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Evergreen Solar, Inc. Q4 2008 Earnings Call Transcript

February 06, 2009 | about: ESLR

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Evergreen Solar, Inc. (ESLR)

Q4 2008 Earnings Call Transcript

February 05, 2009 at 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

Jonathan Hoopes - ThinkEquity, LLC

Sanjay Shrestha - Lazard Capital Markets

Jesse Pichel - Piper Jaffray

Al Kaschalk - Wedbush Morgan Securities Inc.

Timothy Arcuri - Citigroup

Pearce Hammond, Jr. - Simmons & Company International

Michael Horwitz - Stanford Group Company

Paul Clegg - Jefferies & Co.

Mark Bachman - Pacific Crest Securities

Michael Carboy - Signal Hill Group LLC

Omar Zaman - UBS

Robert Stone - Cowen & Company

Adam Krop - Ardour Capital Investments

Presentation

Operator

Good day everyone and welcome to Evergreen Solar’s fourth quarter 2008 conference call. This call is being recorded and webcast. At this time for opening remarks, I would like to turn the call over to Chief Financial Officer of Evergreen Solar, Mr. Michael El-Hillow. Please go ahead sir.

Michael El-Hillow

Thank you and good afternoon everyone. Before we begin today’s call I would like to remind you that statements that are made in this conference call that are not historical facts such as those dealing with our future financial performance and growth are forward-looking statements under the Private Securities Litigation Reform Act of 1995. Future performance and financial results of the Company will differ from those expressed or implied in any such forward-looking statements due to various factors.

Such factors include but are not limited to those described in filings of 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 fourth quarter, Rick.

Richard Feld

Thanks Mike and good afternoon everybody. Today, I will be discussing progress with our Devens facility, our expectations for 2009 and our plan for future expansion. But first let me start with Devens.

In the fourth quarter of 2008 we shipped 8.5 megawatts of products in Devens more than a fivefold increase from the 1.5 megawatts that we shipped in the third quarter. To give you a little additional insight Devens today is producing panels at the rate of little over one megawatt per week.

So, from the output perspective we are achieving our production targets and momentum is definitely building. All three fabs, meaning wafer cell and panel are ramping as we expected. We are particularly pleased with wafer fabs in our new Quad String Ribbon furnaces.

Today, we have over 245 furnaces running in the factory, 40 of which are part of the Phase II expansion. By summer we’ll have all 360 furnaces planned to be in operation, so not only we are making rapid progress on our Phase I wafer fab ramp but we are off to a really good start with Phase II.

Quad will enable us to maintain our industry leading position in silicon consumption and wafer manufacturing cost. Additionally, each of our three fabs is on plan with yield slightly in excess of 90% today and we expect to be in the high 90s range in each fab by the end of the year. As 15% cell efficiency is also where we expected to be, but when all equipment is installed and optimized we continue to expect cell efficiency to be at about 15.5%.

I am also pleased to report that we have filed patents for low cost technique for improving cell efficiency. We have demonstrated in the lab that this innovative metallization process increases efficiency by 1 percentage point, 15.5% increases to 16.5%.

Next, I would like to talk a little bit about the near term market dynamics. There is no doubt that the uncertainty of today’s economic environment is casting an ominous shadow and not only on the solar industry but also the worldwide economy. We remain cautiously optimistic that 2009 can still be a robust year for Solar. We also believe that the longer term market prospects for the Solar industry are very promising, especially given this significant commitment to renewable energy by the new Obama Administration. However, like all companies in the industry, we expect that demand from Solar products in the first half of 2009, especially for large projects that are currently not financed maybe materially impacted by both the typical seasonal weakness that we see in the first quarter in the current worldwide economic and credit environment. In fact, two of our contract customers that are project oriented have delayed their early 2009 orders of about four megawatts later in the year.

Now, fortunately our customer base is diverse and we have been able to place that product. As we have said, we have been careful to have a balanced customer profile which installers and integrators who cater to both large and small projects and residential installations.

Nevertheless, we are in unprecedented times, we like many other companies will not be giving our typical quarterly financial guidance. There are too many variables beyond our control to adequately project financial performance. With that said, for 2009 we expect to have a productive capacity of between 125 megawatts and 130 megawatts which is consistent with the long range plan that we discussed a year ago.

In the first quarter of 2009 we expect to double our production capacity from the fourth quarter of ’08 to about 16 megawatts to 17 megawatts. In the second quarter of ’09 we expect to double again and reach a level of about 30 megawatts as we begin to rapidly expand Phase II of Devens. In the second half of ’09 we expect capacity will be between 35 megawatts and 40 megawatts per quarter.

We are really excited about the progress we have made so far with Devens. We continue to execute as planned and we are on tract for reaching our target of approximately 40 megawatts per quarter at a manufacturing cost of about $2 by the fourth quarter of this year. Of course we will moderate our output pending market demand, but we will be positioned to take advantage of an industry that is poised to return to significant growth once the credit markets improved.

Before I get into our expansion plans beyond our Devens facility, let me recap what we have discussed about expansion in the past. First, we stated that we will expect our growths 130 megawatts in ’09, 300 megawatts in 2010, 600 megawatts in 2011, and 850 megawatts in 2012 and all this growth might be done organically.

Second that we have secured enough silicon through contracts to support our expansion plans assuming we build factories that coincided more or less with the delivery schedules of these contracts.

Finally, we have over the past two years signed customer contracts that have a total contractual backlog of approximately one gigawatt extending over the next five years broken out as follows: 79 megawatts in ’09, 116 megawatts in 2010, 254 megawatts in 2011, 327 megawatts in 2012, and 287 megawatts in 2013. On the last call we discussed the fact that obtaining funding for factory expansions at a cost of capital commensurate with the expected financial return of such expansions was not available given the turmoil in the financial markets.

We believe this is still the case. We are also concerned about near term market demand and thought it more prudent view on expansion was warranted. However, based on our ability to successfully demonstrate the Quad String Ribbon technology at Devens, we have entered discussions with subcontract manufacturers where we would provide wafer using our industry leading string ribbon technology and they would convert those wafers to cells and panels.

We are finding that subcontract is our interest in making an investment in a cell and panel factories and in some cases using existing capacity. Even with the typical subcontractor margins they and we believe that our product can continue to be a market leader and add at attractive price point because of the low cost of our wafers. They also have said they think the Solar is very attractive because there historic segments i.e., the electronic industry has really slowed down.

Using a subcontractor would significantly reduce our need for expansion capital, while allowing us to meet our sales expansion goals. For example, we have stated that our next factory, built in Asia would cost about $1.50 per watt to build or about $225 million for 150 megawatts facility.

Under the subcontract manufacturing arrangement we could reduce our capital needs by about 75%, meaning we will be about $56 million instead of $225 million and still meet our sales goals in 2010.

So, we are ready to leverage the proven performance of our String Ribbon technology and eventually into early discussions with subcontract manufacturers.

I will now turn the discussion over to Mike.

Michael El-Hillow

Thank you, Rick. But now, I will discuss our fourth quarter 2008 financial results and give you an assessment of our cash flow over the next six months.

First, fourth quarter financial results. Product sales for the quarter of $41.1 million were higher than the third quarter $17.8 million and in line with the low end on our fourth quarter guidance of about $41 million. The sequential increase in product revenue was due to the approximately seven megawatts increased in volume from our Devens facility, offset somewhat by a 6.6% decline in our average selling price.

ASP declined quarter-over-quarter due to the strengthening US dollar combined with a higher concentration of sales to US customers. During the quarter we shipped approximately 12.1 megawatts of which approximatly 8.5 megawatts for some Devens compared to 4.8 megawatts in the third quarter of 2008 of which 1.5 was in Devens.

Average selling price is $3.39 per watt in the fourth quarter, down from $3.63 per watt in the third quarter. During the fourth quarter, approximately 34% of our product was sold in Europe and 65% in the US compared to 31% of our product in Europe, 57% in the US and 12% in Asia during the third quarter.

Fees from Sovello, our joint venture with REC and Q-cells formally called Ever-Q were $3.1 million down from $4.3 million of the third quarter 2008 due to year-to-date accrue ups and the strengthening US dollar. Gross margin was 4.6% in the fourth quarter down from 5.7% in the third quarter and slightly below the low end of our guidance of 5%. Gross margin decreased sequentially due to the impact of the strengthening US dollar on our average selling price.

R&D expense was $5.7 million for the fourth quarter, which is essentially flat compared to $5.5 million for the third quarter of 2008. SG&A expense was $6.8 million compared with $6.2 million in the third quarter. Sequentially increase in SG&A expense was driven primarily by increasing legal cost in connection with our suit against Barclays and Lehman Brothers associated with Lehman Brothers bankruptcy. Although we have taken legal actions against Lehman, Barclays and all appropriate parties, we do not have any new significant information at this point of time. We are proceeding expeditiously but the complexity of the Lehman bankruptcy and the continuing difficulty in obtaining information has made the process very detailed and time consuming. While we will continue to pursue these avenues we are also cognizant of the ability to run up significant legal fees that may not result in the successful defense of the suit.

Plant startup costs at Devens were $9.7 million in the fourth quarter, slightly higher than the third quarter of $9 million. These costs were a bit above the high end of our guidance of $9 million as we have began to incur more costs associated with the ramp of the second phase of the Devens facility because we have accelerated that ramp.

In the quarter we incurred $23.1 million principally non-cash of restructuring costs associated with the Marlboro shutdown, most of which relates to the write off of manufacturing equipment, inventory, and leasehold improvements of the pilot facility. Over the next 12 months we may also incur occupancy location restoration and moving costs of approximately $4 million to $5 million which under current accounting rules must be expensed as incurred.

In addition to the restructuring charges incurred in the fourth quarter and a conjunction with refocusing our R&D efforts, we incurred charges of approximately $8 million relating to R&D equipment to support net obsolete technologies.

On a year-to-date basis our startup cost is $30.6 million of which approximately $27.8 million is related to Devens and the remainder to the string facility. When Devens is completed in early 2009, we expect that our startup cost will be approximately $35 million. String factory startup costs in 2009 are expected to be about $6 million.

Our operating loss which includes the restructuring charges and equipment write offs previously mentioned was $51.3 million compared to $22.1 million in the third quarter. On a pro forma basis operating loss, both the restructuring and equipment write off charges was $22.1 million as compared to $19.4 million in the third quarter and basically at the low end of our guidance or high end in this case of $20 million.

Other losses were $3.1 million in the fourth quarter which consisted foreign exchange loss of $2.7 million and net interest expense of about $400,000. Other losses in the third quarter of 2008 were $3.3 million which consisted of foreign exchange losses of $5 million and net interest income of $1.7 million.

Year-to-date foreign exchange loss was $4.1 million, most of our foreign exchange activity resulted from mark-to-market adjustments of our loan to a silicon supplier, and other silicon prepayments. Hedging needs long term assets that require us to put approximately $25 million into an escrow account with a counter party which we believe would not be prudent, given our liquidity needs and uncertainty in the banking environment.

Equity income from Sovello was $2.2 million versus $1.6 million for the third quarter 2008. The sequential increase was due to an increase in Sovello net income driven mainly by foreign currency derivative gains.

Net loss for the fourth quarter was $32.1 million or $0.32 per share versus $23.8 million or $0.18 per share in the third quarter. Weighted average shares for the fourth quarter were $161.7 million, which include the $30.9 million shares associated with the common stock we lent to Lehman Brothers in conjunction with our convertible note financing consummated in July of 2008.

Turning to Sovello results. During the fourth quarter 2008, Sovello had total revenue of 49.7 million euro and shipped 17.7 megawatts of products and an average selling price of 2.69 euro per watt. In the third quarter of 2008, Sovello had total revenue of 55.8 million and an average selling price of 2.52 euro per watt.

Sales volume decreased sequentially from the third quarter resulting from delays with sunlight customer projects due mainly to the uncertain status of the credit markets of the time.

Sovello gross margin and net income in the fourth quarter 2008 was 30% and 5.6 million euro respectively, compared to 22% and 3.3 million euro respectively in the third quarter of 2008. Gross margin increased sequentially due to higher average selling prices due to higher European sale mix and slightly lower material cost due to improved factory yields.

During the fourth quarter, approximately 64% of Sovello product was sold in Europe, 35% in the US, and 1% in Asia, compared to 47% products in Europe, 52% in the US, and 1% in Asia during the third quarter.

Turning back to Evergreen. From the liquidity standpoint we ended the year with cash, cash equivalents and short term investments of about $178 million, of that amount about $23 million was due to Sovello principally for customer payments that we collected on their behalf as a sales agent at the end of 2008. The cash available for our operations was about $155 million.

Over the next six months our major capital related cash needs were about $120 million as follows: completion of Devens of about $90 million, first space of String factory of about $15 million, and debt service of about $15 million. So, by mid-year as Devens approaches full capacity, we will have about $35 million in cash and $15 million of working capital.

With that Rick and I will now be happy to answer any questions, so Operator, please open the lines.

Question-and-Answer Session

Operator

(Operator's Instruction) Your first question comes from the line of Jonathan Hoopes - ThinkEquity, LLC.

Jonathan Hoopes - ThinkEquity, LLC

I got a couple of questions. The first one is regarding pricing. In your discussions with your customers, are you having to offer lower pricing? Could you talk about the dynamics with your take or pay contracts right now?

Terry Bailey

Yes, this is Terry Bailey. I will answer that one. So the answer is yes. There is clearly pricing pressure in the market place now and so we have had these discussions with our customers and we are working to that with them. It is kind of up in the air at the moment so it is difficult to say a clear path of where things will settle but there is clearly pressure in the market place.

Jonathan Hoopes - ThinkEquity, LLC

Do you have any indication, Terry thank you for your response, as to perhaps percent year-on-year decline in 2009 versus the 2008 number on, say, constant FX currency basis?

Terry Bailey

So, I will give you our, that stands where I can on that. Clearly, the feed in tariffs in Europe primarily in Germany which is driving it dropped to close to 10% at the beginning of the year and that has factored in so that is the normal minimum decrease that you would expect to see. As there is little capital for financing of large projects available that has put some increased pressure on it but we have to say on a total year basis, we think that second half of the year assuming capital becomes available for anything, it is going to look very good for Solar and so some of that pressure would be taken off so you can look for something on the order of 10% to 15% but until these things settles down, it is difficult to say.

Jonathan Hoopes - ThinkEquity, LLC

If I could follow on there, I notice the new line item in the liabilities on the balance sheet. My question is the due to Sovello line item there, the $29 million in 2007? It looks like $23 million in 2008?

Richard Feld

That would be the intercompany pay. We collect, we are a sales agent for Sovello and we collect the receivables note that is what I am saying earlier. We finished the year with a $177 million in cash but about $25 million will be going.

Jonathan Hoopes - ThinkEquity, LLC

Okay and if you could kindly repeat what the average for fourth quarter shipments in ASP was?

Richard Feld

Just give me one second on that. While we are going to that information, let me just point out that we have about 80 megawatts under the long term contacts in 2009 and the average exchange rate of about 1.25 euro to dollar. Our average selling price is $3.22 at 1.35 and that is I mean it has been going between 1.25 and 1.35 for the last year. Those contracts at 340 .So that is the basis of our contract but as Terry said there is no doubt that we will have to negotiate given market dynamics but we have the certain customer niche that Rich talked about and we have deal with the certain types of customer that values our long term product proposition. Sovello shipped 17.7 megawatts in the quarter at an average of 2.69 euro per watt.

Operator

(Operator Instruction) Your next question comes from the line of Sanjay Shrestha of Lazard Capital Markets.

Sanjay Shrestha - Lazard Capital Markets

Couple of quick questions. I know Ricky mentioned that is there is a lot more details coming out on this sub contracting model but does that mean that your comfortable with your wafer manufacturing process and that is the only area you are going to focus on and is there anything you can share with us as to what type of companies this is going to be. Are these the guys in Asia that have already have a lot of item capacity that can take advantage of the fact that you have poly as well as the cheaper wafer or this is going to be the one of the new entrants in the market. Can you give us more color on that?

Richard Feld

Sanjay I give you little color but until we have a something to announce I can not probably give you the panel that covers but I will try to answer your question. So as I said in my prepared remarks the furnaces are coming out very nicely and yields, productivity or the things that we are interested in are progressing very, very well so as a consequence we feel really good about that and we believe we will maintain our leadership in both silicon consumption and low cost rate per production.

As we have some operating experience now, as we have some we are starting to share that with some subcontractors who actually have approached us. Mostly with operations in Asia, saying in most cases they have got excess capacity as their electronic subcontract manufacturers and they would be interested in making cells and panels for us and so in our minds eyes as we have not a lot of work here we do think that is if you can marry our advance wafer technology with sort of inherent lower cost production capabilities that exist in Asia. It is a real wonder whether we do it our self or whether we do it in concert with the subcontract manufacturers. That is where we are looking at now.

And the appeal of the subcontract manufacturers, some have facilities that are already built and require modest capital to retrofit our cells and panel and even if they do not have facilities because they are interesting in any business some have volunteered to front the enormous money capital cost. So we do not have a deal yet but we are in discussions with a few subcontract manufacturers and the discussions are pretty serious and they are pretty enthusiastic so we think that offers us a real opportunity.

Sanjay Shrestha - Lazard Capital Markets

That makes a lot of sense. One quick question and I will hop back in the queue so with the precipitous decline in the price of poly in the spot market and potential for more polies being available during 2009 and beyond? I know you guys had done a great job of securing a lot of poly (inaudible) existing long term poly contract versus where there are spot prices is and how should we think about that competitive advantage for you and how low the poly prices have to fall before you get to a point where utilization that we have with slightly lower efficiency benefit is no longer there?

Richard Feld

Well right now we are in the market, we try to stay abreast of that and we do make calls and we get now with poly being more available on solicited calls. So you can find poly in the spot market from between about $120 to $150. Some will try to get more but you can get in the spot market but that is the operating range.

Now long term contracts are definitely well below that. If poly was widely available and everyone was selling it at let us say $50 and our long term contracts will put us to a slight disadvantage. On the other hand if everyone really is selling in at $50 then we probably can get it for that too because most major manufacturers have signed up for long term contracts with the poly silicon producers.

So I do not think it will be at any greater disadvantage than anyone else will be, Sanjay, but in terms of numbers if we get down to 50 and we got no relief then a long term contracts will be a little bit higher than the spot price.

Sanjay Shrestha - Lazard Capital Markets

That is kind of like what I was looking at directionally. And so in terms of the financing risks that is out there and your existing giga watt in backlog so you guys clearly have not seen any cancellation or even anything significantly pushed out other than what you just talked about?

Richard Feld

That is right. We shipped all that we produced in the fourth quarter; we did not have any decline there. We did have a few megawatt push out but we have already recover that with other customers so without a doubt things feel unsettled and no one feels more comfortable but particularly as you go out into the field and talk to our customers they are not quite as negative as everyone is sitting at the home office seems to be.

There is a lot of interest in solar. The IQC extension that was passed in the stimulus package in the United States is very helpful. France has increased the subsidies by about 50%. Japan is talking about getting back in the solar in the big range trying to regain leadership with very successful subsidies. Costs are coming down and so smaller projects are still going reasonably well. It is the large, probably the large PPA’s that you need, it takes big financing. That is probably hurting the most. So, at any rate we are not poly here but it is very unsettled and we watch this everyday but we have not experienced any major erosion yet. No.

Operator

Your next question comes from the line of Jesse Pichel with Piper Jaffray

Jesse Pichel - Piper Jaffray

Following upon Sanji’s question on the subcontractors or EMS Companies, are they going to do the modules or they are also going to do the cells and wafers? I think you said the CapEx would go down 75% so then should we assume that really that is soup to nuts, wafer cells and modules?

Richard Feld

Well, again it is difficult to provide too much more color until we have a real deal to talk about so I can only do this more conceptually. By conceptually we would most likely be responsible for the wafer piece. The subcontractor will be responsible for the cell and panel piece. Therefore given the cost structures of cell and panel manufacturing in Asia the numbers that I am talking about, you just compare it, we would have to do on our own versus doing a factory that the output would effectively be panels. Our cost would be only about 25% maybe 30% of what they would be if we did it ourselves.

Jesse Pichel - Piper Jaffray

Can you walk us through the with regards to the few megawatt push out that occurred? Would that be just one of your customers and you give them relief on their contract or is it that their selling those take or pay modules in the open market and then you try to find a home for them? How does that work?

Richard Feld

I will let Terry answer this and he can give you the specifics on this.

Terry Bailey

So the answer is – it does not change the total amount of the contract, we just simply allowed them to move it out later in the year and have back up places in order to put that that we were able to accommodate it, which as good partners we will try to do what is possible and when that will hold the harder line but that was simply it.

Jesse Pichel - Piper Jaffray

Could you discus what your poly costs will be for Devens in 2009?

Richard Feld

Our poly cost on all of our contracts of the like, average will be about $80 to $85. In 2009 it will be a little bit higher, but not signicicantly but it will be below $90 per kilogram.

Jesse Pichel - Piper Jaffray

And what type of gross margin do you think you can get on that or maybe I should ask where do you think your non-poly cost will be in 2009?

Terry Bailey

The important thing as Rich said during his presentation, by the end of the year when Devens is at full capacity we expect to be about $2 per watt full manufacturing cost and that is what we were driving towards and that includes the silicon between $85 and $90 kilogram.

Jesse Pichel - Piper Jaffray

We have seen some of the divergence with Chinese companies coming in very low ASPs perhaps even nearing that $2 number and the European module companies towards the high end of that range and how does Evergreen fit? How is it perceived by its customers?

Richard Feld

I am sorry Jesse, I am sorry could you just repeat that?

Jesse Pichel - Piper Jaffray

There seems to be a growing divergence between the ASPs of the Chinese and those of the Europeans.

Terry Bailey

So if that happens we will give you the case…

Jesse Pichel - Piper Jaffray

And do you think that will continue and how do you maintain a premium for your product?

Richard Feld

There are a couple of answers to that, Jesse. One is we maintain a premium because there is actually higher quality and better specs in our product and that results in reduction of the installed system cost. So there is a real calculable value which net is the calculable premium over people we do not have the same advantages.

Relative to the Chinese, you sort of break that into 2 parts; they are if you will smaller, lesser known Chinese module fabs, panel fabs, that have to our understanding basically shut down quite a bit and all of the inventories they are trying to move through and that is causing some really low pricing for those types of things.

With regards to the, if you will , the listed Chinese panel companies, those are in a significantly higher price than the less known Chinese. Generally speaking we think they’re a higher quality and so there are differences in the panels. There is always been a Delta in that pricing and I expect that Delta will continue but how much can the difference be is to be seen. Clearly and that is part of what is putting overall pressure on the market at this moment. I really think there is big (inaudible) of inventory that is trying to move through that got stranded.

Operator

Your next question comes from the line of Al Kaschalk with Wedbush Morgan Securities Inc.

Al Kaschalk - Wedbush Morgan Securities Inc.

My question has been answered, sorry.

Operator

Your next question comes from the line of Timothy Arcuri with Citigroup

Timothy Arcuri - Citigroup

Just on the question about that push out, it was a very small number but it is a fairly significant number relative to your production in the quarter. It was about a third of your quarter’s worth of output so I guess I am wondering what sort of confidence we can really have in either with what you have under contract in 2009 if you would let 1/3 of your production out of contract in Q4.

Richard Feld

That is the lesson up there but you have keep in mind in normal business practices, individual customer will move things around frequently and if we were able to accommodate it we always do. So this was the case where there is request to move out for a fairly specific reason which we understood and as we had back-up customerS to take it, it was not a big deal. So it was not a push out and there is no home for the product. There is a push out that a customer requested, we accommodated and we moved it to another customer. With regards to the year we have high confidence in the year and of course for this quarter.

Timothy Arcuri - Citigroup

Okay. I guess my second question is you laid out what the capital requirements are for the first half of this year but what would you guide CapEx for all of fiscal ’09?

Michael El-Hillow

For the remainder of ’09 we are looking at about another $10 million. This will go down substantially.

Timothy Arcuri - Citigroup

Okay. And then I guess last thing, you gave the capacity numbers for the first half of ’09 from Devens. I would assume that you are going to be under producing during the first half of ’09, so what sort of utilization can we expect relative to that capacity number that you gave for Devens in the first half of ’09?

Michael El-Hillow

I am not sure what you mean by under producing. As we sit right here today we believe we will be able to sell what we can produce and so we are trying to ramp up about as fast as you can ramp appropriate to this complexity and magnitude. So we are targeting to build 16 or 17 MW this quarter. We plan about doubling that next quarter as we get the entire equivalent. Right now, when we just think about what is happening we took beneficial occupancy in the Phase II facility just this Christmas time and we are moving equipment in. The Phase II equipment is being installed as we speak.

As I said, we put 40 furnaces in Phase II; we are starting to put screen printers in, acid ex lines, fusion machines, silicon nitrite machines and robotic, etc, etc. We will be installing that equipment this quarter as we are ramping up Phase I still and then next quarter we will be ramping up Phase II so we are ramping about as fast as you can ramp a facility of that magnitude. We are consciously holding back. We will produce less in those numbers as sales soften but right now, we are producing this as fast as we can. We think we can sell what we can produce.

Timothy Arcuri - Citigroup

Okay, I guess just last thing, can you give us the silicon consumption number out of Devens initially?

Michael El-Hillow

We are not going to be talking about that now, Tim. We will probably give more detail. We are going to have an Analyst Meeting some time in the spring. We will give much more detail there about silicon consumption.

Operator

Your next question comes from the line of Pearce Hammond, Jr. - Simmons & Company International.

Pearce Hammond, Jr. - Simmons & Company International

Terry, if you would not mind to give us an overview of the global market as you see it in Q1, what areas are a little stronger than expected? What is a little weaker? Just what you are seeing out there?

Terry Bailey

So, as Rich said, the primary area of weakness, forget which geographical markets, have to do with large projects which are not already financed. So until those can be financed and then orders for panels and all the other equipment has been laid out. So that has been generically a slowdown directly as a result of the financing available in the capital markets. Actually the residential side of the business is going pretty well. So let us pick up some of the slack. From a geographical viewpoint, Q1 is always low generically in Europe, especially in Germany because of snow on the ground and because of warehouses being full and gradually moving out and our contact with our customers is that that inventory and warehouses had started to move out and so, we are beginning to see the normal pick up as the quarter goes on.

Clearly, there have been some significant changes in positions in Italy and France and now in Greece that are causing a lot of interest and a lot of available projects in the pipeline there that are coming to fruition. Some are financed and some will wait until the capital availability becomes clearer. Japan is known, we expect it to ramp up pretty nicely this year and those are the primary ones. The US was waiting to see who got elected and having known that, are now waiting to see what the outcome of the negotiations are from the House and the Senate on the details of the bill and how much money will be made available to fund that but generally speaking, we are expecting that the whole pile will move and that the later half of Q2 and Q3 is going to look very promising.

Pearce Hammond, Jr. - Simmons & Company International

Thank you and then Rich if you can provide some more color on the patents that you filed that will drive the efficiency of one full percentage point to 16.5%?

Richard Feld

Well, actually we think they will issue later this year. We are actually going to present a paper in a few months on that. So, without going to a lot of detail, we have a unique way of laying down a number of thin metal strips which is very clever and very inexpensive way of doing it. It is really great boon for cell efficiency.

Pearce Hammond, Jr. - Simmons & Company International

And then one final housekeeping question for Mike, the line of credit, the $40 million for Silicon Valley, is that is still in place?

Michael El-Hillow

It is still in place, Pearce but the situation is that it requires a minimum cash balance of about $80 million and so we are talking with our banking consortium to have a relaxation there and given that Devens is coming at the full capacity and we will start generating EBITDA and cash flow, we are sure we will be able to get that done in the near term.

Operator

Your next question comes from the line of Michael Horwitz - Stanford Group Company.

Michael Horwitz - Stanford Group Company

Can you just give me an idea, obviously the Senate, they are all going to go back and forth in DC but there is a couple of things in that about US manufacturing facilities and some tax benefits that will likely go through, in what kind of way are you working on quantifying what benefit you maybe able to get out of this, given that you do have so much factory capacity being built in the US both on the streamside and on your Devens facility?

Richard Feld

First of all, it is really hard to handicap what actually will get passed. As you know Michael, things have continue to change in that bill quite a bit. So, it is really is not clear to us. Remember, we have pretty much sold Devens out so in order for us to get a direct benefit, we have to probably put in more capacity in the US and get it subsidized because we have already pretty much sold out Devens, right?

Michael Horwitz - Stanford Group Company

In terms of the future of the company, maybe in some of the better alternatives that you have discussed, what would R&D look like at this time over the next few years? Does that change significantly?

Michael El-Hillow

It does not change significantly, no. We are spending $25-ish million, $26 million in the year right now. We would expect as revenues increase that we will increase R&D gradually because there are a lot of things to work on but it will not change dramatically. I mean let us face it, as the percent of sales, we way overspent most companies because we have lot of technology to develop and very small sales but as sales start to grow to commercial size, we will keep R&D in sort of the normal commercial range. So the 25 can go to 30 and so 35 over time but it will not double, triple. We will keep it in 4-ish, three to four, five depending on what is going on percent of sales over time.

Operator

Your next question comes from the line of Patrick Guiltlea - Jefferies & Co.

Paul Clegg - Jefferies & Co.

Hey, you actually got Paul Clegg on the line here. How much of the hit did you have to take on the 4 MW of redeployed modules on pricing that is, relative to what they were contracted at?

Richard Feld

There was not a hit. It was at the plant pricing.

Paul Clegg - Jefferies & Co.

Okay, great and can you maybe talk a little bit more about the subcontractor model? Physically, is there anything that the subcontractor would need to do differently to adapt to your cell structure, I mean the fact that your wafers are thinner and somewhat in a different format?

Richard Feld

In big picture, broad picture, no. One of the reasons that we have looked at going to Asia and we talked about this when the capital markets were different, we would be going to Asia ourself is that we would be trading capital for lower cost labor so our expectation was we would spend less on automation and therefore have lower capital cost that is why our CapEx go down to about $1.50 a watt. So, I mean the limit, there might be a few things but not a lot, no.

Paul Clegg - Jefferies & Co.

Can, if I may, a couple of balance sheet questions here? Restricted cash balances, what is in there? Do you ever see that again and then on the VAT receivables, is that something that is likely to be paid off soon?

Michael El-Hillow

The VAT is certainly not going to be a problem. The restricted cash, it is a very small amount. We had it last year but it is now the least. So, most of our cash are not restricted..

Paul Clegg - Jefferies & Co.

Okay and CapEx and depreciation for the quarter and then I will jump off.

Michael El-Hillow

Let me submit it to you separately if I could.

Operator

Your next question comes from the line of Mark Bachman - Pacific Crest Securities.

Mark Bachman - Pacific Crest Securities

Question here, longer term, how do we think about your business model? It sounds like from what we heard today that you are transforming your company from what I would say is, from an integrated module manufacturer to more of just a wafer company and I realized that Evergreen itself here is going to have enough capacity to fill the contracts in 2009 and 2010 but what I am really looking at is really what happens beyond 2011.

Richard Feld

Well, I would not characterize it as a fundamental transformation. We said all along that we have a real advantage in making wafers and that we are competitive with cells and panels and in order to really be a leader, we have to go to really into the world where the leaders are. So that is Asia and we said for quite some time that we would end up doing some manufacturing in Asia because we have this unique capability in making wafers and in Asia there is no unique type of capability. It is really sort of judicious tradeoff of low cost labor and capital dollars.

So whether we do that organically or whether we do that in contract with a subcontractor, I would not characterize that as a fundamental transformation, maybe a much more effective use of capitals as long as we can strike the right deal but it is not really a transformation. We will continue to work hard in making wafers at lower cost and we are a real leader there and we are pretty much a fast follower or we can be as competitive as the next company inorganically or through subcontracting. So, I am not sure if that exactly answers your question but, but because I do not feel it as a real substantial change. It is just a different way of executing the same strategy which says take advantage of our wafer capability and make sure that we are very competitive with best in breed in cells and panels.

Mark Bachman - Pacific Crest Securities

Okay, I guess most, I would definitely under the impression I would say that most of your investors were tuned at that the idea to grow the company that you would be building out, not only wafering but cell and module manufacturing over in Asia and to that point I guess, is this idea of using contract manufacturing then your new direction? Is it a done deal, and its just a matter of timing at this point?

Richard Feld

Well, it was a done deal. We would actually have a deal to announce,so I cannot say it is a done deal but we have a lot of interest, we are interested in a number of subcontract manufacturers who are interested. So, to that extent, we have a fair amount of confidence that we will end up coming up with something that makes a lot of sense but we do not have a deal yet.

Mark Bachman - Pacific Crest Securities

Okay and then, let us just for the sake of argument to assume that maybe the capital markets come back, do you think that this because the Evergreen's wafering capabilities here that it might make you a more attractive takeout? Does that that type of scenario enter into your decision here to explore this contract manufacturing?

Richard Feld

Well, we do not really think about what we are going to do so that we potentially can be taken out. We do focus on what we can do to grow the business and add value. So, I would not characterize that wya. What I would say, we will continue to look for the most effective ways of growing and taking advantage of our strengths and either partnering, if someone else can provide the cell and panel operations more effectively than us. If we can do it organically, more effectively then anyone else in the world will do that but it is not good that we will be the best of breed in all products and processes. We said all along that we will be the best of breeds in wafers and that we would be very competitive with cell and panel. One good way of doing it would be to go to a subcontract manufacturer who have some capabilities or have some match. Because they are bigger, they can help with material costs.

As you know, the electronic industry, whether it be television sets or PCs or iPods, is the very typical way of manufacturing product and so now that is where we are looking at.

Michael El-Hillow

One last and Rick has been talking about it, just a point of clarity and that is for the last six months, one of the major concern is R&D, to raise $800 million to build this next factory and we have said all along that our strength is wafers, the string ribbon and we are going to prove that viability and we are going to attract people to want to partner with us. The Company has not decided on what they are going to do, we want to point out we have significant flexibility to take advantage of whatever we want to do at any capital structure level and so that is one of the reasons why we put that out there today and as Rick said, people are coming to us and finding it very, very attractive because what we do is unique. We use half of the amount of silicon for whatever it is worth and we are less than 5 grams a log now and we will not give the specific numbers but less than 5 grams per watt.

So, there will be more to talk about later on but please do understand that this overriding concern that we have to raise $800 million to meet our ongoing expansion is not the game plan directly right now. We have flexibility.

Richard Feld

Perfect, Mike. That is exactly what I just wrote down here. So I appreciate that answer. I mean you just took that concern off the table.

Mark Bachman - Pacific Crest Securities

Lastly, I just want to ask is, has there been any change then in your idea about possibly licensing your IP then to other people?

Richard Feld

No, no real change. What we have been saying for some time is that if we get dozens up and going by the middle, in the second or third quarter, and if it is running as we expect it will and there is every indication that it will, that we would be then much more amenable to discussing licensing opportunities. Because we said all along, even though our costs were low, Gemini being the first generation of technology was more manual and operational than we want it to be, quad has proven to be as we advertised we thought it would. That is pretty much hands off. So once it is really optimized then we will entertain that, yes, but we have nothing in that regard right now.

Operator

Your next question comes from the line of Michael Carboy - Signal Hill Group LLC.

Michael Carboy - Signal Hill Group LLC

Couple of questions surrounding this whole issue of potential outsourcing and subcontracting. First off to your contracts with your end customers, I am presuming there are no restrictions in those contracts that prohibit you from outsourcing some of the downstream operations, is that correct?

Richard Feld

No, we just have to ensure that the quality specifications and warranty requirements were all met and we would do that. I mean, this is not a way of cheapening anything. It is just a way of reducing costs and we think in a very judicious manner.

Michael Carboy - Signal Hill Group LLC

To the extent that you do go down this path, will you have to have those contract manufacturers, will they have to go get their own safety approvals on these manufactured panels or those are done under an overall design program that you will submit to UV or UL or whatever it might be?

Terry Bailey

So, any time you go to a new factory, you have to get certification specific to that factory but assuming the designs are identical, materials are identical then there is an easy thing to go and do.

Michael Carboy - Signal Hill Group LLC

And then in building out Devens, I seem to recall there were some tax benefits that Evergreen had received from the State to sort of incentivize the Company to create the manufacturing operation there in Massachusetts. Are there any potential consequences arising from the outsourcing with regard to those tax benefits?

Richard Feld

No, we start to deal with the State that we’re honoring and it was really around how many people we would be employ. So, we will end up employing substantially more people because the factory is larger than our minimum permit to the State was now.

Michael Carboy - Signal Hill Group LLC

Great and then the last question for Mike, on the inventory write down associated with the closure of the older facility, I presume that was just work in process that was written down.

Michael El-Hillow

No, actually there is some, I will say raw materials that were written down mainly because in Devens, we make a little bit different product, this was model of (inaudible) pilot materials.

Operator

Your next question comes from the line of Stephen Chin - UBS.

Analyst for Stephen Chin - UBS

Hi. This is Omar Zaman calling in for Stephen Chin. The questions, firstly, are you renegotiating lower poly prices with your poly suppliers at this time and then I have a follow up?

Richard Feld

Well, like everyone as the price of poly drops, we are going to our suppliers and saying“Look it is dropping.” We are going to ask you for concession so that we end up remaining competitive and that is how I would describe it.

Omar Zaman - UBS

So you are having those conversations?

Richard Feld

Sure.

Omar Zaman - UBS

And then, given your guidance for first quarter, I wanted to know if you will be taking less poly in Q1 2009 as it was in Q4 2008 from your supplier?

Richard Feld

Taking less poly?

Omar Zaman - UBS

Yes.

Richard Feld

No, we will be taking more poly.

Michael El-Hillow

Our output going to be double.

Omar Zaman - UBS

So, we should not expect the inventories of poly to go down?

Richard Feld

No. The inventories, we will take first watch our inventory levels. There will be inventory levels will be commensurate with the production levels.

Omar Zaman - UBS

Okay and then just one final question, what is your thinking on the IPO for (inaudible?

Richard Feld

Well, until there is an improvement in the capital markets, there is really not an opportunity for any company to IPO whether it is Solar or anything. So we do not have, there is not too much we can say about that until the whole market is clear.

Operator

Your next question comes from the line of Robert Stone - Cowen & Company.