Energy Conversion Devices Inc. F2Q09 (Qtr End 12/31/08) Earnings Call Transcript

Executives

Mark Trinske – Vice President, Investor Relations and Corporate Communications

Mark Morelli – President and Chief Executive Officer

Harry Zike – Vice President and Chief Financial Officer

Analysts

Sanjay Shrestha – Lazard Capital Markets

Paul Clegg – Jefferies & Co.

Steve O'Rourke – Deutsche Bank

Stephen Chin – UBS

Rob Stone – Cowen and Company

Colin Rusch – Broadpoint AmTech

Brian Gamble – Simmons & Company

Satya Kumar – Credit Suisse

Jesse Pichel – Piper Jaffray

Adam Krop – Ardour Capital Investments

Timothy Arcuri – Citigroup

Al Kaschalk – Wedbush Morgan Securities Inc.

Kelly Dougherty – Macquarie Research Equities

Energy Conversion Devices Inc. (ENER) F2Q09 Earnings Call February 9, 2009 10:00 AM ET

Operator

Welcome to Energy Conversion Devices conference call to discuss the company’s second quarter fiscal year 2009 financial results. (Operator Instructions) I would now like to turn the call over to Mr. Mark Trinske, Vice President of Investor Relations and Corporate Communications. Please go ahead, sir.

Mark Trinske

Thank you for joining us on our second quarter earnings call. Participating on this call are Mark Morelli, our President and CEO, and Harry Zike, Vice President and Chief Financial Officer.

This morning's presentation will include the use of several slides, which will be on our webcast. We will be controlling the advancement of the slides and providing commentary on each. A downloadable copy of the slide presentation and our second quarter earnings press release are available on our website at www.ovonic.com. Today's call will also be archived on our website. A special note for those who are participating via the conference call today, we ask that you please select the no audio slides only link when prompted during your webcast registration. This will allow conference call participants to view slides in sync with the audio.

I’d like to remind you that today’s following discussion may contain forward-looking statements within the meaning of SEC Safe Harbor provisions. Such statements are based on assumptions, which ECD as of the date of this call, believes to be reasonable and appropriate. We caution you that the facts and conditions that may exist in the future could vary materially from those upon which these statements are based today. Please review the risk factors identified in the ECD filings with the SEC, including our most recent 10-Q, which will be filed later today.

Now, I would like to turn the call over to Mark Morelli. Mark?

Mark Morelli

Please turn to slide three. As you can see from this slide and our earnings release, we had another successful quarter of growth and profitability despite global economic headwinds. Let me review a few key points. Total revenues in solar product sales nearly doubled from the prior year. Solar gross margins rose above 35% driven by an average selling price of $2.99 per watt and multiple operational improvements that increased productivity and reduced cost.

Our cumulative operating cash flow for the first six months of the fiscal year was approximately $37 million, which is approximately six times higher than last years comparative figure, and second quarter earnings per share increased 14% from the first quarter and reflected our fourth consecutive quarter of profitability.

Please turn to slide four. In addition of being another quarter of growth and profitability, the second quarter also validates our business model. We continue to be a global leader in rooftop solar PV by successfully matching UNI-SOLAR’s value proposition of flexibility, durability and lightweight with our targeted markets, commercial rooftops and building integrated installations.

Because of ongoing focus on operational excellence, we continue to improve our yields, throughput and uptime, which is having a direct positive effect on our gross margin. We also continue to focus on reducing our cost structure.

CapEx per watt is coming down as we implement significant engineering and design enhancements introducing new capital equipment suppliers and getting further negotiating leverage as we increase our production volumes, and we’re making steady progress and reduce our manufacturing cost per watt by increasing productivity and lowering material costs.

While the current economic uncertainty is creating challenges, it also creates opportunities and we are well positioned to take advantage of those opportunities. We continue to see strength in Europe, particularly Italy and France, and also improving access to capital in Germany, and the United States represents a significant upside opportunity for us. According to the Solar Energy Industries Association, if the House/Senate Conference recommendations are enacted, the provisions will deploy 1GW of solar power in 2009 and more than 2GWs in 2010.

There are still some details that need to be worked out in the final legislation, but we believe the outcome will be advantageous to or industry. Also, President Obama has suggested that the government adopt a national goal of generating 10% of electricity from renewable sources by 2012 and 25% by 2025.

These efforts by the federal government are in addition to solar PV incentives that are already being offered by municipalities and states, including California, New Jersey and Colorado in the form of renewable portfolio standards and other incentive programs.

As an example, last week Michigan, supported by Governor Granholm, announced legislation proposes a feed-in tariff favoring rooftop systems. Clearly, this is a great opportunity in our own backyard. In summary, we believe that U.S. demand is set to increase substantially in the coming years and we believe we are well positioned to take advantage of the growing U.S. market for solar PV.

Please turn to slide five. Our long-term growth strategy remains unchanged, but we are not immune from the challenges of today’s marketplace and, therefore, we are shifting our near-term strategy from demand management to demand creation. The biggest challenge facing our customers today isn’t the cost of our solar laminates its securing financing for projects.

But even in the current credit crisis, good deals are getting done and since we’ve established our credibility with more than ten years of field tested insulations of PV laminates on commercial rooftops, lenders see UNI-SOLAR products as forming the foundation of a bankable PV system on rooftops.

In response to the change environment, we are more aggressively managing our sales pipeline by signing deals with large financially stable customers and partners. A recent example is the agreement with Carlisle, and we are also making sure that our customers and distribution partners fully understand the range of UNI-SOLAR’s value proposition to help them in their own selling efforts.

We have created a new structure for our sales and marketing organization both in Europe and the U.S. We can now localize our efforts so that we can better work with our global customer base and focus on projects that make sense.

Please turn to slide six. Our second quarter results underscore our strong presence in Europe, which represented a full 74% of our global PV sales. We are seeing particular strength in France and Italy because these countries offer the highest incentives for rooftop and building integrating insulations, which is our sweet spot.

Sales in North America decreased slightly as a percentage of overall product sales in the quarter compared to fiscal 2008, but actually increased in dollar terms. We believe the United States will be one of the fastest growing markets in the world for the next five years and we have a specific three-part strategy to increase our sales in the U.S. market.

Please turn to slide seven. As a U.S. based company whose primary manufacturing facilities are located in Michigan, we are well poised to serve the U.S. market. For the last year and a half, our focus has been predominately on Europe where attractive Terasen incentives, particularly for rooftop and building integrated applications, help fuel demand. But we are aggressively rolling out a more robust U.S. strategy.

First, we’re continuing to target the U.S. commercial market for the same reasons that we target commercial buildings in Europe. Second, we are expanding into the residential rooftop market and are developing solar PV products with CertainTeed in which our technology is integrated into the roofing material. And finally, we are targeting utilities with a turnkey solution comprised of distributors, installers, financiers and in some cases third-party building owners.

We have a dedicated team within our sales and marketing organization to focus on this segment and we are already in discussions with potential customers. Because of our presence in the United States and our many field proven installations, we’re in a unique position to execute on this strategy.

Please turn to slide eight. This chart shows our sales by distribution channel. We provided versions of this chart before, but I wanted to show it again because our unique distribution channels are essential to our ability to sustain ASPs in gross margins. Approximately half of our second quarter solar product sales are to the building materials channel in which we have a strong leadership position.

Using UNI-SOLAR laminates on the rooftop, the building materials companies can offer our product at a competitive cost per watt in projects that realize attractive returns. In this channel rooftop PV represents a valuable up-sell. The building materials channel has a demonstrated competency on the roof and are the experts in roofing products and processes and they quickly grasp UNI-SOLAR’s unique value proposition.

About 70% of our solar product sales are in building integrated applications. We define BIPV as an application where our laminate is part of the roof, either installed in the field as part of the roof or the roofing material comes from the factory with our laminates already integrated.

Italy, France and the United States have extra financial incentives for this solution. However, all markets can benefit from UNI-SOLAR products because they are lightweight, easier to install, require no roof penetrations and are excellent in high winds.

Please turn to slide nine. This slide shows a 100KW BIPV installation of UNI-SOLAR laminates, which were bonded directly onto a standing seam metal roof of the Phoenix Convention Center. They preferred the thin film UNI-SOLAR laminates because they were easier to install and offered a lightweight alternative for mounting on this weight-constrained roof.

Please turn to slide ten. This 2.4MW project in Germany was installed on the roof of a Volkswagen facility. This system is lightweight, easily removable and does not penetrate the roof, which were major requirements for this customer. The installation was completed in November 2008 in just six weeks and the system has been generating power since December. This installation represents the kind of commercial roof activity we believe will continue in Europe where we can bring installation and financing partners together.

Please turn to the next slide. This photo shows a 300KW BIPV system atop the multi-billion Riverbend Elementary School near Sacramento. It is one of several UNI-SOLAR installations for schools in the state. The Yuba City School District chose UNI-SOLAR because it integrated into the roof and required no penetrations. This is just one example of the tens of thousands of federal, state and municipal government buildings around the country that represent a major opportunity for the growth of rooftop solar PV.

As of today, our solar pipeline is approximately $2.4 billion. There is risk to the pipeline based on what is happening in the economy. As we've told you, we are managing this risk by closely monitoring our customer’s needs and reallocating volumes where possible. We're also signing agreements with large high quality and financially stable customers and partners.

Please turn to slide 12. Our focus on operational excellence continued to produce great results. Let me review some specific achievements that helped drive our performance in the second quarter. We decreased the changeover time on all of our deposition lines by 40%. In the first quarter, we rebuilt our first generation deposition machine in Auburn Hills, which generated 12% improvement in yields in the second quarter.

We also made a change in our cell lines that drove 6% greater throughput and capacity. We are currently incorporating this change across all of our existing cell lines. In our Greenville II facility, we ramped a new deposition line two months ahead of schedule, and the yield uptime in deposition speeds also exceeded our original expectations. We will continue to realize additional material cost savings by bringing on new suppliers and leveraging the recent decline in the price of many commodities.

Please turn to slide 13. We produced 34MW in the second quarter, up from the 31MW in the first quarter, and more than twice last year's second quarter production. Let me take a minute to discuss our expansion plans.

We continue to make headway toward our stated goal of reaching 1GW with annual production capacity. Despite near-term uncertainties, we believe the long-term global outlook for UNI-SOLAR products remains strong, and we're building this company for the long-term.

Under the current economic circumstances, we've adjusted our expansion by eliminating overtime during the construction of our Battle Creek plan. But this should not impact our overall expansion plan, as we believe we can replicate this pace at our Greenville II ramp at Battle Creek. We remain firmly committed to the concept of demand driven expansion, and we will continue to balance our expansion plans with economic conditions.

Now, our Chief Financial Officer, Harry Zike, will provide a review of the financials. Harry?

Harry Zike

Please turn to slide 14. We had a very good performance in the second quarter and first half of fiscal 2009. Most notably, we surpassed $100 million in total revenues, which was an 83% improvement over last year's second quarter. Year-to-date revenues increased 92% to approximately $199 million. We continue to grow the company, even in the face of these economic headwinds.

Please turn to slide 15. Results for the first half of fiscal 2009, which ended December 31, 2008, show our continued progress in growing net income and net operating cash flow. Net income was approximately $27 million, as compared to a loss of $13 million for the same period last year. Net operating cash flow rose to approximately $37 million, a six-fold increase from the same period in the prior year.

Changes in working capital declined due to an increase in accounts receivable and inventory, partially offset by an increase in accounts payable. Accounts receivable increased due to delayed receipt of certain customer payments. Inventory grew as throughput in Greenville was higher than planned, and we took advantage of certain lower pricing to build raw material stock. As we previously mentioned, we produced 34MW of finished product and sold 32.5.

We invested more than $100 million in property plant and equipment in the first half of 2009 as part of our ongoing expansion plan. As of December 31, 2008, we had additional commitments for about $70 million of capital equipment. Depreciation expense was approximately $15 million for the first half of the fiscal year. In total, we ended December with a healthy $468 million in cash, short and long-term investments, a substantial portion of which is held in U.S. government-backed securities.

Please turn to slide 16. Turning now to our United Solar Operating segment, we sold $97.3 million of solar products in the second quarter, which was a 9% improvement over the $89.5 million we sold in the first quarter, and almost double the $49.7 million we sold in the second quarter of fiscal 2008.

Due to the reasons Mark previously mentioned, we also grew our solar gross margin to 35.2% in the second quarter up nearly two points from the first quarter's 33.4%, and significantly higher than the 19.2% from last year's second quarter. We anticipate solar gross margins will be in the mid-30% range for the fiscal year.

Please turn to slide 17. Let me also touch briefly on Ovonic Materials, which comprises our license and royalty business, nickel hydroxide product sales and other non-solar technologies. Revenues were lower year-over-year due to lower volume and lower nickel prices on our nickel hydroxide product sales. Royalties and other revenues were essentially unchanged.

The results for the quarter included a catch-up royalty payment of approximately $200,000, nevertheless, operating income more than doubled year-on-year primarily reflecting the results of restructuring. Please remember that royalty income is uneven and is dependent upon consumer demand.

Please turn to slide 18. Our strong financial position remains an important differentiator for us in this market. Our entire sector is facing headwinds and we are already seeing weaker companies struggling to move forward. That is not the case with ECD.

We have a strong balance sheet with about $468 million in cash and short and long-term investments. We generated about $37 million in net operating cash flow in the first half of the year despite the increase in working capital. We have approximately $300 million in tax net operating loss carryforwards where we are now on a path to utilization.

There are several advantages to our strong financial position. First and foremost, customers, suppliers and partners can be confident in doing business with us. Second, we have a strong capital base, which provides the foundation for our growth plans. And last but not least, this financial strength enables us to weather this stormy economic period.

I'll now turn the call back to Mark.

Mark Morelli

Please turn to slide 19. Make no mistake, our business model remains intact. We have a differentiated product, and we're successfully selling that product into the markets and channels that most value it and we continue to grow our solar pipeline.

That said, the global markets are a challenge for the entire solar PV sector and that includes us. The most challenging factor remains customer access to project financing. We are working hard to help our customers find financing, as I discussed. But in the near-term, it can be difficult to predict when projects are launched, which makes forecasting our future performance a bit more complicated. Therefore, we believe the prudent course of action is to take a more conservative view with our guidance for the remainder of fiscal 2009.

For the fiscal third quarter ending March 31st, we’re anticipating total revenues of $95 to $110 million of which solar product sales are likely to be $90 to $105 million. Gross margin on solar product sales are expected to be 34% to 35% and consolidated gross margin is expected to be approximately 35%. Preproduction costs are expected to be between $1.5 and $2 million.

For the full 2009 fiscal year, we’re expecting total revenues to be between $395 and $440 million of which solar product sales will represent $375 to $410 million. Gross margin on solar product sales are expected to be between 34% and 35% and consolidated gross margin is expected to be approximately 35%. Finally, full year preproduction guidance is unchanged at $7 to $9 million.

Please turn to slide 20. Before we take questions, I wanted to share with you the reasons why I believe ECD will emerge as the long-term winner in the global solar PV industry. We have a demonstrated track record of growth and financial performance even in the face of a challenging economy. Our UNI-SOLAR laminates have a proven differentiated value proposition, which makes them the foundation of a bankable PV solution for rooftops.

Our ongoing focus on operational excellence is generating higher productivity and reducing costs. We are effectively managing through the current headwinds using a demand creation strategy and finally our strong balance sheet enables us to, not only weather the short-term challenges, but actually extend our lead so that we’ll even be better positioned in the future.

Harry and I will now be happy to answer questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Sanjay Shrestha – Lazard Capital Markets

Sanjay Shrestha – Lazard Capital Markets

Couple of quick questions here: You guys talked about the pipeline growing by about $400 million on a sequential basis and at the same time we’ve got this big credit crunch happening in the environment. So can you go into that in terms of some more detail as to one, what segment of the market that’s coming from and what type of customer they are and how confident you feel about that? So can you talk about that in a little more detail?

Mark Morelli

Yes. As we indicated, we have seen some risk in our pipeline. However, we do add new players to the pipeline in particular the one we just added with Carlisle was our focus on the U.S. market. We think it is an excellent high quality player in the market that will help us. They’ve got hundreds of salespeople and thousands of contractors focused on the commercial building segment.

We’ve also signed a few smaller deals, actually even a take or pay agreement last week that was in Europe. So we do see pockets of activity out there that we think bodes well for the longer term. I think clearly the near-term issues make things a bit more cloudy but we think our guidance is responsible here.

Sanjay Shrestha – Lazard Capital Markets

I know, Mark, you mentioned some of this, but can you go through some more detail as to where exactly are you getting the cost reduction from? You said that the higher throughput and things like that. Can you go through some more detail how much of that is raw material, how much is throughput and sort of walk us through that value demand driven cost reduction even before you get the volume benefit.

Mark Morelli

Well we think our focus on operating excellence is really paying off. We see a number of areas where we’ve really gained some great traction, namely our ramps in Greenville II have just gone very well. I think that bodes well for our flexibility for our growth to 1GW, but more importantly we’re getting the direct benefit of the costs at the bottom line. We also see great opportunities for material productivity in the terms of utilization of materials, as well as negotiation with suppliers, as well as a great runway on yield, as well.

Sanjay Shrestha – Lazard Capital Markets

One last question, then I’ll hop back in the queue. In terms of the range that you guys have for the full year fiscal ’09, is that reflective of just in case things don’t come back in the calendar second quarter 2009 and credit is not available and that’s why it’s the low end of the range, but if things sort of get slightly better then you’re at the high end of the range basically.

Mark Morelli

If you’ve noticed, we’ve broadened our range a bit. The situation in the market is a bit cloudy. We think it is important to offer guidance here and not to just merely say that we are not able to provide guidance. We’re trying to establish a track record of providing responsible guidance and meeting that guidance accordingly.

We do see that there are opportunities where projects continue to go through. Even large projects go through with the right financing partners with the right suppliers and we think we are part of that with a bankable PV solution. However, things are sluggish. They are slower than they certainly were last year and we are providing a fairly wide range to be able to take that into account.

Operator

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

Paul Clegg – Jefferies & Co.

Your reduction in full year guidance how much of that comes from reductions in volumes versus what you were previously expecting rather than in pricing versus what you were previously expecting? And I have a follow-up.

Harry Zike

The reduction in the guidance is primarily, as Mark said before, reflects a little bit of cloudiness that we see on projects and when those projects will actually close whether it be in Q3 or Q4. So what we see, Paul, from our side most of that comes from the volume side.

Paul Clegg – Jefferies & Co.

Are you seeing pushback on pricing customers coming back to you saying crystal and silicon modules have gotten cheaper and cheaper and that gap has kind of narrowed with between you are and some of your competitors? The customer’s looking for a break?

Harry Zike

Well, certainly we are in a recessionary time and it’s normal in recessionary times to ask for pricing concessions. We see the primary issue that where things may be more sluggish is because of the access to project financing. We do have some normal price downs in our contracts. What you have seen so far in our fiscal year, we’ve been pretty flat and we guided the flat gross margins around the $3 per watt range and, as you can see, we’ve hit that. However, starting January 1st, we’ve had these contractual price downs. We see for the balance of the fiscal year, low single-digit price declines.

Operator

Your next question comes from Steve O’Rourke – Deutsche Bank

Steve O'Rourke – Deutsche Bank

Couple of questions here, first, could you help us quantify things like postponements that you’re seen from customers out there and maybe comment a bit by geography and how many customers it might have been?

Mark Morelli

Well we have seen a couple folks not have projects go through, so as a consequence that may be a postponement in your classification of the word. At the same time, we’re pretty bullish on the long-term and we think those projects will ultimately be freed up.

It’s a very interesting dynamic in the market today because last year it seemed like you developed a project and it would almost immediately get financed. This year banks are much more discerning. While the PV projects offer attractive financial returns, it’s very important that all the players are the right players. The good news is that we’ve got a bankable PV solution where the banks are quite active to do business with us, but it’s taking us a little bit longer to maybe line those things up as it has in the past.

Steve O'Rourke – Deutsche Bank

Harry, you made a comment in your prepared remarks about delayed receipt of certain customer payments. Could you elaborate a bit on that? Just sort of give us a little background on it and what it means going forward.

Harry Zike

It’s tied to the working capital change that I talked about where we did grow working capital. Certain of our customers at the end of the quarter didn’t make their payments on time to meet our cutoff and those payments came in sometime in January. So we did have some late payments come through.

Steve O'Rourke – Deutsche Bank

So this is not something we should expect to continue or get worse going out to the next quarter or two?

Harry Zike

Well, we anticipate it and we have terms and conditions with all of our customers and we anticipate they’re going to be paying on time. I think sometimes at a quarter-end when you have a cutoff, especially around a holiday period, things just don’t happen to hit on time.

Operator

Your next questions comes from Stephen Chin – UBS

Stephen Chin – UBS

I wanted to see if you could elaborate more, Mark, on the push into the utility market. How many utility projects are you working on now, and do you expect any utility customers to be added into the sales pipeline or backlog in calendar 2009?

Mark Morelli

We think that the utility market in the U.S. represents a very good opportunity. It’s quite early, as you can see a lot of activity in Washington may also spur some further growth here in the U.S. markets, particularly utilities. The utilities that we have the most interest in are ones that are looking for distributed power generation, which is a very good solution for our rooftop PV solutions.

We have made some investments both in terms of resources and we’ve worked out some business models so we’re currently in conversations with folks, and we’ll update you accordingly as we have more news as it develops.

Operator

Your next question comes from Rob Stone – Cowen and Company.

Rob Stone – Cowen and Company

I wonder if you could just provide any color with the increase in your pipeline, what is your coverage for fiscal 2010, and there is any way you can quantify what you anticipate is the risk over the next six quarters or so?

Mark Morelli

Well we have more visibility clearly in the shorter term. In the longer term, we remain quite bullish. The coverage that we’ve got we think is actually reflected in the widened range of guidance that we’ve offered.

We do see great activity in Italy and France with the rooftops systems in particular the BIPV feed-in tariffs are working quite well. We’re also very optimistic that the U.S. market, particularly for rooftops, will also grow quite appreciably. So we think that the right way to look at is that we’re offering the guidance within that range and we think we can cover that range accordingly.

Rob Stone – Cowen and Company

Actually I wasn’t talking about the period which you’ve given guidance, I’m more interested in fiscal 2010 you will have a significant increase in manufacturing capacity. I’m just wondering approximately how much of your anticipated increase in production is covered by backlog so far for the next fiscal year?

Mark Morelli

Rob, we have not guided to a specific number there. I think maybe you’ve heard us talk about those some in the past. I think one indication is that our pipeline overall has grown. We have indicated the risk. We’re very bullish on the longer term. Our business model of demand driven expansion is clearly intact here.

We look at this on a weekly basis and we evaluate exactly where we are. The fact that we’re actually improving on the operating front where we improved our installation times and we improved our ramps, actually gives us even greater flexibility. So we see that 1GW intact, but we’re going to make decisions as we go forward. And I think the issue is what happens in the next three to six months is mostly the issue that we’re concerned about.

Rob Stone – Cowen and Company

Have you made a decision about releasing the equipment orders for Battle Creek?

Mark Morelli

We have spent some money on Battle Creek, actually only about $10,000,000. But once again we look at that weekly. Given the fact that we’ve been able to shrink some of our lead times here, has certainly improved our flexibility and we’re going to make the right decisions for the business. Once again it’s demand driven expansion.

Rob Stone – Cowen and Company

And can you provide any color on what raw material it was that you opportunistically contributed to the increased inventory?

Harry Zike

Rob, it’s Harry. There are a certain number of raw materials, most of them dealt with Indium in the gas side and some polymers.

Operator

Your next question comes from Colin Rusch – Broadpoint AmTech.

Colin Rusch – Broadpoint AmTech

Can you talk a little bit in more detail about the number of finance partners you’re working with and downstream players to serve the utility markets in the U.S.? And, as well, how many finance partners are you working with in Europe?

Mark Morelli

Colin, we’ve got a number of folks that we work with, particularly in the U.S. We’ve seen Wells Fargo, JP Morgan Chase, HSH, all quite actively in the financing side, but we’re not going to disclose the utility partners for competitive reasons. In Europe, we see great activities from both local banks for smaller size projects being involved both in Italy, France and in Germany. And the good news in Europe is that we see some, particularly in the case of Germany, some larger projects also moving forward, being financed.

We have a project right now going forward in Europe where we have multiple financing partners on it so we’re somewhat consciously optimistic that the financial situation will improve. But once again, we just have to watch this week by week.

Colin Rusch – Broadpoint AmTech

And can you talk a little bit about the length of sales cycle? How much has it increased with these projects and what’s your expectation going forward?

Mark Morelli

The self-cycle has been pushed out. That’s really the difficult thing to tell because, even though a project might be in the works, it’s very difficult for us to ascertain when that project will come in. I think that’s reflected in the expanding guidance that we’re showing.

There are really two issues here that we have to work on to help us. One is both sales efficiency because are we really work on the right projects and help pushing through the right projects, and the other is in the area of demand creation. We’ve got this bankable PV solution but we’ve deployed resources to more effective with our channel partners to help free those projects up accordingly.

Colin Rusch – Broadpoint AmTech

And then one final question. In terms of the number of customers that you’re working with, can you quantify how many new customers you’re working with and even on a percentage basis from your previous customer pool?

Mark Morelli

As you know our customer pool is not over burdensome and there is really probably about 15 to 20 customers we work with on a quarterly basis, sometimes it might be a little bit higher 25 depending on the mix. We’ve only added a couple new folks into our solar pipeline and that we’re working with. And I think that that’s the right choice to make because we need to focus on the right partners that are high quality players in the market.

I don’t think it’s the number that you work with per se; it’s just that you’re working with the right partner to have a bankable PV solution. They’re going to invest in selling. They’ve got hundreds of salespeople and thousands of contractors in the case of Carlisle, and we think that’s the right approach.

Operator

Your next question comes from Brian Gamble – Simmons & Company

Brian Gamble – Simmons & Company

Harry, I just want to touch on one thing real quick. On the guidance, you mentioned you can tell what the ASP declines have been quarter-on-quarter, but going forward over the next two fiscal quarters remaining this year, what have you banked in to your assumptions to get you to that guidance range for those solar sales gross margin number?

Harry Zike

Brian, we’ve mentioned before that as part of our normal take or pay agreements, we have automatic price downs that kick into place on January 1, and those are in the single digits. So those will automatically kick into place. We don’t really give guidance on pricing obviously for competitive reasons, but I would say on the pricing side for the next two quarters we have single-digit declines.

Brian Gamble – Simmons & Company

Secondly, because you guys are so focused on the residential side of the market, maybe you could give your thoughts on new home builds and what sort of sale cycle you were seeing there? I know that obviously the entire country would like to see the housing market turn around, but any thoughts you have there would be appreciated.

Mark Morelli

Actually I’d like to correct the statement there. We’re actually mostly focused on the commercial buildings in the United States. We’re actually beginning to penetrate the residential market. Last quarter we announced a joint development agreement with CertainTeed for the U.S. market specifically. We actually have a very small offering in Europe and Italy from [Tegala Kenadazay]. So we think that we see the residential as a great opportunity for us to begin to sell and grow volume.

Operator

Your next question comes from Satya Kumar – Credit Suisse

Satya Kumar – Credit Suisse

In terms of ASPs in fiscal 2010, how should we think about that? Will ASPs be flattish in the second half of this calendar year and you get the next contractual decline in the first of January of next year?

Mark Morelli

We actually haven’t guided any ASPs for fiscal 2010. Obviously, we do have some stipulations on pricing into our agreements. I don’t think you should assume any cliffs here. However, we’re not going to disclose ASPs for competitive reasons for 2010.

Satya Kumar – Credit Suisse

On backlog, did you disclose the specific backlog that you have and what portion of that is take or pay and do you have a sense of how much of that is for the U.S.?

Mark Morelli

Our take or pay agreements in the backlog is about $1.5 billion. Our U.S. portion, as you see, has come down a bit. We think that was indicative of the ITC being uncertain for last year, and we focus accordingly on the European markets with very clear and obvious runway to them for the rooftop PV segments, and we made great progress in Italy and France accordingly. However, now we’ve refocused back on the United States and I think you’re going to see that percentage of sales that we showed in our presentation to increase based on the pipeline question you had.

Satya Kumar – Credit Suisse

I think one of the most interesting comments you said earlier on was the U.S. demand estimate of 1GW this year and 2GW for next year. What portion of that do you reckon is going to be on rooftops? And as a follow-up to that, you guys in Michigan, which has obviously the highest unemployment, you’re still hiring. Some of the U.S. demand will be on federal government roofs from federal procurement programs, how does that position you to capture more than your fair share of the U.S. market.

Mark Morelli

On the first side of the question, it’s difficult for us to tell exactly the split that will be on rooftops, but we’re seeing a very significant portion perhaps going that way. There seems to be a lot of state legislation in particular that seems to be angling for rooftop solutions. It’s not only interesting that Michigan offered a PV specific rooftop incentive and based on a feed-in tariff, but also Indiana and Washington are also talking about rooftop-based feed-in tariff systems of more than $0.60 per kilowatt hour.

I think to the latter part of the question, I think it’s great. We really enjoyed having a wonderful labor force here in Michigan. We can really pick from the cream of the crop on the operating side of the business, and the fact that Governor Granholm in Michigan is talking about so many incentives. It’s really an awakening of many states to the possibility of creating green energy jobs and taking advantage of the fact that you can also improve the environment at the same time.

So the fact that we’re here in the United States and a lot of this happening in the Midwest in our own backyard bodes well for the future.

Operator

Your next question comes from Timothy Arcuri – Citi.

Timothy Arcuri – Citigroup

I’ve got a couple of things. First of all, did you have to renegotiate any existing contracts this quarter and, if so, what were the terms?

Mark Morelli

As we said, over the last two quarters we’ve had some folks approach us with having some difficulty meeting their commitments. In the case of a take or pay, we do have firm commitments with Teed in those agreements, and we stick to those agreements accordingly. At the same time, we work a lot with our customers for the long-term, and we think that for whatever reallocations we’ve done in the past two quarters, we’ve done on the same terms and conditions. And I think you’ve seen very similar ASPs accordingly.

As we go forward, the important thing is to really focus on our demand creation and our sales efficiency. We’ve invested with a new organization structure. We’ve deployed more resources down to work with our channel partners to work with our bankable PV solutions with financing, providing the right solutions and the right certification to the market so we can get a lot better to help them with the sales efficiency side and also the demand creation side.

Timothy Arcuri – Citigroup

Does that mean that you did change the terms on any of the existing contracts?

Mark Morelli

We have had some negotiations with folks, but anything that may have changed is on the same lines to the existing terms and conditions.

Timothy Arcuri – Citigroup

So that would not be lower pricing? Then if not similar condition, what would change?

Mark Morelli

You may work with somebody on a project volume as an instance where one project may slide out from one quarter to the next, but we don’t comment on any specific customer situations themselves. But just in general terms if it’s the right thing to do, we may work with people accordingly to help them out. But on balance, we’ve really stuck through and we’ve worked through this economic downturn quite successfully.

Timothy Arcuri – Citigroup

So I guess any terms that were changed it sounds like would be more volume versus pricing. Is that right?

Mark Morelli

Yes. Once again, we don’t want to comment on any specific customer situations themselves, but we think that so far what we’ve demonstrated is our ability to navigate the stormy waters and we’re making pretty good progress.

Timothy Arcuri – Citigroup

I guess my second thing is you guided production last quarter, I think you said for the year 145 to 155?

Harry Zike

Yes. Timothy that was our last guidance on the production, if that was your question.

Operator

It looks like he disconnected. Your next question comes from Al Kaschalk – Wedbush Morgan.

Al Kaschalk – Wedbush Morgan Securities, Inc.

Maybe I can help answer that question. Have you adjusted your guidance for 2009 in terms of the 145 to 155?

Mark Morelli

Yes, we have. I think that the guidance that we’re showing here is shown in terms of sales numbers and I think that the way you can get to it is that we’re in low single digits in terms of price downs.

Al Kaschalk – Wedbush Morgan Securities, Inc.

So it sounds like everything on the revenue adjustment, Mark, is volume given the ASP contractual decline, which sounds like comes only in the first quarter of the calendar year. Is that correct?

Mark Morelli

Well, I think that if you look at our prior guidance, we’ve also widened our range on guidance because of the uncertainty we think the market is a bit more cloudy, for obvious reasons, and we think that we’ve reflected a wider range for both quarters accordingly.

Al Kaschalk – Wedbush Morgan Securities, Inc.

One cleanup item, Harry, it looks like on the cash flow there was an inventory write-down in movable product. Could you talk about that balanced to the comment I think that was made earlier that you are trying to find places to move certain volumes of inventory.

Harry Zike

During the quarter, as you would expect, when we increase the sales we’re obviously increasing the inventory and we look at our inventory every quarter to decide how much we need to reserve and how much is movable, and then we take the appropriate reserves accordingly.

Al Kaschalk – Wedbush Morgan Securities, Inc.

There’s nothing specific there given the change in the end markets that’s taken place?

Harry Zike

No. In fact, most of the inventory that we had reserved with some of the initial production coming out of Auburn Hills I.

Al Kaschalk – Wedbush Morgan Securities, Inc.

I’ll follow up on that later. On the sales efficiency, Mark, versus the projects that make sense, could you get a little more color on what’s changed? Are folks being compensated differently? Are you hiring less people there? Just to get a little more color on what still is a very robust forward calendar.

Mark Morelli

We’ve done two things. We have a new organization structure both in the U.S. and Europe and we’ve invested in more sales folks accordingly to work with our channel partners. We’ve also worked to put in place more applications engineers. We do, in fact, have a new incentive plan for the balance of this fiscal year because we are focused more on how we deliver in longer term sales.

At the same time, we have to now be more focused on working with our channel partners on some near-term issues as well. We think that’s responsibly in our guidance and at the same time we’ve made a number of changes here. One of which we announced a new general manager for EMEA whose got a lot of excellent contacts and business experience in the European markets, as well as in the Middle East that we think will help us and bear fruit here shortly.

Operator

Your next question comes from Kelly Dougherty – Macquarie.

Kelly Dougherty – Macquarie Research Equities

We like the differentiate the strategy that you guys have selling into the building materials market, but I am wondering if you could just give us a little bit of insight into what’s going on there, what the basic customer profile looks like, if the majority of these projects are replacement roofs rather than being dependent on new construction, any kind of basic color around things like that?

Mark Morelli

The great thing about the building materials channel is that they are really focused on re-roofing right now. Even in economic downturn, there is a lot of re-roofing that goes on. In fact, even the solar incentives can help that case. In the U.S., tax laws can help. In particularly, in Italy as well, even the removal of asbestos can be subsidized by government so that the re-roofing activities continue to go on.

The great news is that we continue to sign high quality players in the building materials area, and for them this is a really up-sell opportunity. If you think about it, it is about a ten times revenue increase opportunity for them where they see overall the building materials segment has slowed, there’s move of a focus on their end. And what they can really bring to the party here is literally hundreds of salespeople and thousands of contractors working and focused on PV solutions for that up-sell opportunity.

Kelly Dougherty – Macquarie Research Equities

Then just a follow-up on some of the incentives being tossed around in Washington right now, there’s one on the table to incentive domestic manufacturing. And I am just trying to get a handle on whether the process is automated enough and the incentives strong enough and the fact that a good portion of your demand will come from the U.S. if it makes sense to just continue to produce domestically?

Mark Morelli

As you may know, Kelly, the balance of our manufacturing by far is in the United States in terms of a content manufacturing content, even in terms of the number of employees that we overall have. So we think that any legislation in this area really bodes well for us.

Kelly Dougherty – Macquarie Research Equities

So when you have a $1 per watt CapEx guidance out there, does that assume you move out of the U.S.? And how would maybe that change if incentives were instituted domestically?

Mark Morelli

Well, there are some incentives in the United States that we currently take advantage of. As we make decisions of where we’re going to put our footprint going forward, one of the key areas that we really focus on is what incentives are available. The great news is that we have a really wonderful ability to ramp. We know how to ramp. We can ramp pretty much anywhere in the world. We’ve got a lot of confidence in our technology and as we make these decisions, we're going to make the best decisions from where we're selling the product and what incentives we have in place that we can take advantage of.

Operator

Your next question comes from Jesse Pichel – Piper Jaffray.