Polizzotto, Vice President of Investor Relations for First Solar, Inc. Mr. Polizzotto, you may begin.

[Larry Polizzotto:]

Thank you. Good afternoon, everyone, and thank you for joining us for First Solar's Second Quarter 2010 Conference Call. Today after the market closed, the company issued a press release announcing its second quarter financial results. If you did not receive a copy of the press release, you can obtain one from the Investors section of First Solar website at www.firstsolar.com. In addition, First Solar has posted the presentation for this call, key quarterly financial metrics, historical data and financial and operating performance on the IR website. We'll be discussing the presentation during this call and webcast. An audio replay of this conference call will also be available approximately two hours after the conclusion of this call. The audio replay will remain available until Tuesday, August 3, 2010, at 7

[Robert Gillette:]

Thanks, Larry, and thanks, everybody, for joining our second quarter earnings call today. I want to quickly turn to the performance summary. We had a really strong quarter with net sales of $588 million, which was 12% growth year-over-year. Our net income was $159 million or 27.1% of net sales, and diluted earnings per share was $1.84. The return on net assets was 21.1% on a fourth quarter rolling basis, and marketable securities were $960 million, which is $232 million increase year-over-year. Our production in the quarter was 344-megawatt, up 19% versus prior year and 7% quarter-over-quarter. The annual capacity per line increased to 59-megawatt, which equates to adding two new production lines to our existing and planned capacity. This improvement increases our current and announced capacity to 2.2 gigawatt by 2012. Our conversion efficiency was 11.2%, which is an improvement of $0.03 year-over-year. The cost per watt was $0.76, which is down 13% year-over-year and down $0.05 from the first quarter of 2010. We're on track with our expansion to the Malaysian facility and the addition of Plants 5 and 6. Shipments will begin in the first half of 2011. We also recently announced the addition of a new four-line plant in Frankfurt (Oder), Germany, where shipments will begin in the fourth quarter of 2011. On July 1, we launched our Series 3 module, which is an extension of our industry-leading design. The Series 3 product is our low-voltage platform that further improves efficiency, lowers module and balanced systems costs and provides field energy yield advantages, relative to polycrystalline or crystalline silicon. I'll discuss this further during this presentation today. Finally, in Q2, a reflected cost, associated with a module replacement program. During the period from June of 2008 to June of 2009, a manufacturing excursion occurred affecting less than 4% of the total product manufacture within the period. The excursion could result in possible premature power loss in affected modules. The root cause was identified and subsequently mitigated in June of 2009. Ongoing testing confirms the corrective actions are effective. We have been working directly with impacted customers to replace the affected modules, and these efforts are well underway and, in some cases, complete. Some of these efforts go beyond our normal warranty coverage. We accrued the estimated full cost of these additional efforts in our Q2 results, and Jens will discuss the financial impact in more detail. I now would like to spend a few minutes highlighting the progress we've made on our Utility Systems business and the project that we have underway. So first turning to Page 7, the picture on Slide 7 demonstrates the progress we've made on expanding the 20-megawatt site to 80 megawatts for Enbridge in Ontario, Canada. The construction is on schedule and highlights the progress our EPC team has made in cycle time and Balance of Systems cost. The 60-megawatt expansion is expected to be completed at a velocity that's 2x the rate of the first phase built less than a year ago. Half the site is now producing power and another quarter will be connected very soon. Turning now to Copper Mountain. Slide 8 shows 48-megawatt expansion of our original 10-megawatt installations at the El Dorado site for Sempra Generation. El Dorado is the first site we constructed in North America in late 2008. The expansion also highlights the progress made in design and execution of Utility-scale solar plants. Cimarron project in New Mexico for Southern Company is our first large-scale installation of the Series 3 product. The construction is underway and progressing well. Our mention of Series 3 and the installation at Cimarron Park. Now you can see on Page 10, the Series 3 provides higher efficiencies with initial product launch having 2/10 improvement over the existing Series 2 product. The higher efficiency also lowers cost per watt. Series 3 retains the band gap and temperature coefficient strength of Series 2 and continues the energy yield advantages over crystalline silicon. The low-voltage enables up to 50% more modules per string, which further reduces the Balance of Systems costs. In addition, it has new locking connectors, which provides faster installation and improved connection reliability. Series 3 retains the same form factor, module construction and semiconductor processes as Series 2. This will be our new technology platform for the future energy improvements that we make. Agua Caliente is the first project we expect to realize from the NextLight acquisition. The CPUC has approved the 290-megawatt project, and the major permits are in place. We plan to begin construction in 2010 and start installation of modules in 2011. In addition, yesterday, the first NextLight Silver State project of 50-megawatt received Public Utility Commission of Nevada approval of the PPA with NV Energy. Work is ongoing to obtain BLM approval to a final environmental impact study in 2010. The NextLight acquisition was closed on July 12 and increases our North American contract pipeline to 2.2 gigawatt. We've already benefited from the experienced team at NextLight and expect to begin to realize the value of the 570-megawatt PPA pipeline starting in 2011. The purchase price at closing is about $297 million in cash, and we expect to incur $12 million of additional operating costs in the second half of 2010. As previously announced, the acquisition is expected to reduce 2010 earnings by $0.09 to $0.10 per diluted share. With the completion of the NextLight acquisition, we also announced the formation of a Utility Systems business. This signifies the importance of this segment to our future growth and our objective of expanding global demand for solar power. On Slide 13, we've outlined our mission for the Utility Systems business. I’ve asked Jens Meyerhoff to lead this business. Many of you know Jens is our CFO, but in addition, he's been a significant contributor to the development of our business strategy and to the acquisition of the development businesses which constitute what we now call Utility Systems. He is uniquely qualified to lead this business, and I’m really excited about the contributions that both he and the team will make to the continuing success of First Solar. With our goal of providing solutions at the lowest cost for our Utility customers and to ultimately provide an asset which competes with fossil fuel sources, we have to consider all aspects of the value chain. We want to minimize LCOE, while at the same time, maximize the return for our project owners, and First Solar is uniquely positioned to provide both through driving performance and execution from the module to the Balance of Systems, project development and financing. All four of these elements must be optimized to achieve our goal of future cost parity. I'd like to give you an update of the market and what's happened and changes that we've seen since last quarter. First of all, in Germany. The German government, as you know, decided on the new 2010 and 2011 FiT disgression, implementation timing and growth corridors [ph] (25

[Jens Meyerhoff:]

Thank you, Rob, and good afternoon. During the second quarter, we continued to experience strong module demand ahead of the July 1 German feed-in tariff change, continued growth in France and Italy, as well as growing sales through our project development and EPC business. Net sales for the second quarter were $588 million, an increase of 12% year-over-year and a sequential increase of $20 million compared to the first quarter of 2010. The sequential increase of 3.5% was mainly driven by a higher percentage of system revenue recognition for the 48-megawatt Copper Mountain and 30-megawatt Cimarron project, partially offset by a decrease in module ASPs due to a lower blended foreign exchange rate and the mix implications. Please note that we did not recognize any revenues for the Sarnia 50 project during the second quarter, due to the completed contract nature of this project. EPC system net sales increased from 7% of total net sales in the first quarter to 15% in the second quarter. The blended exchange rate in Q2 was down $0.03 quarter-over-quarter to $1.36 per euro, demonstrating the effectiveness of our hedging programs. We produced 344 megawatts during the second quarter, up 7% compared to the prior quarter. The increase was a result of the fixed percent improvement in line, production to 59-megawatt per line annually and to more production days in the second quarter. Most of this increase will shift into construction in progress and inventory for the projects currently under construction and not yet recognized in our net sales. Module cost per watt produced for the second quarter was $0.76, down $0.05, benefiting from higher throughput rates, improvement in conversion efficiency, lower material costs and the decline in the euro, partially offset by stock-based compensation comps. Core manufacturing cost per watt declined by $0.06 quarter-over-quarter to $0.74 per watt. We'd like to remind you that our long-term cost-reduction roadmap assumes annual cost declines of approximately 10% and that we expect more modest cost per watt declines in the second half of 2010. Q2 gross margin was 48.3%, down by 1.4 percentage points over the prior quarter. The decrease was the result of increased EPC system mix impacting margins by approximately 2.3 percentage points, lower module ASPs and the accrued module replacement costs described earlier by Rob. These factors were mostly offset by the reduction in module manufacturing costs. During the second quarter, we accrued $17.8 million in cost of sales for expected module replacement cost in our cost of goods sold. In addition, we accrued $5.6 million of operating expenses, associated with this process excursion, bringing our total accrued expenses to $27.4 million at the end of the second quarter. Module gross margins were 52.2% during the second quarter of 2010, essentially flat compared to the first quarter. Operating expenses were up $12.8 million quarter-over-quarter due to increased stock-based compensation expenses, higher plant start-up costs and the aforementioned $5.6 million of one-time expenses. Our operating income for the second quarter was $180.5 million or 30.7% of net sales compared to $191 million or 33.7%, primarily due to the higher operating expenses, slightly offset by a higher gross profit. Net income was $159 million or $1.84 per fully diluted share. The effective tax rate was 11.9% for the second quarter. In the second quarter, free cash flow consumed $57 million of cash with operating cash flow for $76 million due to approximately $170 million in project assets and unbilled accounts receivable that we expect to collect in the second half of 2010. We spent $134 million in capital expenditures against depreciation of $36 million. Cash and all other marketable securities decreased by $59 million quarter-over-quarter to $960 million. That decreased by $24 million to $139 million. Our debt-to-equity ratio remains low at 5%, providing us with the strongest balance sheet in the industry. Please note that our cash balances subsequently [ph] (37

[Operator:]

[Operator Instructions] And we'll take our first question from Mark Wienkes with Goldman Sachs.

[Mark Wienkes:]

How should we think about the improved build velocity affecting the planned 500, 700 megawatts of the Utility System installations in the year? And then, I guess, just more broadly, what are the other items you see that could result in the company falling outside of that range on either side?

[Bruce Sohn:]

On the advancements -- this is Bruce. In terms of the advancements of the constructability of our facilities, this is actually an area of focus for us. One of the things that we've always said is that we wanted to apply in the field the kind of expertise that we have in the factory, and the engineering and construction teams have worked diligently to improve the constructability of our systems as well as the effectiveness in actually doing the engineering and construction work. This should prove valuable in reducing our working inventory from a financial perspective. It also helps to ensure that we begin producing energy as rapidly as possible so that our customers are the ultimate owners of these systems. We’ll be able to begin securing revenue as quickly as possible.

[Operator:]

And we'll go next to Satya Kumar with Crédit Suisse.

[Satya Kumar:]

Quickly on pricing. Is your second half pricing set in stone in terms of contracts? The reason I ask is because in the past, you’ve had rebate mechanisms to level your pricing closer to market prices, which are clearly flat or going up. Just trying to understand some sensitivity around that.

[Jens Meyerhoff:]

[indiscernible] (45

[Operator:]

And we'll go next to Vishal Shah with Barclays Capital.

[Vishal Shah:]

If you look at the Slide 31, it implies that pricing will be down double digits sequentially in Q3, Q4. Is that for all markets? Or is it only for Germany? And the Balance of System cost implies, based on your comments of 175 megawatts, it's about $2 per watt. Why so high?

[Jens Meyerhoff:]

So I would say, so if you look at the price declines that you see and the thing that you're implying probably out of the margin trend pricing. As usual, we don't like to detail, really, our pricing strategy out here. But keep in mind, obviously, that pricing gets adjusted to respond to the feed-in tariff declines, right, which are a double-digit percent. At the same point in time, please keep also in mind that we drastically reduced spot rate on the euro here from $1.30 down to $1.20. Right, so the further you go out, if you look at some of the margin decline on the Module side into Q4, Q4 has a level of a hedge rate applied in Q3, so you get a slightly bigger impact on that. As it relates to implies [ph] (46

[Operator:]

And we'll go next to Sanjay Shrestha with as our Lazard Capital Markets.

[Sanjay Shrestha:]

Just a quick question on the Utility Systems side of the business. Now that we have permitting in place for Agua Caliente, can you give us a sense as to what can we expect in terms of selling the project, getting financing in place? Can you give us a sense as to the type of the discussion you’re having? And maybe talk a bit about the time on that -- just to when we might be able to hear some incremental information on that.

[Jens Meyerhoff:]

Yes. I mean, I would say this was obviously a project, right, that’s pretty much ready to go at this point in time. So we're in discussions with multiple equity investors who have followed the same processes that you've seen us deploy in other projects. So at this point in time, we're maintaining a competitive environment around the bids on the asset. At the same point in time, we're in the position to have established grant in lieu of the IDC eligibility for the project, which ties into the timing of the construction start in order to get the qualification, which, as you know, right, broadens the equity investor universe because we don't necessarily rely solely on tax equity capacity. At the same point in time, we're in active discussion around DOE application, which we're in for this project, right, which guides the overall debt side of the financing. So I would say, at this point in time, we're fairly far down the road. Obviously, this is a project we acquired through NextLight. NextLight, I think, did a lot of work up front. We're now bringing this project right into a much broader equity investor pool that we had established prior to the acquisition, and I think you should obviously expect that the financing will be in place right, ahead of any meaningful construction start because we do not intend to build an asset of that size off our own balance sheet.

[Operator:]

And we'll go next to Dan Ries with Collins Stewart.

[Daniel Ries:]

I had the same question as Vishal. On Slide 15, you talk about constructing 175 megawatts this year and then on a later Slide you refer to $400 million of revenue from the EPC. Do you have EPC projects outside of North America at this point? Or is that $400 million attributable in a sense to that $175 million?

[Jens Meyerhoff:]

So in the total system revenue for the year, I think there is a small kind of European content I think included in that. And then we talked a little bit about our host project on our last call, so that factors into that as well. And then obviously, I think we've got the project here in North America between the U.S. and Canada.

[Operator:]

And we'll go next to [ph] Smitty (50

[Smittipon Srethapramote:]

Maybe just a follow-up on the previous question. Can you give us an update on your organic pipeline development in both North America and Europe and any progress that you've made on the Edison Mission pipeline that you purchased earlier this year?

[Jens Meyerhoff:]

Okay. So obviously, with the NextLight acquisition, we've tried focused, right, on the overall organizational integration. We're looking now at the portfolio in its entirely. So each of the projects, right, are following their due course through the different permitting stages. I would say, I think generally, the progress is in line with our plans and expectations. As I mentioned, on the Agua side I'm seeing a parallel, right, we're following these processes on the project finance side with generally encouraging and positive results. So overall, I would say I think we remain on track with respect to our outlook as it relates to megawatt realization of these projects in line with the 500 to 700 megawatts. But as you know it's a combination, right, of our own development efforts and some of our partner efforts. At the same point in time, I'd like to reiterate that it's probably not the most useful exercise to track each and every milestone on the permitting side on these projects. Some projects will accelerate, some projects may face certain delays. So we're much more focused on when do the projects get over the [ph] hurdle rate (51

[Operator:]

And we'll go next to Stephen Chin with UBS.

[Stephen Chin:]

I was wondering if you could just share some more information on the module problems that you [ph] called at (51

[Bruce Sohn:]

Yes, this is Bruce. About 4% of the production during the time frame from June 2008 to 2009 was affected, in the neighborhood of about 30 megawatts. And we've been working with our customers since that time frame and expect to continue to do so for about the next six months or so.

[Operator:]

And we'll go next to Christopher Blansett with JPMorgan.

[Christopher Blansett:]

A quick question about the change in the guidance for the gross margin for the EPC business. I want to understand what's behind that change in your outlook?

[Jens Meyerhoff:]

Okay. So I think if you look at it, so mathematically, as you know, the EPC business has been an enabler, right, that in any scenario results to an operating income of breakeven. So what you see underlying in this guidance, if you compare our module guidance to the prior quarter, the module margin guidance is flat. One reason for that is that the EPC margin mathematically increases through the reduction of revenues on the EPC side; however, still requiring a certain contribution margin in order to cover all the fixed costs. So this is purely a mathematical impact out of this enabler concept, it is not really an implication of a change in profitability in the EPC business. As a matter of fact, to some degree, the module business is indirectly, right, subsidizing the lack of scale in the EPC business because it utilizes the EPC business at the channel.

[Operator:]

And we'll go next to [ph] Steve Milunovich (53

[Unidentified Analyst:]

Could you be a bit more specific in terms of how you got the core module cost from $0.80 to $0.74 with a very slight improvement in efficiency?

[Bruce Sohn:]

Yes, Steve, the improvements are basically along the core methodologies that you would expect so the improvements in efficiency have had an impact that drive up the general yield. We have continued to drive down our costs on the bill of materials and improved our productivity and run rate as you could see by the increasing line run rate this quarter. And then also, the change in the euro exchange rate also provided some enhanced benefit as a result. The combination of all of those helped to drive down the costs over the last quarter.

[Operator:]

And our next question comes from [ph] Steve O'Rourke (54

[Unidentified Analyst:]

First, can you give us an indication of what Balance of System costs are now, and how that should progress down to your goal through 2014? And just as a follow-up to the last question, were the material cost reductions anything more substantial than what you've been able to do in prior quarters?

[Bruce Sohn:]

Yes, Steve. So the Balance of Systems costs have come down steadily. We have been able to be effective from the early days with the first El Dorado facility a couple of years ago. The increase in our installation rates, the lower costs, the improved engineering designs, have all allowed us to drive down the cost. And then, of course, the scale going from just a few megawatts a couple of years ago to the 175 or so this year that we're looking at and the 400 to 700 next year that we're looking at, also contribute to driving the cost down. We do expect to be able to hit our roadmap for costs over time, and the challenge will continue to be to address the effects of inflation over time. In terms of the materials costs, yes, we've made steady progress. I think that our supply-chain folks have done an excellent job, actually, going out into the marketplace, making good use of the scale at which we are procuring materials today and finding the good quality suppliers that are able to satisfy our needs over the long term. And that has proved beneficial throughout this year, and we're going to continue to work on it.

[Operator:]

And we'll go next to [ph] Jesse Pichel (56

[Unidentified Analyst:]

My question's for Mr. Gillette. Mr. Gillette, First Solar is operating extremely well, but the market is growing much faster than your capacity in 2010 and thus, you're not reaching the market share targets that you set earlier. I'm wondering, what market signals would you need to expand production more aggressively?

[Robert Gillette:]

Well, as you know, we've announced quite a bit of expansion already and we're considering what we may do in the future. It does take time to get the assets in the ground and the equipment in place, so we're working as quickly as we can, I think, to get that achieved. So, yes, we definitely have a near term challenge as it relates to getting product out the door and we tell Bruce, we'd like to get more out every day, so we work on that. And you saw the throughput improvements in the quarter. So we are continuing to evaluate our next increments of capacity and once determined, we'll advise you all of what they are.

[Operator:]

And we'll go next to Timothy Arcuri with Citi.

[Timothy Arcuri:]

I had also asked you this last call, but I know that you guys have sort of gotten away from sort of giving a market forecast next year. But maybe you can answer the question of whether you feel better or worse about 2011 demand today than you did when I asked you the same question three months ago?

[Bruce Sohn:]

Better or worse, I think like we state in the front part of the presentation in terms of market, we think, given the changes in FiT and other advances and changes in Germany, that the market is going to grow significantly in 2010. So we -- and the range is, I guess, kind of the consensus forecast is in the 6.5% to 7% range, we gave a range of six to eight -- so we think there's significant growth there. We think that, as we've mentioned before, the markets in Europe outside of Germany are going to grow more rapidly than Germany. So we think these FiT changes may slow the growth or change the market in Germany quite a bit in 2011. But we also think that the other markets, Italy, France and Spain will continue to grow. I think our last estimates on the call were in the range of 60% compounded. So we're putting a lot of focus on that growth, that [indiscernible] (59

[Operator:]

And we'll go next to Stuart Bush with RBC Capital Markets.

[Stuart Bush:]

You're targeting 500 to 700 megawatts in system projects for 2011. Have you been able to delay some North American projects this year to feed module demand? Are there any end service deadlines for 2011 or would you have continued flexibility to shift that business out if you needed to?

[Jens Meyerhoff:]

I will tell you there is, if you look at the underlying DBAs, there is some flexibility. However, there is also certain projects, I think, for example, if you look at some of the projects we moved out in Canada, that we probably do want to complete next year. So I mean the flexibility is there for some projects, but flexibility is not eternal. So at some point in time, you want to move forward. Once the financing's stamped on these projects, you want to execute, right, because you don't want to idle the funds on the financing. It has a negative IRR on cash. But I say, we still maintain a good amount of flexibility in the execution.

[Operator:]

And our next question comes from Kelly Dougherty with Macquarie.

[Kelly Dougherty:]

Just going back to 2011, can you maybe talk about the level of visibility you have for your non-pipeline expectations? Kind of what you're selling to the general market and then maybe how you're thinking about pricing for First Solar relative to some of the Chinese peers?

[Bruce Sohn:]

Well, as Jens said earlier, we don't really talk about pricing on the calls or externally. So in terms of the market overall and the growth that exists, we think that there's significant opportunity to grow outside of Germany and continue to expand the market there. And for 2011, as we said, the big change that'll take place is the growth in Germany relative to the growth corridor and what changes in the FiT that is out there. So I think that we have pretty good visibility with our customers. And as we mentioned, we have supported some pricing changes to support our customers' development and future development on the project side, and are working with them to grow a market outside of Germany and made a lot of progress to that end. So we feel good about that, and we feel good about the visibility on the project side, both our partners' and our own in the market, and we'll continue to see how it evolves.

[Jens Meyerhoff:]

Yes, maybe just to add one comment to that, Kelly. I will tell you that if we find ourselves in discussion about capacity and the amount as we're looking for sure to first half of '11, the discussions circle more around how to satisfy the demand, not necessarily at this point in time how to sell the capacity for what that's worth.

[Operator:]

And we'll go next to Marc Bachman with Auriga.

[Marc Bachman:]

First, Jens, can you just put a dollar amount on the module replacement program to go along with the 30 megawatts or so, so we don't need to wait for the queue? And then, Bruce, I believe Steve O'Rourke asked you what your current Balance of System cost was but I never heard you actually give a number. Can you take another shot at answering that question from a quantitative point of view?

[Bruce Sohn:]

Yes, I'll actually answer both of them for you real quickly here, Mark. So the cost of the program in total is about $23.4 million, $17.8 million in COGS and $5.6 million that we have reserved in this quarter. That reserve completes our current estimate of the cost of the program. In terms of the Balance of Systems costs, you're right, I didn't get too specific on the exact number. On the other hand, the trend is well en route to our goal of being under $1 a watt. The progress is, as I mentioned earlier, is in really good shape. I anticipate that we would probably be on the more assertive side of hitting our goal, but as I said earlier, the challenge is to keep it there while inflationary pressures ensue.

[Jens Meyerhoff:]

So maybe just to add real quick, so the numbers Bruce gave you, right, were what we booked in Q2. As we publish our queue, you're going to see in our footnote (a), the accrued liability, that the total accrual stands at $27.4 million.

[Operator:]

And we'll go next to Burt Chao with Simmons & Company.

[Burt Chao:]

Just taking a quick step back, looking at Washington with Senator Reid's proposal for an energy bill, you've got an energy bill that, (a) doesn't include our renewable energy standard, and secondly, excludes any benefits really to solar? What is your view on that? Is the North American market forever a state-by-state market when you're looking at projects? And secondly, outside of North America and maybe South Europe, or Europe in general, where are you focusing your efforts on looking for projects and also customers and end markets mostly?

[Robert Gillette:]

It's Rob, I'll take a stab at that. I think that as it relates to the bills that are on the table and considered today, we do our best through government relations to position the industry and ourselves for growth. I think that development is clearly a local effort and one that requires local knowledge and relationships. So it still is driven quite a bit both locally and from a state standpoint with the RPS objectives. We continue to -- we find our definition of what we believe will be a sustainable market, our focus and strategy as we've put together and presented it before is to maximize our penetration in the markets that are subsidized and focus on markets that are in transition that we believe will be sustainable over time. So that relates to a certain amount of available solar resource combined with what we believe about the future costs of energy in given regions. So the southern United States is definitely the Southwest. France, as you know, has a lot of good installation and good support from a [indiscernible] (1

[Operator:]

And we'll go next to Gary Hsueh with Oppenheimer & Co.

[Gary Hsueh:]

Just kind of a high level question if you could address it qualitatively. It looks like there's a little bit of inverse relationship between the EPC project business revenue and operating or gross margin. Looking into 2011, as you start to veer back more towards a normalized model, with the Project business coming back online, I'm wondering, what the margin structure would look like for the company? And specifically, what the risk is with a billion dollar kind of plus expectation for EPC project business in 2011, that the margin model isn't below 10% or below 8%, which you guided originally for 2010?

[Jens Meyerhoff:]

Okay, so I'll take a quick crack at this. Obviously, we haven't given any specific guidance on 2011. But I think that the mechanics that I described, I think, on an earlier answer have to do with the EPC and Systems business, still as a relatively small size and scale, and our conscientious decision to actually remove volume from that channel to satisfy the current demand in Europe. So I think what we should expect as we go into next year, obviously, that, that business goes to scale. There's a fixed cost component organizationally to that business that will scale rapidly as we move from 175 to 500 to 700 megawatts. So now as you state the specific margin guidance, I'd like to refrain from that, I think that's obviously subject to our continued cost reductions, as well as subject to pricing for next year, and we haven't given guidance yet. But I think I feel comfortable for you guys to revisit our long-term models, the information we shared around the [ph] second (1

[Operator:]

And we'll go next to Pavel Molchanov with Raymond James.

[Pavel Molchanov:]

Some of your customers, especially in Germany, might start to see you as more of a competitor as you get further into systems. Given that, do you see any logic for a spin-off of the Utility business group?

[Jens Meyerhoff:]

So I mean, I would say, I think there is here and there, once in a while, a misconception of this creating any type of competitive nature. So if you look at what we're doing in the U.S., in the U.S. we're developing sites, we're building power plants for sale. We're not in the business, as you know, of owning and operating those power plants. So if you think about this, in our mind it actually amounts to a synergy between many of our IPP customers and ourselves as it relates to partnering. It's [ph] all (1

[Robert Gillette:]

Yes, I would just further it to say that we're focused on developing, really growing the market overall and focused on developing utility scale applications to drive the adoption of the technology. So a few of our partners get into that type of range in terms of constructing power plants. But many of them understand, we're really focused on driving the growth in the market and working together with them.

[Operator:]

And we'll take our final question from Colin Rusch with ThinkEquity.

[Colin Rusch:]

Can you talk about, in the Systems business, how you're approaching management of voltage [ph] fluttering (1

[Jens Meyerhoff:]

Yes, Colin, the engineering of these projects is really developing -- this is something that we're working very closely with the utilities, as well as the grid operators. As we bring on these new and larger systems, these types of control capabilities are the kinds of things that are going to be needed in order for the grid to see a solar array much as they have seen a traditional fossil fuel power plant. And we're currently working on exactly what the right mechanisms are for handling the control and at what scale. To date, the size of the projects is relatively small compared to the size of the demand in the regions in which we are installing these things. Over time, as we become a larger and larger percentage of the regional load, those kinds of issues are ones that we will have to engineer. And today, we've got our folks working on it and working with the other key stakeholders.

[Jens Meyerhoff:]

Maybe to add to that, if anything, an experience indicative of what we're seeing in Europe, it would seem that we're still far away from that being a meaningful problem in the U.S. market.

[Operator:]

And this does conclude today's conference. Thank you for your participation.