SunPower Inc. (SPWR) Q3 2011 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the SunPower Corporation's Third Quarter 2011 Earnings Conference Call. Today's call is being recorded. [Operator Instructions] Right now I would like to turn the call over to your host, Mr. Bob Okunski, Senior Director of Investor Relations at SunPower Corporation. Sir, you may begin.

Thank you, Ed. I'd like to welcome everyone to our third quarter 2011 earnings conference call. And I'd like to thank everybody for their patience for the call. On the call today, we will start off with Tom Werner, our CEO, providing an overview of our third quarter performance; followed by Dennis Arriola, our CFO, who will review our third quarter financial results and discuss our Q4 and 2011 guidance. We will then open up the call for questions. And a replay of this call 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 that may impact these forward-looking statements. To enhance this call, we have also posted a set of PowerPoint slides, which we will reference on this call on the Events 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. On Slide 2 of our PowerPoint presentation, you will find our Safe Harbor statement. Our prepared remarks will run approximately 25 minutes and then we will take approximately 15 minutes for questions. With that, I'd like turn the call over to Tom Werner, CEO of SunPower, who will begin on Slide 3. Tom?

Thanks, Bob, and thank you for joining us today. And as Bob mentioned, sorry we're starting a little late. On today's call, we will review our Q3 operational performance and preview our 2011 results. We will update you on our panel cost roadmap and detail our third quarter financials and outlook for the year. Please turn to Slide 4. We met our third quarter plan despite a period of rapidly changing market conditions as our diversified channeled strategy enabled us to reallocate products between segments and regions. Our Utility and Power Plant business exceeded our forecast, and we gained share in Germany and the U.S. in our Residential and Commercial businesses. We continue to invest in our downstream channel, and we are further differentiating our business through new product development by leveraging our industry-leading technology. These actions, along with a strong, flexible balance sheet and the continued full support of Total, position us well for long-term success. Specifically for the quarter, we met our outlook for revenue and exceeded plan for EPS in Q3. Gross margin was slightly below our plan due to product mix. We reduced price at the beginning of Q3 in our Residential and Commercial business, which is our regular process, but very different from what we saw from many of our competitors. Our capacity was fully utilized for the quarter, which led to record cell production of 270 megawatts. We also achieved record yields in Fab 3. On working capital, we executed well as inventory turns were up sequentially, DSOs declined and overall inventory was stable. With $475 million in new credit facilities completed during the quarter, our liquidity position improved as cash rose more than 25% due to higher revenue, project completions and expense control programs. We also continue to see the benefits of our relationship with Total from their support of our financing activities, as well as our potential joint R&D and project development activities. Looking forward to Q4, we have seen a pickup in demand in the EU markets, especially in Germany. We're also seeing strong demand for our racing products in the U.S. and started construction on the 250-megawatt California Valley Solar Ranch power plant. We expect the pricing environment to remain very competitive through at least next year. At the beginning of Q4, we reduced pricing in our R&C segment in response to lower-than-planned industry ASPs, our strategy to gain share of account with our dealers. This strategy is working but will impact our revenue and margins in this segment in Q4. As we saw in Q3, we will continue to maintain a substantial premium in the market due to our differentiated technology and brand position. Additionally, we expect to implement company-wide restructuring program in the fourth quarter to reduce our operating expenses and improve operating efficiency, consistent with the more competitive marketplace. Furthermore, we are prudently managing our manufacturing capacity to meet today's demand-driven environment, specifically in order to balance inventory levels and working capital going into the first quarter of next year, we will reduce Q4 production output by up to 20%. As a result of our focus on the balance sheet, we are reallocating CapEx dollars from fab expansion to our cost reduction programs with a plan of accelerating our 2012 cost reduction roadmap. A key part of that roadmap is our cell process step-reduction program, which remains on plan. We've already ramped one line under the new step-reduced configuration, producing tens of thousands of sales to date that meet or beat our specifications. We are confident that this program, along with other changes, will reduce our cost per watt by 15% next year. With respect to our working capital, we expect our Q4 inventory levels to decline and inventory turns to increase. We are managing the company with focus on the balance sheet and liquidity, and are planning to be free cash flow positive in 2012. Now I'd like to spend more -- some time highlighting the performance in our UPP and R&C business segments. Please turn to Slide 5. In UPP, we exceeded our revenue and margin forecast for the quarter as we executed well in our North American systems business and EU components segment. We shipped 120 megawatts in the quarter, up 80% year-over-year, and the second highest UPP quarterly shipment rate to date. In Italy, we completed construction of 2 power plants by the August 31 deadline and sold that by the end of the quarter. We began construction on the 250-megawatt CVSR project and sold the project to NRG immediately prior to the DOE loan guarantee approval and settled all litigation related to the project. As Dennis will detail, we expect to recognize approximately $100 million in non-GAAP revenue from CVSR in Q4 and $21 million in non-GAAP gross margin. Our expansion into new markets also continued in the quarter as we received our first power plant orders from India with a 15-megawatt agreement with Mahindra EPC Services with delivery to be completed by the end of the year. We are also making share gains in Japan through our Toshiba partnership, with 2011 orders have doubled compared to 2010 with indications that 2012 brings the opportunity for further growth. In the U.S., we have found the project finance environment to be healthy for projects offering competitive IRRs from bankable suppliers. For example, the 25-megawatt Modesto Irrigation District project in California is currently in negotiations, and we have seen a very competitive environment for this financing. We expect to close this process and begin construction this quarter. Our UPP pipeline continues to mature. We now have more than 1 gigawatt of power plants installed or under contract, and we saw a number of our U.S. projects advance in the permitting and transmission process during Q3. We are also working closely with Total on new opportunities in the Middle East. Finally, we are continuing to benefit from our technology investment. For example, feedback has been strong from utilities on our new C7 concentrated PV tracker, following our launch of Solar Power International. We expect first commercial installation of this product in 2012. Moving on to R&C, please turn to Slide 6. Demand in Germany and Italy improved less than we anticipated last quarter, which changed our product mix in Q3. As many of you know, our Residential segment is primarily a turns business, and the segment most exposed to short-term pricing and demand conditions. Despite these conditions, we shipped a record amount of product into Germany during Q3 and expect Q4 German shipments to rise by more than 70% sequentially as demand patterns improve significantly exiting the quarter. In the U.S., we extended our #1 position in the Residential market during Q3 according to the most recent CSI and other state data. Our recently launched leasing program, now in 8 states, is gaining traction with our dealers. We expect to expand our lease product and other financial solutions to additional U.S. markets next year. With moderating demand for power plants in Europe, we've been able to offer more volume to our dealer base, which is allowing us to increase our share of account. As dealers increase their use of SunPower product, we designate them as elite or premier dealers, which gives them access to additional benefits due to their status, ultimately driving more SunPower business. This strategy is paying off in both Europe and the U.S. And in the North American commercial market, we have substantially expanded our footprint into the public sector. For example, we are building more than 90 solar systems at schools in California this -- during the school year. Finally, we are increasing our mass-market co-branding effort as evidenced by our recent announcements with Ford in the automotive space, as well as with Orchard Supply Hardware in the retail sector. I'd now like to talk briefly about how our investments in R&D are positioning us well for future success. Please turn to Slide 7. Our differentiated products, based on a world-leading high-efficiency cells, panels and proprietary tracking system enable us to provide our customers with solutions that are cost competitive with traditional energy generation, and we are continuing to invest in this area. In Q3, we produced tens of thousands of our Gen 3 cells, with efficiencies of 23% to 24%. For the Residential market, we launched our first line of AC solar panels at Solar Power International. This module, which utilizes micro inverters, optimizes power production at the panel level while providing an additional sliding flexibility for customers. Initial demand for this product looks very strong. In the utility market, the ramp of our integrated Oasis power plant is on plan as we completed both our 20-megawatt copper crushing power plant for Iberdrola and our 9-megawatt project or Campbell's Soup. We remain on target to reduce BOS costs by 25% this year. Let me spend a little more time talking about the C7 Tracker. We have made the strategic decision to accelerate the ramp of the C7 Tracker as this not only improves the LCOE for power plant customers by up to 20% but also reduces our capital expenditures per watt by a factor of 6. We expect to roll out this product next year, and we'll ramp the induction capacity to meet anticipated, strong mid-decade UPP demand. Turning to Slide 8. I would now like to provide an update on our panel cost per watt roadmap. We are on track to meet our year-end goal of $1.48 or $1.08 per watt on an efficiency adjusted basis on or large-format panel configurations. For example, our Philippines' built 128-cell panel had costs of $1.42 per watt. However, a reduction in capacity in Q4 will impact our average cost by up to $0.04 per watt. We are also on plan to meet our 2012 15% step-reduction goal as evidenced by the initial ramp I mentioned earlier. We also remain committed to a 40% reduction by the end of 2013. To meet that goal, we expect to benefit from more efficient policy poly utilization through thinner wafers, utilizing diamond wires saws starting in Q1, as well as diversifying our wafer suppliers next year. We are also in discussions with our poly partners on mutually beneficial ways to work through the recent decline in poly pricing. We are already transitioning Fab 2 to 135-micron wafers, the thinnest in the industry. We expect all of our lines to be using 135-micron wafers by the end of 2012. Our ability to reduce wafer thickness is directly related to our VAC [ph] content technology and is a distinct competitive advantage. With the execution of these initiatives, we expect our Q4 2012 cost per watt to be less than $1.25 per watt, with large-format panel production below $1.20 per watt. If you take into account our technology, and BOS advantages, our cost per watt on an efficiency adjusted basis will be approximately $0.86 per watt exiting 2012. Bottom line, our long-term cost reduction program remains on track and our 2012 target is very achievable. With that, I'd like to turn the call over to Dennis, who will discuss our Q3 financial performance in greater detail and provide our outlook for Q4 in 2011. Dennis?

Thanks, Tom. And please turn to Slide 9. Before I get to our non-GAAP financial results for the third quarter, I want to start with some comments on the $349.8 million non-cash charge we reported in our GAAP results for the impairment of goodwill and intangible assets. The U.S. accounting standards require all companies to conduct a thorough impairment analysis every year, and so for SunPower this analysis is done using the end of third quarter data. The impairment analysis uses internal valuation, but focuses heavily on the company's market capitalization on the testing date, which for us was December 30, 2011. As a result of our internal analysis and our market capitalization on the testing date, we recorded the impairment to goodwill and intangible assets as required by GAAP rules. Once again, this is a non-cash charge that is only included in our GAAP results. Now let's turn to our third quarter non-GAAP financial results. Our performance in Q3, as Tom mentioned, was solid despite the challenging market conditions. Revenue was up 19% over the second quarter, and more than 27% over Q3 in 2010. We recognized 240 megawatts in revenue in the third quarter compared to 190 megawatts in the second quarter, a 26% increase. Gross margin, however, was challenged as we and the rest of the industry encountered softer demand than anticipated and more than expected ASP declines. We were, however, able to reallocate some of this product to stronger and more profitable markets, which helped us finish quarter with a consolidated gross margin of 11.4%. Our strongest markets in the quarter continue to be the U.S. and Italy, although we saw a nice pickup in megawatts in both France and Germany as well. In our Utility and Power Plant segment or UPP, revenues were up 7.3% over the second quarter. Our third quarter results did not include any revenue from our CVSR project. Gross margin improved to 12.6% in the third quarter as we monetized our 2 remaining power plants in Italy and our business in North America remained strong. In our Residential and Commercial segment or R&C, revenues in the third quarter were up over 31% from the second quarter. Gross margin was 10.3% in the quarter, and was primarily impacted by ASP declines in key markets. We expect a challenging market environment to continue through at least next year. Overall, we were still able to maintain our pricing premium for our higher efficiency technology as our dealers and customers continue to recognize the added value of the SunPower system. We reported non-GAAP operating expenses of $73.7 million in the third quarter, down from $77.9 million in the second quarter. As I'll describe in the more detail in just a moment, we are heavily focused on continuing to drive down both our fixed and variable operating costs. At the same time, we're working closely with our colleagues at Total to leverage off of their research and development programs and investments. Non-GAAP other income and expense for the quarter was a positive contributor to profitability, as we recorded other income net of $12.8 million compared to an expense of $18.8 million in the second quarter. Our third quarter results included a pretax net gain of approximately $11 million from the monetization of some of our strategic investments, including our Woongjin Energy share in South Korea. Going forward, we will continue to evaluate whether it makes sense to monetize more of our Woongjin Energy shares. We ended the quarter with a non-GAAP profit before taxes of $19.4 million compared to a loss before taxes of $22.9 million in the second quarter. Our non-GAAP effective tax rate for the quarter was 25.6%, and we recorded non-GAAP earnings per share of $0.16 per share. Our GAAP results for the quarter were a loss of $3.77 per share and include the impact of the non-cash charge for the impairment of goodwill and intangible assets, which was the loss of $3.56 per share. In the third quarter, we made significant progress in improving our balance sheet and working in capital metrics. Please turn to Slide 10. We recognize that during challenging market environments, we can further differentiate our company by focusing heavily on the strength of our balance sheet and liquidity. We ended the third quarter with over $610 million of cash, cash equivalents and marketable securities, up from $471 million at the end of the second quarter. In order to improve our financial flexibility, we recently established, with the help of Total, a new $275 million revolving credit facility and put in place another $200 million amount of credit facility that we used to help close our California Valley Solar Ranch sale to NRG. Since we completed our transformational investment with Total, we've been able to raise nearly $1.25 billion in credit facilities. These credit facilities are more flexible and cost competitive as a result of our Total relationship. Our increased focus on working capital efficiency is starting to show results, as our inventory turns in the third quarter improved to 5.9x from 4.6x in the second quarter and we expect additional improvement in 2012. We ended the quarter with inventories of $425 million compared to $413 million at the end of the second quarter. Capital expenditures in the second quarter -- or, excuse me, in the third quarter was $17 million, and we contributed $30 million of capital to fund our share of Fab 3 Malaysian JV with AU Optronics. Let me now turn to our guidance for the fourth quarter on Slide 11. In order to match our manufacturing output to the current demand in ASP environment, we plan to modulate our manufacturing capacity in the fourth quarter in order to optimize our overall inventory levels. Since we will not run all of our lines at a 100% capacity in Q4, our planned cost per watt will be slightly higher than originally planned due to fixed cost that will be absorbed by our lower amount of sales and modules produced than originally planned. Given the current environment, we've also made a decision to push out any additional expansion to our JV fab in Malaysia from 2012 until 2013. This move will further improve our cash flow and liquidity positions in 2012, and I'll provide you with more information on our plans for next year on our fourth quarter conference call planned for February. We've also increased our focus on operating expenses by substantially limiting any new hiring and reducing other variable spend including travel and consulting costs. Additionally, we have commenced a reorganization of the company that should further reduce both fixed and variable expenses in 2012 by eliminating redundant positions, improving productivity and better prioritizing where we invest our resources. These activities are expected to reduce our nonmanufacturing operating expenses by as much as 10% in 2012. We expect to recognize approximately 250 megawatts to 275 megawatts in revenue in the fourth quarter and expect our non-GAAP Q4 revenues to be in the range of $675 million to $725 million, which will include revenue from our CVSR project and our Residential lease program. We expect to start recognizing CVSR and lease revenue on a GAAP basis as well beginning in the first quarter of 2012. Gross margin in Q4 is expected to be in the range of 10% to 12%. Non-GAAP earnings per share projected to be a loss of $0.15 to a positive $0.10 per share. We expect the GAAP loss per share of $0.60 to negative $0.35, which will exclude any revenue or margin from the CVSR project in the fourth quarter. Capital expenditures in the fourth quarter expected to be in the range of $40 million to $50 million. Now let me turn to a couple other items before handing it back to Tom. First, in regards to our potential acquisition of Tenesol from Total, we're nearly complete with our due diligence and are far along on negotiations related to deal terms. If we go forward, deal could close as early as the first quarter of 2012. The acquisition of Tenesol would provide SunPower with added flexibility and a stronger marketing presence in key markets where we currently are underrepresented. Next, we have a special shareholder meeting scheduled for November 15 where we expect to receive shareholder approval to collapse our A&B shares into a single class of common equity. And lastly, in regards to our 1.25% convertible debentures that have a flip date in February of 2012, our current plan is to use our existing cash and liquidity to retire those bonds. With that, let me turn it back to Tom.

Thanks, Dennis. Before turning over the call to questions, I want to announce a couple of executive changes. First, Dennis has decided to transition out of the company to pursue other opportunities. He will be with us until March of 2012, and we are beginning a search to replace him. Over the last 3 years, Dennis has established a culture of process and procedure in the finance and accounting teams and built up a strong set of leaders around him. He also was very instrumental in our recent successful series of financings and credit facilities that he and his team completed. I want to thank him for his leadership during tremendous growth at SunPower. As part of a larger reorganization announcement coming later this afternoon, Jim Pape, Head of our Residential and Commercial segment, will be leaving the company to pursue other opportunities. Jim has grown the Residential and Commercial business in scale, footprint and efficiency during his tenure, and we thank him for his contributions and leadership. In summary, we remain confident in our long-term strategy and believe our recent initiatives will enable us to successfully manage our business through the recent -- through the current market conditions. With a diversified channel strategy, differentiated product portfolio, flexible balance sheet through our Total partnership, cost per watt reductions and focus on expense management, we are well positioned to grow profitably over the long term. We'll now open the call to questions. In addition to Dennis, we also have Howard Wenger, President of our Utility and Power Plants group; 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, so that they may provide some of our answers. [Operator Instructions]

Our first question comes from Satya Kumar. Brandon Heiken - Crédit Suisse AG, Research Division: This is Brandon Heiken speaking on behalf of Satya Kumar. I was wondering if you're able to -- it sounds like a little later today, you're talking about the -- more on the reorganization, is that right?

Yes, it should be within an hour. You'll see a press release. Brandon Heiken - Crédit Suisse AG, Research Division: I see. Okay. I guess in that case, can you talk about the ASP premium that SunPower's seeing? Has the company been able to maintain its ASP premium?

The answer is yes. The ASP premium was slightly increased in Q3. Brandon Heiken - Crédit Suisse AG, Research Division: Okay. And can you talk about the cost per watt targets and this transition of funds from CapEx to R&D to improve the cost targets?

Sure, Brandon, and then we're going to have to move on to the next question here. The CapEx shift has been along the lines of what was talked about on previous calls, which is that we'll move capital to the highest return on investment activities. And at this point, we think we can cost-reduce or we plan to cost-reduce existing capacity, and it has a higher return than adding new capacity. And as we've talked about on previous calls, we have a strong pipeline, step reduction projects for our self fab, a number of engineering improvements in our modules and then we have a power plant and commercial balance of system projects that are also bearing fruit. And so, over the next 14 months, that's the highest priority. And we think that the numbers that we gave to you are very achievable, and we hope to do at least what we said.

Our next question comes from Vishal Shah.

It's Deutsche Bank. This is Scott Reynolds for Vishal Shah. You guys had mentioned that Germany was pretty strong for you this quarter, and next quarter is expected to pretty good as well. Can you just talk about some of the demand drivers there and how you're able to grow shipments and what's expected to be a pretty weak market?

I'll say -- this is Tom. I'll cover a little bit, and Howard, you may want to add a few comments. So we, over the last 6 months, have increased our focus on Germany. We've got a long-standing investment there, but we've ramped up our investment in the form of more sales managers who can add more dealers. We've also increased our marketing presence, and then more aggressively pricing, so that we can increase the share of dealer volume. And we've been able to add growth dealers into our marketing program to increase the sell-through at each of those dealers. So it's a combination of those things. And, of course, we had a differentiated product that works really well in a feed-in-tariff environment because you get a higher net present value with a high-efficiency product. I think we'll leave it at that.

Okay, great. And second part of the question, what kind of ASP declines did you see in the quarter? What do you expect for the fourth quarter? And how are you able to hold such a good premium in markets such as Germany, when your Chinese competitors, for instance, are pricing well below what you are currently?

Yes, I'll ask Dennis to help me out with Q3. But Q4, it's less than 10% decrease in sales price. Next year, on our February earnings call, we'll go through the complete guidance picture for 2012, including ASPs. Of course, you are well aware that the year starts in Germany with a 15% decrease in feed-in tariff. Now to hold the premium, it's a combination of a higher efficiency product. It gives you a higher return in feed-in tariff environment. And in America, where you have high solar influence for products, high efficiency is even more important. So that's the first thing. Secondly, we offer a set of services to our dealer network that no one else has, including financing, marketing, development funds, lead generation and supply chain, training and quality, that it's a value to our dealer base. So as we said in many other calls, we're being compensated for services that we offer our dealer base. And then lastly, you can imagine in an oversupply environment that there's a flight to quality and we have demonstrated time and again to be a very reliable high-quality source of product. Dennis, can you answer the Q3 question?

Yes, for Q3, it was in the high single digits.

The next question comes from Kelly Dougherty.

Kelly Dougherty from Macquarie. I apologize for jumping back and forth between calls, so I apologize if you answered. You've mentioned in the past that you have about 90% of your poly under long-term contract. With the recent collapse and the admission that poly companies are finally open to renegotiating. Just wondering how much wiggle room you have in your contracts that were already well below what some of your competitors were paying recently?

Yes, Kelly, this is Tom. I'll answer the question, and we have not answered it yet. So the percent that we have on contract varies by year, and of course, as percentages changed, that we've decided to modify our CapEx plans. Next year, I think it's less than 90%. The following year, it's something we'll need to follow up on. Now we've been -- there are 2 very large suppliers to us, and we've been very close to those suppliers for 7 years. And frankly, when we paid some large prepays that have helped build some new facilities, and I think that significant partnership over the years put us in a productive discussion with both of those partners. In terms of putting a number on that, that's premature, but we're in productive discussions and it's clearly highly relevant. It just makes sense that the companies that funded the expansion should be the ones that get the best benefit.

And do you have any flexibility in those contracts to slow down delivery of poly if demand isn't exactly at levels that you've been expecting?

Yes, I would say, Kelly, that the -- without being too vague, discussions are productive. And let's just say that sometimes, when you lease a building, you extend in favorable terms and that does good things for your overall lease costs. And I'm sure that there are things like that, that might be done.

Okay, great. And then just one quick question on pricing. So you had the Analyst Day last year. You gave us a lot of information about ASPs. Just wondering where we stand relative to those numbers? I think you're kind of talking about 450 ASP for North American commercial, 275 for sort of RLC business. Maybe if not actual numbers, if you can kind of help us think about relatively speaking, where pricing stands for those businesses at this point?

I think what I'm going to want to do is rather give you an educated guess, I'm going to do a little homework and I'll answer that question in a few minutes. So Kelly, if we can go to the next question and I promise I'll make sure we answer it in the next few minutes.

Next question comes from Jesse Pichel. Min Xu - Jefferies & Company, Inc., Research Division: This is Min Xu for Jesse Pichel with Jefferies. Can you tell us what is your UPP and R&C backlog, as well as the geographic distribution?

We -- that is not a statistic that we've given nor are we prepared to give it today. What I would say to you is we gave some color in my script on the UPP backlog advancing through the permitting and transmission processes and -- well in excess of 1 gigawatt. And our North American commercial business has the strongest backlog that we've ever had. So I guess I would offer you color that things are going really well in both of those businesses. And of course, those are the 2 businesses that have backlog that run off a backlog.

I think one thing that's worth mentioning, we talked about -- we don't get into specifics on the backlog, as Tom talked about. We have talked about the pipeline and this quarter, specifically the third quarter, with the closing of the California Valley Solar Ranch, that's now something that's moved from our pipeline, and now there's uncertainty in our backlog. So in UPP alone, you've got 250 megawatts that are now part of our backlog here. Min Xu - Jefferies & Company, Inc., Research Division: Okay. Yes, that's helpful. And you mentioned your R&C shipment into Germany was strong in Q3 and will be up 17% sequentially in Q4. Is that a correct number?

We're going to check the percentage, but Germany shipments will be up sequentially in Q4 and have started consistent with that projection. I'm not quite sure I said 17%, though. And so Bob is going to check. Yes, it 70%. Min Xu - Jefferies & Company, Inc., Research Division: 7-0, Okay. That's very strong. Where is this strength from? Is it from one distributer or you're gaining share from all distributors?

It's a combination of both. And they're not distributors, they're dealers. There isn't a distributor between us and the dealer/installer. We are the distributor. And so we've added dealers and we've increased the share of each dealer's volume. And that's true in the majority of cases, of course that's not true in every dealer case. Thanks for the question. Operator, before we go to the next question, we're going to take -- give Kelly a quick answer on the ASP.

Yes, Kelly, this is Dennis. On the -- even though we're not going to give up the specific numbers, what I can tell you is, for example, on our North American commercial business, we're still in the range of the -- if when we look at revenue per watt or as we think about the North American commercial ASPs, since we're selling systems there, we're still in the range of the dollar amounts that we had talked about at our conference call or conference in New York last year. As far as our UPP, it's the same thing. We're still in the ballpark range of what we talked about. As it relates the Residential and Commercial specifically, the RLC Residential and Light Commercial, we're seeing more pressure there as a result of the decline in ASPs. So I'd said that we're a little bit south of what we expect -- or we're south of what we expected there. So in line for UPP, in line with North American commercial and below what our expectations were for the Residential and Light Commercial.

So we'll take that question and make sure that on our next call, we're clear on that, if not sooner.

Next question comes from James Medvedeff.

Cowen and Company. I see a couple here, you've answered a lot of them, but as you go through your CapEx reallocations for next year, should we be thinking about -- what sort of capacity growth should we be thinking about?

We publish on our website a fact sheet that gives you statistics. And you'll see on our website that 2012 is 1,270 or 1.27 gigawatts.

Okay. I guess I'll take a look at that. And when you talk about continuing ASP pressure in the environment through 2012, do you mean a continued, I -- understand the German fits[ph] are down 15%. But aside from that obvious impact, do you mean the sort of pressure that we're seeing this year or we kind of go to a new level and may be stabilize there where it's a weak price but not a continuing declining price?

Yes, what we see is we see a market with moderate growth, single-digit growth. And of course, there's been capacity expansions that are more than moderate. So that will cause continued pressure. Now exactly how that pressure plays out in the marketplace, we're going to talk a lot more about it on our February call. It would be fair to say it has a lot to do with how much more costs can come out of various competitors. Clearly, there'll be less people making solar over the next 14 months, making solar panels. So it's a combination of prices coming down perhaps more aggressively, but certainly it's a winnowing out of competition. And I would broadly say there's not -- the same kind of percentages drops are very unlikely to continue through next year. However, stability and increase in prices is not what SunPower is planning on.

Sure. A final one, and I'll let someone else have their turn. When you think about Germany, with the big increase in the fourth quarter and -- for your shipments, should we be thinking about Europe rising in the mix next year? And I'm wondering what sort of ASP differential there might have been involved in getting that 70% increase in bookings or whatever for the fourth quarter?

Yes, so ASP would be roughly in line with what I said about ASPs, it should be 10% or less. And the market in Europe is something that we project to be materially the same next year, maybe slight growth in general. So this is share gain, and again, because our high-efficiency product. And I forgot to mention in the earlier question, let's not forget that we are introducing -- we've built tens of thousands of solar cells in the 23% to 24% efficiency range, extending our lead. And our position is the highest energy density, highest efficiency solar cell producer. And so that positioning affects our market positioning.

Next question comes from Tim Arcuri.

Hi, it's Seth for Tim. I was just wondering if you could touch base on any update on your kind of cost targets. I know you don't disclose them specifically, but if you could kind of give the benchmarks again and how they, I guess, on an efficiency adjusted numbers too so we can compare them.

Sure, the numbers for next year are what I covered -- I did cover this in my script, and that is that it will be less than $1.25 for the average of our products, $1.20 or less for our large-format panels, and this is a new thing we're doing to give greater clarity because there's a broad mix of products and panel configurations that we make, and obviously the cost varies depending on the panel configuration. If the efficiency adjusts that, the number is $0.86 or better per watt exiting Q4 2012.

And if I could just -- just a slight clarification on your premium relative to kind of others in the market. Do you see like a pennies per watt range or a percentage range that you typically see at the moment?

Yes, it varies considerably by market. The more sunshine you have and the more states constrained, the higher the premium. Also depending on the amount of services that the dealer would leverage. So it varies considerably. I think the range is 20% to 60%.

The premium is 20% to 60%?

Yes.

Our next question comes from Sanjay Shrestha.

Great, it's Aditya Satghare[ph] from Lazard Capital Markets. One big picture question here, please. As you look to 2012, how should we think about some of the key steps you plan to take in some of the major rooftop markets globally as we plan to expand this segment given the differentials -- well, product proposition you have? And say, for example take a market like Italy, what will be some of the key steps you would take to grow into these markets next year?

Yes, if you think of -- and we're going to -- operator, we're going to take one more question and then we'll wrap up the call. As we look at solar markets worldwide, we see currently a shift to a rooftop business, and especially outside of America to a roof-dominated business, and our product is perfectly well suited to that because rooftops almost always are states-constrained and therefore, you want the highest-efficiency product you can get. And so the answer to your question, how we're going to exploit that is we're increasing the efficiency of our products so that we further improve the value proposition to our customers. We're going to be introducing new products and balance the system that it will give new features, as well as lower costs, so that the complete solution is superior. And then thirdly, we're going to increase -- continue to increase our dealer base so that we have a broader footprint. And we have not saturated any market in terms of the dealer base that we have a lot of upside in terms of the number of dealers. And I should add, sorry, that as we move dealers to our elite and premier status, the benefits of being an elite or premier dealer encourage those dealers to increase share of account even further.

The next one comes from Pavel Molchanov. Pavel Molchanov - Raymond James & Associates, Inc., Research Division: Just quickly in your relationship with Total, have you booked any revenue from projects that were, let's say, developed in collaboration with Total so far?

Pavel, this is Tom. We have not. We have work that we're doing in a number of countries in the Middle East that will bear fruit but over more of a multiyear time frame. They have a long history working with Tenesol, and if we do an acquisition of Tenesol, it's likely that they would include some projects that they're doing with Tenesol that would cause some things to happen faster. And then there are other assets that Total has that -- probably in the 2012 time frame we'll see come to fruition. So, not yet, but starting in 2012 and then perhaps rather substantially beyond that. Thank you all for joining us today for our call. We look forward to our February call with you to go through 2012 in great detail. Thank you very much.