Evergreen Solar, Inc. Q3 2008 Earnings Call Transcript

Evergreen Solar, Inc. (ESLR)

Q3 2008 Earnings Call

October 16, 2008 5:00 pm ET

Executives

Michael El-Hillow – Chief Financial Officer

Richard Feld – Chairman, President, Chief Executive Officer

Terry Bailey – Senior Vice President, Marketing & Sales

Analysts

Timothy Arcuri – Citigroup

Stuart Bush – RBC Capital Markets

Paul Kleg – Jefferies & Co.

Jonathan Hoopes – ThinkPanmure

[Chris Lansa]

Michael Carboy – Signal Hill Capital

Pierce Hammond – Simmons & Company

Benedict Pang – Caris & Company

[Elaine Clay]

Presentation

Michael El-Hillow

Good afternoon everyone. This is Mike El-Hillow, Chief Financial Officer of Evergreen Solar. Sorry for the delay. Before we begin today's call we'd like to remind everyone that statements that are made in the conference call that are not historical facts such as those dealing with future performance and growth are forward-looking statements under the Private Securities Litigation Reform act of 1995. Future performance and financial results will differ from those expressed or implied in any of these forward-looking statements due to various factors.

Such factors include but are not limited to those described in the filing the company makes from time to time with the Securities Exchange Commission. The company undertakes no obligation to update these statements. I will now turn the call over to Chairman, President and CEO, Rick Feld for his review of the third quarter.

Richard Feld

Before I review the significant operational progress we've made during the quarter, I'd like to address our financial position and how the current economic crisis may impact our expansion plans. Let me begin with our current cash position.

At the end of the third quarter, we had approximately $309 million which is sufficient cash to number one, complete our Devens manufacturing facility by early 2009 and reach our quarterly full capacity in run rate of 40 MW by mid year. As we have said for over a year, we expect to sell approximately 135 MW in 2009 and achieve significant sustained profitability. Two, we have cash to complete the initial phase of our string factory in 2009.

By the end of 2009 we will have enough internal string capacity to support the needs of the Devon facility and will continue to expand our internal string capacity as we grow our wafer cell panel capacity in 2010 and beyond.

Combined with our current sole current supplier of string, we'll have enough string to supply both Evergreen Solar and EverQ and more importantly, we'll have two sources of supply for this critical material. And finally, we will be able to fund our working capital needs as we gradually begin to generate cash from operations as 2009 progresses.

In a short while, Mike will review our third quarter results, fourth quarter guidance and an update on the Lehman situation. But now, I would like to address our long term sales contracts and factory expansion beyond Devens to meet those contracts

Regarding the sales contracts, today we announced two new long term contracts totaling more than 160 MW with United States based Mainstream Energy and a leading Japanese global enterprise company. Despite the current uncertainty in the financial markets and concerns regarding the availability credit for funding major projects, these contracts demonstrate that the demand for our products remain strong.

Combined with the contracts that we signed earlier this year with five other established solar installers and distributors, we have total contractual backlog of approximately 1 GW extending over the next five years as follows: 79 MW in 2009, 160 MW in 2010, 254 MW in 2011, 227 MW in 2012 and 287 MW in 2013.

While we have enough capacity from Devens to meet our long term sales contracts through 2010, our expansion plans are to reach sales of 200 MW in 2010, 620 MW in 2011 and 850 MW in 2012.

Today, obtaining funding for factory expansions at a cost of capital commensurate with the expected financial return of those expansions is really not available given the current turmoil of the financial markets. Fortunately, we don't need those funds today. Given that we have the ability to open a factory in about nine months as we did Devens, we can begin construction of the next factory as late as June of 2009 and still meet our 2010 capacity expansion targets.

So, we have almost nine months for the global economy and the capital markets to improve to levels that will make reasonable financing available to us and capacity expansion prudent. If the markets improve before then, we are prepared to move forward with our expansion. If improvement is delayed then added capacity in an unfavorable economic environment is not warranted, and we won't.

Like all of you, we are hoping for improved financial conditions to drive capital availability for both capacity expansion and user demand. In the meantime, we are really focused on what we can control which is the continued ramp of our Devens facility.

During the quarter, we shipped over 1.5 MW which was within our guidance of 1 MW to 3 MW, so one year after breaking ground in the Greenfield location, a factory that's over 300,000 square feet and is more than three football fields long, the first 80 MW days at Devens was operational within the time frame and at the production volumes that we had projected a year ago.

Of particular note is that the ramp of our core technology, the Quad furnaces has gone extremely well. At the end of the quarter, we had 200 furnaces on the floor, full complement for this first phase of Devens and about 135 had been turned on and were producing wafers.

In fact, the Quad furnace ramp is going so well that is has outpaced the ramp of the solar panel manufacturing areas. During the quarter, we made enough wafers to produce approximately 3.5 MW of panels which would have exceeded the upper range of our production guidance.

However, the rest of the factory has been ramping a bit slower than expected. For those of you who have visited the Devens facility you know that it is a fully integrated, high automated wafer to panel manufacturing operation involving multiple complex manufacturing process steps that need to be synchronized and optimized.

Although we are using industry standard equipment, the equipment is technologically sophisticated, especially the panel fab automation which needs a number of debugging cycles and numerous software interface issued to be resolved. These start up challenges are typical with intricate manufacturing operations with the size and scope of Devens, the solar panel implementations did fall behind our wafer fab resulting in output for the quarter that was at the low end of our guidance.

That being said, we continue to make good progress every day and remain on schedule to reach full capacity at Devens of about 20 MW per quarter by the second quarter of '09. As a reference point, during the first weeks of this quarter, we have produced a little more than 1 MW of panels at Devens. We expect to see improvement of our through put as the quartet progresses and we believe that our total panel production from Devens and Marlboro will be in the 12 MW to 15 MW range for the quarter.

We think Devens will produce between 8 MW to 11 MW, 11 MW being a little higher than our guidance in July of 8 MW to 10 MW. Marlboro will produce the remaining 4 MW of panels using about 2 MW of wafers and cells in Marboro and about 2 MW of wafer and cells produced at Devens because the wafer and cell fab area at Devens continues to ramp faster than the panel fab over the next few months.

When we began the Devens project just over a year ago, there was skepticism outside Evergreen Solar as to whether we would be able to implement a new Quad technology as seamlessly as we were predicting at that time. I think our results in the fourth quarter justify our enthusiasm for the project.

However, we are disappointed that our cell and panel fab execution was not as successful as our wafer area because we would have been able to exceed the output of our production range of 3 MW and would not have had to give such lengthy explanations here.

We gave our revenue guidance in July for the third quarter, the low end of the dollar range of about $20 million, assuming that we would be about at the mid point of our Devens production. Our reasoning was that the initial start up of the new Quad furnaces in July have gone very, very well. To plan commissioning times by the cell and panel fab vendors supported production at the higher end of the range.

Even though the equipment being installed in those fabs is complex, once more, it is industry standard. In hindsight we should have been more conservative in our estimation of start up times of the cell and panel fabs and going forward we'll ensure that our revenue guidance will be consistent with our production range guidance.

Working closely with the key equipment suppliers, we're confident we'll make good progress this quarter as we finish the Devens One ramp and begin the Devens Two.

Now I would like to briefly address the PV market. Once we get beyond the macro economic issues that we all focus, recent developments that directly impact the PV market should continue to drive industry growth. Up until a month ago, everyone was concerned about getting an extension of the United States investment tax credit passed this year.

The law passed extends for much period of time and is substantially better than anyone had probably hoped for. With the ITC and other current subsidies, solar is a good pairing in many areas of the United States, and more importantly can be viewed as providing a better than average return for investors than the PPA models.

With the ability to access the ITC, some utilities are clearly serious about adding solar to their portfolio. From a demand standpoint, there doesn't appear to be pressure on companies who relied on spot sales at the highest price and did not create long term relationships, strong brand, differentiation based on strong energy performance.

As you know, we at Evergreen have created strong long term customer relationships and are recognized in the industry as providing strong energy output and providing good return on investment where performance based incentives exist.

So assuming the current economic delays does not get appreciably worse, we believe we are well positioned to continue to grow with the demand for PV expanse. At this weeks show in San Diego, we held in-depth review of product performance with most of our customers. As of now, they're asking for the contracts specified quantities, and in some instances have asked us for a good deal more.

So again, our backlog looks solid as we sit here today. With that, I'll now turn the discussion over to Mike.

Michael El-Hillow

I'll discuss our third quarter financial results, fourth quarter and give a status update on the transactions we had with Lehman Brothers we had this past summer.

First, our third quarter financial results. Product sales for the quarter of $17.8 million was slightly lower than the second quarter of $18.1 million and about $2 million less than the lower end of our third quarter guidance of $20 million. The decrease on a sequential basis was due to a decline in our ASP caused by the impact of the stronger dollar on our sales to Europe. There were no changes in our selling prices to our customers. We missed the low end of our product revenue guidance principally because of the lower shipments from Devens which we discussed earlier, plus the impact of the stronger dollar.

During the quarter, we shipped approximately 4.8 MW compared to 4.7 MW in the second quarter of 2008. Our average selling price was $3.63 per watt in the quarter, down from $3.78 per watt in the second quarter.

During the third quarter, approximately 31% of our product was sold in Europe, 57% in the U.S. and 12% in Asia compared to 53% of product in Europe, 42% in the U.S. and 5% in Asia during the second quarter of 2008.

Fees from EverQ, our joint venture with Q-Cells were $4.3 million, down from $4.6 million in the second quarter due to the strengthening U.S. dollar.

Gross margin was 5.7% in the third quarter, down from 34.7% in the second quarter, and near the low end of our guidance of 6%. Gross margin decreased sequentially as expected due to higher costs associated with the initial production of our Devens facility. Higher initial production costs are temporary and results and inefficiencies that companies typically incur in the initial stages of significant capacity changes.

R&D expenses were $5.5 million for the third quarter compared to $5.9 million for the second quarter of 2008. The decrease in R&D expense was driven primarily by re-allocating resources to focus on the ramp up of our Devens facility.

SG&A expense was $6.2 million compared with $5.9 million in the second quarter. The sequential increase in SG&A expenses was driven primarily by the added G&A costs at our Devens facility. Plant start up costs at Devens were $9 million or roughly flat compared to the second quarter of $8.6 million.

These costs were higher than our guidance of $5 million to $5.5 million because of the timing of our new hires to support a higher production level than actually occurred, and we also started to incur start up costs for the second phase of Devens.

On a year to date basis, our Devens and string factory start up costs are $21 million. When Devens is completed in early 2009, we expect that our total start up cost for Devens will be approximately $30 million as we have guided for about a year. String factory start up costs will also be about $3 million.

Similar to the second quarter, we had $2.7 million of accelerated depreciation relating to the disposition of certain equipments as part of our Marlboro ramp down plant.

Our operating loss is $22.1 million for the quarter compared to $15.2 million in the second quarter and our guidance of about $19 million. The sequential increase in operating loss is primarily due to costs associated with the start up and initial production of Devens. The higher than guided operating loss was due to the lower Devens production and lower ASP caused by the stronger dollar.

Other losses were $3.3 million in the quarter which consisted of foreign exchange loss of $5 million and net interest income of $1.7 million. Other income in the second quarter of 2008 was $2.5 million which consisted of foreign exchange losses of $158,000 and net interest income of $2.7 million.

The $5 million in foreign exchange losses for the third quarter of 2008 essential offset foreign exchange gains realized during the first and second quarters as the U.S. dollar strengthened considerably. Year to date, our foreign exchange losses were approximately $1.4 million. Most of our foreign exchange activity results from market to market adjustments of a long term loan to one of our silicon suppliers, SolPro and other silicon pre-payments.

These are essentially translation losses not transaction losses so in the near term, they are book losses. Hedging these long term assets would require us to put approximately $25 million into an escrow account with a counter-party which we believe would not be prudent given our capital need and the uncertainty in the capital markets.

Equity income from EverQ was $1.6 million versus $3.7 million for the second quarter. The sequential decrease was due to a strengthening U.S. dollar and EverQ's higher operating expenses associated with its own expansion activities.

Net loss for the third quarter was $23.8 million or $0.18 per share versus $8.9 million or $0.08 per share in the second quarter.

Regarding our per-share information, we will now include the 30.9 million share that we lent to Lehman in our per-share calculation on a weighted average basis pending the results of pursuing all available legal remedies. As such, approximately 4.4 million shares are included in the per-share computation for the quarter ended September 27, 2008.

Turning to EverQ results, during the third quarter of 2008, EverQ had revenues of 55.8 million Euros and shipped 21.6 MW of product at an average selling price of EU 2.25 per watt. In the second quarter of 2008, EverQ had total revenue of 58.8 million Euros and shipped 21.7 MW at an average selling price of 2.65Euros per watt.

EverQ's gross margin net income in the third quarter of 2008 was 22% and 3.3 million Euros respectively compared to 24% and 6.4 million Euros respectively in the second quarter of 2008. Net income decreased in the second quarter due to the higher operating expenses associated with their expansion activities.

During the third quarter approximately 47% of EverQ product was sold in Europe, 52% in the U.S. and 1% in Asia compared to 70% of product in Europe, and 29% in the U.S. in the second quarter.

Now I would like to discuss guidance for the fourth quarter of 2008. Revenue is expected to be approximately $45 million to $55 million including approximately $4 million of selling fees and royalty payments from EverQ. Gross margin is expected to be in the range of 5% to 10% and it is at this low level because Devens will be only at about 50% of its full capacity and ops cost absorption will be low.

Operating expenses excluding factory start up costs are expected to be approximately $12.5 million to $13.5 million. Factory start up costs at Devens are expected to be between $6 million and $9 million, but as I said earlier, when we complete the Devens activity, we should be at approximately $30 million that we talked about a year ago.

Accelerated depreciation associated with the Marlboro ramp down will again be approximately $2.7 million. Operating loss is expected to be between $16 million and $22 million and other income is expected to be approximately $500,000 and our share of EverQ income is expected to be approximately $3 million.

Net loss is expected to be approximately $13 million to $19 million or $0.08 to $0.12 per share based on weighted average shares outstanding of about $162 million. From a liquidity standpoint, as Rick pointed out, we ended the third quarter with cash, cash equivalents and short term investment of about $309 million.

Over the next six months our major cash needs are about $250 million as follows: completion of Devens will cost us about $150 million. The first stage of our string factory will cost us about $25 million. The final silicon pre-payment will be about $15 million and our working capital needs will be about $60 million as we rapidly ramp sales So combined with the $40 million working capital line of credit that we signed with Silicon .Valley Bank today we have sufficient liquidity to support our operations as we move to profitability and positive cash flow in 2009.

I'll now provide you with a status update on the transactions we engaged with Lehman Brothers during this past summer. As you know, in July we completed our public offering of 373.75 million of senior convertible notes. Concurrent with that transaction, we lent 30.9 million shares of our common stock to Lehman that were to be returned to us no later than July 15, 2013 which is the maturity date of the notes.

As a result of the bankruptcy, Lehman was contractually required to return the shares. We have made demands of Lehman but so far to no avail. Last week, Barclay's PLC, one of the institutions that bought a portion of Lehman filed a Form 13-G with the SEC stating that they own 12.2 million in share of Evergreen Solar.

This is the first time that we learned that any of the shares that went to Lehman were still in Lehman's possession at the time of the bankruptcy. We believe that these shares are ours, that they should have been returned to us at the time of the bankruptcy and that the transfer of these shares to Barclay violated our agreements.

We have approached Barclay to confirm that they will assume Lehman's obligations to us or have them return the 12.2 million shares. So far they have refused. Therefore, we are now prepared to take legal action against Lehman, Barclay's and all appropriate parties involved in this transaction. We are proceeding expeditiously but the complexity of this bankruptcy and the continuing difficulty in obtaining information about the disposition of Lehman's assets makes the process very detailed and time consuming.

Also in connection with the offering we entered into a cap call transaction with Lehman to reduce the ultimate dilution that would otherwise occur as a result of the new common stock issuance upon conversion of the new notes. We paid approximately $39.5 million for the cap call transaction and are working with council to recover as much as we can in what is sure to be a very slow bankruptcy process.

We have no intention of entering into an additional cap call which would have required approximately another $30 million to be paid out.

With that, Rick and I will be happy to answer any questions.

Question-and-Answer Session

Operator

(Operator Instructions) You first call comes from Timothy Arcuri – Citigroup.

Timothy Arcuri – Citigroup

Can you talk about when we might see kind of a hockey stick in margins as you look at next year? I think you've been saying you would have 30% or greater gross margin next year, so when do you think that hockey stick might occur?

Michael El-Hillow

There should be a substantial improvement in the first quarter of 2009, and then I'd say the hockey stick will occur in the second or third quarter of next year and then continue beyond that. So it's really trying to get Devens to north of about 15 MW a quarter.

Timothy Arcuri – Citigroup

Do you still stand by the notion that margins will be 30% or more for the entire year next year?

Michael El-Hillow

A lot depends upon the economic conditions. The one thing that we're all facing in this industry is a strengthening dollar. I'm assuming that the dollar will continue to strengthen at the rate it has strengthened. Obviously it's peaked at about this 1.35 level recently. Yes, we're absolutely standing behind what we've said.

We have the right cost controls in place. We have the right improvements in our manufacturing costs per watt in place, but we still can't control the strengthening dollar. But again, assuming that the dollar doesn't get appreciably stronger than 1.3 to 1.25 yes, we stand by our predictions.

Timothy Arcuri – Citigroup

It looks like there's been some cost over runs at Devens if you look at what you were saying CapEx per watt. I think you were saying something in the $2.20 to $2.30 range and it looks like it's going to end up more like $2.70 roughly CapEx per watt. Does that change how we should think about what the ongoing cost per watt is in Devens? I think you were talking about $2.00 before. Will that be a bit higher because you've seen some cost over runs in terms of CapEx up front?

Michael El-Hillow

We're actually above the cost and it was a conscious decision. We accelerated the second phase of Devens when we got additional silicon from DC Chemical, but we were also incurring the increased costs that were being driven by higher energy costs. So number one, we anticipated the increased cost.

Regarding the long term impact on our cost per watt, it will not be significant. When you look at the facility, it's about 60% equipment, 40% building, and we depreciate the building over 40 years. We depreciate the equipment over seven years. So it may impact us by a cent or two but not significantly.

The bigger impact is that we spent $100 million more than we though. When we started this project a little over a year ago we were about $2.00 per watt. That's the guideline that we put into the market place. We've kept people apprised of the changes as the year has occurred so the near term impact was the big use of our cash. The long term impact should not be significant.

But most importantly, we did it also because we believe we could get into profitability about a quarter, maybe two quarters earlier, a significant possibility by accelerating Devens Two.

Operator

Your next question comes from Stuart Bush – RBC Capital Markets.

Stuart Bush – RBC Capital Markets

You had quoted that you had signed well over a couple billion dollars in contracts earlier this year and they were the existing exchange rate back then. What would be your total backlog now at the current exchange rate?

Michael El-Hillow

If you just use the 1.35 today. It's still around $3 billion. It obviously would have been a little bit higher. To give everyone a sense of what's happened here, if the dollar strengthened to about $1.2, the backlog is about $2.7 billion, maybe $2.8 billion. So it's still a substantial backlog, well in excess of $2.5 billion. So that should give you a frame of reference.

Stuart Bush – RBC Capital Markets

Can you clarify the AKU file in relation to the EverQ's venture a few days ago and what that was about?

Michael El-Hillow

It was a couple of things we did. It was a sales agreement and also the Quad royalty agreement. These two agreements have been in process. We've been negotiating them for awhile. The sales agreement replaces the previous sales agreement and the technology agreement is for the Quad licensing.

The negotiations went as long as they did because the initial negotiations were among the three partners and then as EverQ was driving to hire a CEO which they did, he took over the negotiations with us. So it's the Quad royalty agreement and it's the continued sales transition agreement. We will support EverQ over the next 12 to 18 months as they drive to become an independent company.

Stuart Bush – RBC Capital Markets

Does that change the licensing percent of royalties that you were expecting to get before?

Michael El-Hillow

It doesn't so much change the licensing percent. We haven't disclosed what the Quad royalty will be so the Gemini royalty which is what we're receiving right now is continuing as is. What we have said is that we will get a royalty as a percentage of savings from Quad. Given that Quad is a new technology that's being introduced to the marketplace, we haven't formally announced what the royalty will be, but you can probably assume that as the next facility at EverQ ramps up, and that's going to be an 80 MW facility and will begin production early next year, that the royalties we get from that contract should mirror what the royalties have been from the Gemini contract.

Stuart Bush – RBC Capital Markets

Can you quantify exactly how much you would expect to need by June of next year to build out the facility in the next phase?

Michael El-Hillow

As Rick said, assuming that the markets require expanded capacity from the panel manufacturers we've said all along that the next factory will be an approximately 480 MW facility built in 240 MW phases. We'll need about $400 million to open up that factory. We would probably need about $100 million per quarter beginning mid next year and we believe that as the markets get better and the demand for panels continues to rise, it will be at the same rate and in the same time that will allow us to get financing. So it's $400 million.

And to kind of dovetail from earlier question, we believe that our manufacturing costs per watt for the next factory which will more than likely be outside the United States will be in the $1.60 per watt range. And so if you take an approximate 500 MW facility, $1.60 a watt, you're talking a total investment of about $800 million.

And so if we're looking for $40 million from outside capital we're telling the world that we expect to internally fund $400 million. So the cash flow that will be coming out of Devens as we have said will be significant and will help us do the next expansion.

Operator

Your next question comes from Paul Kleg – Jefferies & Co.

Paul Kleg – Jefferies & Co.

Obviously facility start up costs were above your guidance number for the quarter. I didn't catch how much was due to the acceleration of Devens versus other spending.

Michael El-Hillow

We didn't break it out per se but some of it was due to the acceleration of Devens. It was mostly due to the lower production level. We've given guidance, we started this maybe seven months ago, and at the time we said that as a frame of reference for the Devens facility, each phase will cost us about $15 million, $5 million a couple of quarters before we start producing, $10 million in the quarter just before as we hire most of the direct labor and indirect labor people.

So for a total of about $30 million, it was an estimate just to try to figure out how we could model it. We do believe that when Devens is opened early next year that the total start up costs will be in the neighborhood of about $30 million to $31 million. How we say we're going to be there has been a little bit of a blip quarter by quarter, but again we don't run the business to figure out what costs are going to be. We run the business and the costs come out of the other side.

Paul Kleg – Jefferies & Co.

So some of that then is due to costs being pulled down from the cogs line into the opex line?

Michael El-Hillow

That's correct.

Paul Kleg – Jefferies & Co.

There's been a lot of talk in San Diego this week about a tax equity. I don't know if you feel adding your two sense about what's going on in the tax equity market, whether or not you've seen it become a problem in your end markets in the U.S. or you see utilities talking about being a part of the solution in 2009.

Michael El-Hillow

Are you talking about the impact of the SEC?

Paul Kleg – Jefferies & Co.

Tax equity becoming a problem for being able to fund large projects in the U.S. The disappearance of Lehman and others from the tax equity market drawing up some of the sources of funds for financing,

Michael El-Hillow

The uncertainty in capital market, there's no doubt there's no money being shared between banks or between banks and their customers right now. However, there's money in the market place. The dust has to settle. I think what Rick had said earlier, we've been in contact with our Senior Vice President of Sales and Marketing, Terry Bailey, who is on the line by the way and if he can answer this, he should chime in.

Everyone's concerned about the economic situation, but there's a lot of opportunity in this space so we'll just leave it at that.

Terry Bailey

What we're finding is yes, we do expect utilities to step in and take care of some of this as they are looking at renewable energy and opportunities. In addition to that you just get a general feel from what we see at the show there are monies available for projects which are clearly there to make a lot of money. And so the customers that we've been dealing with are appropriately concerned but not overly concerned with that clearing itself up over the next three to six months.

Operator

Your next question comes from Jonathan Hoopes – ThinkPanmure

Jonathan Hoopes – ThinkPanmure

I presume that your sales contracts that make up your backlog contain substantial market change provisions. Could you confirm whether or not they do and have you received any letter or petitions claiming substantial market change? I'm specifically referring on the pricing front.

Richard Feld

We've had general discussion around this as we've said in the past. I'm happy to give some general discussion but I can't be too specific because contracts are customer specific and we have confidentiality agreements with the customers. After saying that, what we've said in the past is that we in the market assume that prices will drop somewhat consistent with the digression changes in Germany which is about 8% to 10%.

So our expectation is, and the defacto built into the contracts is that the prices will drop and 7%, 8%, 9% range annually. And that's what we're anticipating. Contract by contract it's a little bit different but if prices don't fall at all, we have a right to renegotiate higher prices and if they drop a lot more than 10% and that what's happened in the market place and customers come to us and in good faith negotiate a lower price.

We have a very practical approach to pricing long term in an industry that's changing dramatically because as you know I'm sure, you could have a contract that says fixed price period, but if the market turns way up, you as a seller are disadvantages, and if the market craters, your customers says I can't afford it, sue me.

So it's not a very practical approach to have it absolutely fixed, so we think it's a good balance in how we manage it. But that's our view.

Jonathan Hoopes – ThinkPanmure

Can you give a little bit of clarity on the backlog pricing not what you discussed back in June? Was that predominantly Euro based or was that a combination of Euro/U.S. dollar basis on those pricing or does it not matter?

Michael El-Hillow

We have talked about this. Some Euro denominated dollar, it's a bit more in Europe. We haven't given specifics but it's a bit more in Euro and the rest of the United States, and some of the product in Asia.

Operator

Your next question comes from [Chris Lansa]

[Chris Lansa]

We saw pricing across the world go up when Spain instituted their subsidies so you're not expecting overall market pricing decline more so in line with that. How long do you think it will be till the Spanish government hits the cap and that influence is off to the broader market?

Richard Feld

Because we have long term contracts and we've gone out of our way really to sell out most of our capacity with longer term arrangements with distributors, installers that we think will be long term players. We haven't participated as much in the spot market and because of that, our year to year decline in prices aren't going to like some people's might, who did more spot market selling in Spain.

We don't have the capacity and the ability to do that. So the downside of our approach is that we can't go to Spain if we've already committed product to companies in the U.S. or Europe. But the upside is that we don't believe we're going to see any more than that 8% year over year decline.

[Chris Lansa]

With some of the increased risks that typically comes with a larger scale project or as the project size grows, I think financiers usually apply more risk to the project. Would you expect that projects get shrunk in size a little bit in order to reduce the risk and maybe reduce the borrowed cost of capital?

Terry Bailey

Projects from sales will usually stand on their own. If there's financing available for the project and the size it is based on the return that's required. We don't expect to be downsizing due to that. We really don't see any effect from it.

Operator

Your next question comes from Michael Carboy – Signal Hill Capital.

Michael Carboy – Signal Hill Capital

I'd like to dig into a little bit what some of the production automation bugs were. Were these software issues, hardware issues, integration issues? Are they closing any of the customers who are looking at longer term contracts to sort of pause at all?

Michael El-Hillow

There are more integration issues. If you visit our factory you'll see that the automation that we have for panel assembly interfaces with wafers, stringers, machines to test the power of the panel to test for JBOX, etc. The issues tend to be more on the interface, the actual ballet movements, the robotics are fairly easy and straightforward, it's really in all the interface. It's a lot of equipment and it's large. It's more in the interface.

So it's a little bit of a vicious circle. When you get behind as the installer did, and we are building wafers and cells at a furious rate, we need to put those wafers and cells into panels to confirm that the wafers and cells are good to get some experience, and so the commissioning company then has to share the equipment with us.

Once you end up in that situation, it's tough for both parties. The commissioning goes slower because you're using the equipment part of the time for production and production goes slower because part of the time commissioning is underway. One of the reasons that we mentioned that in the first two weeks we've built in megawatt, when you think about a ramp, you install equipment, you begin getting it to run effectively, interfacing it with other pieces of equipment and you have to solve a lot of issues.

But the way ramps work, you start out with very, very low levels of production and it tends to build week after week. So here we are two weeks into the quarter and the first two weeks we've done a little over a megawatt of panels already. So we aren't so far behind in the panel area, but a few weeks in a ramp makes a big, big difference.

Michael Carboy – Signal Hill Capital

My concern was that there might have been a finger pointing exercise going on between various venders and subcontractors as to where fault really lies.

Michael El-Hillow

No. There's no finger pointing in the prime contractor, the automation vender owns all those issues so that's not the case. In fact their CLO was here this week. They are behind. They brought their top guns. They're really good faith working it. They're disappointed. We're disappointed that they're behind.

But I don't want to make excuses, but they're all manufacture. This is a very large, complicated facility. It's over 300,000 square feet of space feet now populated with lots of equipment and while we're starting up phase one we're starting construction on phase two and starting to move equipment in.

So there's quite a bit to manage. So we would have liked to produce a few more panels without a doubt and we're committed to getting the volumes we're talking about for the fourth quarter and beyond, but on the grand scheme of things it's a couple week miss, and that's why we missed the up run of the guidance on volume.

For something this complex, a couple of weeks isn't bad. We're not talking about multiple months the inability to produce. The things we do feel good about is that in the wafer area, we're way ahead. So the brand new technology that doesn't exist anywhere else in the world, there was some nervousness on investors parts and analysts parts that this would work.

We're actually substantially ahead in that area. The more routine equipment is where we're behind. So we're not concerned about will it work, it's just the timing of getting it to work the way it's been designed to.

Michael Carboy – Signal Hill Capital

Can you share with us the amount of legal costs that have been incurred so far and what you think you might expect to accrue in the next 12 months in the battle with Lehman trying to pry loose those shares that were supposed to be transferred to a independent third party escrow account under the underwriting agreement?

Michael El-Hillow

Well to date we have incurred a substantial cost. Many people are calling us and rightfully so. But doing something is one thing. Being able to do it in a cost benefit situation is another thing. I will tell you that one of the things we're faced with is obviously Lehman's is an international bank and they touched every major financial center in the world.

Our shares were being held in a U.K. subsidiary of Lehman. To give you a frame of reference, if we wanted to file for just an injunction to say don't do something with those shares, whether it was for Lehman or for Barclay, the cost would be approximately 100,000 pounds. So this could be substantial.

What we've committed to with our Board of Directors is I'm working with our in house general council to put together a thoughtful plan to go after this in a way that makes sense to protect our assets but also going down the right rabbit hole, make sure you're doing the right thing. We're also going to drive hard in the court of public opinion. We'll put that on the table.

We've gone to both of these facilities. We've asked to talk. They've said no. We'll take the legal route, but I will tell you that we have been in contact with the Massachusetts congressional delegations. We're going to talk to our senators and our congress men and women. We want someone to help us and our shareholders.

We've brought 800 jobs to the state of Massachusetts. We raised that money using these shares. We have to find redress. I spoke with one of the congressmen last week. I'm trying to get in front of Barney Franks committee. We're going to go after legally, we're going to go after it morally, we're going to go after it ethically.

And so our shareholders can sit back and understand that we have taken this personally and we will drive it hard. But there is a balancing act. The legal fees could be incredibly substantial.

Michael Carboy – Signal Hill Capital

I think you have a primary lien on those shares given the trip wires that were crossed and I look forward to you being able to affect that claim.

Operator

Your next question comes from Pierce Hammond – Simmons & Company.

Pierce Hammond – Simmons & Company

CapEx guidance for Q4 '08 and then for 2009 just assuming you stay on track with Devens and the string plant not talking about an incremental or other plant.

Michael El-Hillow

The way we put it in the script is we need to spend about another $150 million on Devens between now and the end of June. Most of that will be in the fourth quarter. I have the numbers quarter by quarter, but that could move, but that is the amount that we have to do there. We have to put about $30 million to $35 million in our string factory, about $30 million of that will be this year. The other $5 million will be next year, and then we talked about the silicon.

So that will give you a frame of reference. Then we have some ongoing, what we call sustaining CapEx, and that should be in the range between now and mid year next year of about $15 million to $25 million depending upon some of the technology initiatives and pilot initiatives we're going to pursue.

Pierce Hammond – Simmons & Company

The top tier general trading company in Japan is this your first major contract into Japan and do you see a lot of opportunity in the country?

Richard Feld

It is a first for a top tier company, and we do see a lot of opportunity. There's discussion in the Japanese government about taking back the lead in solar and potentially offering subsidies that would pay for as much as half of a solar installation. So we have no insight into what the legislature will or will not pass, but Japan had been a market leader for a number of year. Europe, specifically Germany, Spain took over leadership as the Japanese subsidies declined and basically nothing.

But there's a lot of discussion in the Japanese government that they want to become a real leader again, so we do see potentially lots of opportunity. We're very glad to be connected with this company.

Pierce Hammond – Simmons & Company

Can you provide a quick update on some of the other major global markets as you see it right now?

Terry Bailey

If you break it down in big pieces, the IPC was important in the U.S. and assuming these financial issues get a little bit behind us, we expect to see substantial growth in the U.S. perhaps something on the order of 500 MW market. It could be quite a bit more than that.

In Europe, Germany will continue to be a back stop country. They have an uncapped subsidy program and that will continue to grow. Spain now seems pretty solid at 500 MW and we'll see how fast that fills up. Italy is coming on quite strong and we would expect them to be the same next year as Spain was this year. A couple of countries are going along a little slower but in the Eastern European portion, there are subsidies coming online.

So everywhere you look, inclusive of Korea, Australia and Japan, there are more and more programs designed for solar so we actually look at it in a very positive way.

Operator

Your next question comes from Benedict Pang – Caris & Company.

Benedict Pang – Caris & Company

Given some of the capital constraints that you see in the industry and these large contracts that you signed, do you still think you're able to sign large contracts over the next three or four quarters?

Michael El-Hillow

There's not too many more that we can sign. We've now sold out Devens almost 2010 and beyond. We have some allocated although verbally committed capacity before '09 that isn't in a take or pay contract so that until we actually break ground or least accelerate our plans to break ground for a new facility we won't be signing other long term contracts.

Benedict Pang – Caris & Company

You mentioned that you haven't seen any impact yet based on your pricing. Is that where you would expect to see some issues, is that you're currently signed contract customers would come back and ask for different pricing. Would that be the first sign?

Richard Feld

It's possible but it's really hard to say. If that's truly the issue, then that would happen. If they couldn't get monies for an installation, change of pricing is really irrelevant. It all depends on what happens with the economy. But I do have to emphasize at least as we sit today, looking out in the short term horizon as far as people going to look out, we have new orders we've just taken and customers are confirming that we will be shipping them what we said we will in the next few quarters. We aren't seeing as we sit today any pressure on pricing or any pressure on volumes.

Benedict Pang – Caris & Company

I understand why you don't have a hedge now but you didn't have a hedge on the currency for the third quarter?

Michael El-Hillow

For this particular transaction, that's going to the silicon supplier, no we've never put a hedge in it. That's why we have. We would have always had to put this cash in escrow. And interesting enough who knows where we might have put that cash. It's an economic decision. We made that.

Benedict Pang – Caris & Company

For the third quarter the impact was more due to the short fall on the factory output or the foreign exchange.

Michael El-Hillow

Let me just clarify. We do not hedge our sales yet either. We may put in that type of hedge and the hedging I'm talking about is hedging a long term receivable, so put that aside. But the biggest impact on the missing revenue in the third quarter was because of the lower production by far.

Operator

Your last question comes from [Elaine Clay]

[Elaine Clay]

On the Devens ramping issue I was wondering if there is a discrete issue or is it just more a problem with integration, if that's something that could potentially happen with the next phase as well.

Richard Feld

Nothing discrete. As I said, we're ahead in wafers. We're on track in the sell area and we're a few weeks in the panel area. And it's more integration in robotics with the other assembling and test devices.

[Elaine Clay]

It sounded like production at EverQ was pretty much flat quarter over quarter. Was that about right?

Richard Feld

That's correct, yet. Until they bring on a third factory, which is underway it will be flat quarter to quarter. They have a fixed capacity.

[Elaine Clay]

Was there any change in the timing of that ramp?

Richard Feld

No, not that we're aware of. It's scheduled for early next year.

Operator

There are no further questions.

Richard Feld

Thank you all for taking part in the call. We look forward to talking to you in 2009 as we move to profitability.

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