Energy Conversion Devices Inc. F3Q09 (Qtr End 31/03/09) Earnings Call Transcript

Energy Conversion Devices Inc. (ENER)

F3Q09 Earnings Call

May 11, 2009; 10:00 am ET

Executives

Mark Morelli - President & Chief Executive Officer

Harry Zike - Vice President & Chief Financial Officer

Mark Trinske - Vice President of Investor Relations & Corporate Communications

Analysts

Kelly Dougherty - Macquarie

Timothy Arcuri - Citi

Amar Zaman - UBS

Brian Gamble - Simmons & Company

Colin Rusch - ThinkEquity

Steve O’Rourke - Deutsche Bank

Paul Clegg - Jefferies

Rob Brown - Craig-Hallum

Rob Stone - Cowen and Company

Satya Kumar - Credit Suisse

Jesse Pichel - Piper Jaffray

Presentation

Operator

Welcome to Energy Conversion Devices conference call to discuss the company’s third 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, operator. Good morning everyone and thank you for joining us on our third 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. We will be controlling the advancement of the slides and providing commentary on each. A downloadable copy of the slide presentation and our third 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 participating via 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 would like to remind you that following discussion may contain forward-looking statements within the meaning of the SEC Safe Harbor provisions. Such statements are based on assumptions, which ECD as of this date 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.

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

Mark Morelli

Thank you, Mark. Please turn to slide three. It will come as no surprise that the fiscal third quarter was challenging. We faced the same macroeconomic challenges that many other companies in our industry have reported. At the end of the quarter, we had lower than anticipated product sales and higher than expected inventory levels.

Customer access to project financing remained tight and a number of projects were delayed. These trends are continuing hampering our visibility into timing of sales. As a result, we will not provide guidance for the fourth quarter.

Slide three shows our total consolidated revenues in Q3 were $66 million compared to more than $100 million in the prior quarter and slightly down year-over-year. Lower pricing and under absorption of overhead costs related to our furlough resulted in solar gross margins of almost 30%.

Consolidated gross margin was 31.6%. Lower revenues resulted in net income of $1.3 million or $0.03 per share. Although, we had a small net operating cash outflow during Q3, we have positive operating cash flow for the fiscal year to-date. Despite the weak performance in the quarter, it’s important to recognize that our business model remains in tact and we are positioned well to weather the downturn.

Please turn to slide four. We believe that we have the right products and we remain focused on maximizing the unique attributes of our UNI-SOLAR laminates. As you can see on slide four, UNI-SOLAR’s flexibility, light weight and ability to be integrated into roofing materials are significant advantages on rooftops. One key attribute is that our laminates weigh less than a third of our nearest competitor’s products. This is a key attribute because approximately one-third of all roofs are low load-bearing roofs.

Please turn to slide five. We are rooftop specialists and as you can see, how UNI-SOLAR products install easily with no roof penetrations. Also our laminates are not susceptible to wind uplift. Many competitors are installing rack and ballast ground-mounted systems on the roof. This ignores the unique requirements of the rooftop space and comprises the integrity of the roof structure as well. UNI-SOLAR laminates are ideal for the rooftop and as a result are the leading product on building integrated PV systems.

Please turn to slide six. To continue to be the leader, we must be efficient in everything we do. During these recessionary times we are especially committed to operational excellence. Today that means flexing our production to meet a lower level of near-term demand, while continuing to improve our technology, processes and efficiencies.

It also means taking advantage of this recession slowdown to implement several improvements that boost material utilization, throughput and other performance metrics. Many of these improvements have not yet appeared in our financials because we are not currently running our factories at full capacity, but when demand recovers and we ramp back to full capacity, we expect to realize the benefits of our efforts.

We’ve renegotiated numerous contracts with equipment and raw material suppliers, which had resulted in meaningful savings that will reduce both CapEx per watt and cost per watt. While global demand has been weak for large-scale projects, we continue to see strength in smaller projects especially in Europe.

We are doing well where feed-in tariffs were high and investors are familiar with the bankable economics of using our UNI-SOLAR laminates and we believe the United States represents a growth opportunity. We expect to see billions of dollars allocated to renewable energy as part of the U.S. government stimulus bill. Many states and municipalities are also offering additional incentives to install solar PV. So our product has a strong competitive advantage and our long-term industry fundamentals are strong and getting better.

The question is, what are we doing to generate short-term demand? Please turn to slide seven. We are launching several new initiatives to spur demand for our products. We have developed project financing initiatives. These initiatives are designed to help reduce the bottleneck in the marketplace that is related to securing development phase financing for project portfolios.

We are in discussions with a number of potential investors and project developers in order to stimulate near-term demand for our UNI-SOLAR laminates. We may invest in these projects using our products, cash or both. As an example, today we announced a co-development agreement with Infinity to work towards building a number of projects which total at least 10 megawatts.

Once the projects are designed and installed, the fund will operate them for several months to verify performance before selling individual projects or the entire portfolio to third-party investors. We anticipate the entire cycle will take 18 months to 24 months per project. Let me be clear that we do not plan to be long term owners of solar power plants rather we are addressing the near-term slowdown caused by a lack of project financing.

These financing initiatives are one way in which we are using our balance sheet to stimulate demand creation and we continue to grow our business with new partners. In fact, we recently signed agreements with several large financially stable commercial customers including [LFN], which is a recognized leader in the European building materials industry.

Finally, we are working to open up new markets including residential through our partnership with CertainTeed and selling to all levels of the U.S. government. We are also targeting unique applications for our products that leverage the characteristics of our UNI-SOLAR laminates in new and interesting ways, such as distributive power for utilities and landfill covers which I will discuss in more detail in a few minutes.

Please turn to slide eight. Our UNI-SOLAR laminate have a competitive advantage in rooftop installations. This slide should give you an idea of what we mean by that. This photo shows our flexible, light weight laminates installed on the expansive roof of the Rome Trade Fair in Italy.

This 1.4 megawatt installation is an ideal application that takes advantage of the specific features and benefits of our product. Our flexible, lightweight product was an ideal match for the architectural flow of the Rome Trade Fair, while producing excellent power output.

Please turn to slide nine. Here is another example of our one megawatt UNI-SOLAR installation on the rooftop of a Volkswagen manufacturing facility in Wolfsburg, Germany. Volkswagen selected UNI-SOLAR, their second use of UNI-SOLAR laminates because they needed a lightweight and flexible solution that did not require any roof penetrations. They also wanted a product that would work well in low light conditions and could generate high energy production when installed flat. Only UNI-SOLAR could meet all of their requirements.

Please turn to slide 10. While the majority of our sales continue to be into the European market, the U.S. market is beginning to show signs of growth. An example is the installation on the roof of the Air Quality Management District in Los Angeles, which was completed in late December.

With billions of dollars in the stimulus bill set aside to improve the energy efficiency of federal buildings, we believe that we are well positioned to benefit from that spending, especially as we are a U.S. company and today we offer a made in America product, but rooftop applications aren’t the end of the story. We continue to see UNI-SOLAR laminates being chosen for new and interesting uses.

Please turn to slide 11. This slide show a new application in which UNI-SOLAR laminate’s unique attributes make it a performance choice for this ground installation. Last month Republic Services used our laminates to cover portions of the membrane on this landfill cover.

In the process they converted what would otherwise be unused space into a source of renewable energy. This photo is a slide from a pilot installation. Republic Services has more than 200 U.S. landfills and as stated that it believes up to 2400 acres is suitable for solar installations. There are other examples of capping landfills with UNI-SOLAR PV.

Please turn to slide 12. Here is a previous landfill installation this time in Rome, Italy. This kind of innovative membrane installation is an excellent fit for UNI-SOLAR, since heavy, glass-based panels and mounting hardware is not an appropriate solution as the landfill settles overtime.

Please turn to slide 13. This slide captures some of the operational improvements I described earlier including reduced cycle times in our manufacturing process. For example, we reduced our deposition cycle by 10% on our ramping machines in Greenville and our lamination cycle times by 9% in Auburn Hills and Mexico.

We also introduced lean manufacturing processes in our Auburn Hills 2 facility that will reduce work-in-progress inventory and improve throughput in our production process. We will be initiating several material utilization improvement initiatives in step three of our manufacturing process. These projects are targeting 10% to 20% reduction in material utilization with several of our polymer suppliers.

We are leveraging the global drop in commodity pricing to push for reduced material costs. We are also upgrading our supply chain management process. Collectively these efforts have led to the qualification of several new suppliers during the quarter. This has resulted in 10% to 20% lower pricing for certain raw materials. Finally, we are reducing labor costs as we continue to manage our production to meet lower near term demand.

Now our CFO, Harry Zike will provide a review of our financials. Harry.

Harry Zike

Thank you, Mark. Please turn to slide 14. This slide shows our consolidated revenue for the third quarter and nine months ended March 31, 2009. As Mark previously mentioned, Q3 was a challenging quarter for us. Revenue was $66 million in the quarter compared to $70 million in Q3 of fiscal 2008. For the nine months ended March 31, 2009 we reported $265 million in revenue versus $173 million in the prior year period or an increase of 53%.

Please turn to slide 15. For the nine month period ended March 31, 2009 we reported positive net income of $28.2 million versus losses in the prior periods. We also had cumulative positive net operating cash flow of $33.7 million. However, due to lower than expected revenues and inventory build, we had a negative change to working capital of about $38 million.

Cash spending on property, plant, and equipment additions for the nine-month period was approximately $194 million. This was higher than prior periods as we were in the midst of ramping up new lines at Greenville and finishing basic construction of our new facility in Battle Creek. As a cost cutting move, we are now ceasing substantially all capital expansion work in both locations. We have also deferred the purchasing and delivery of additional capital equipment until we see demand improving.

Please turn to slide 16. Q3 solar product sales were about $60 million, significantly lower than the Q2 product sales of $97.3 million and slightly below prior-year quarter product sales of about $65 million.

Solar gross margin in the quarter was 29.2% and consolidated gross margin was 31.6%, lower sequentially and year-over-year as a result of pricing declines and less than optimal production levels. We expect production will be from the high teens to approximately 20 megawatts in the fourth quarter and believe under-absorption of fixed costs will continue until we resume running our factories at full capacity.

Please turn to slide 17. As Mark mentioned earlier, we are examining every aspect of our business in order to identify new ways to reduce costs and preserve capital. We are deferring capital expenditure spending through a combination of efforts. These include postponing our expansion at Greenville and at our new Battle Creek site, as well as delaying orders for new equipment and seeking government funds where appropriate.

We are also aggressively cutting costs throughout the entire organization. For example, as we disclosed in mid-March, we are in the process of consolidating certain production lines in our Auburn Hills one and Auburn Hills two facilities, which is expected to save more than $4 million annually.

Last week, we initiated a production furlough and we will run fewer shifts in our factories. We expect this three to four week furlough will save approximately $5 million to $6 million in costs during the quarter. We continue to renegotiate contracts with our raw material and capital equipment suppliers. In the fourth quarter we will target a 20% reduction in total personnel related costs. This will result in additional restructuring costs of approximately $1 million to $2 million in the quarter.

Please turn to slide 18. Ovonic Materials, which is comprised of our license and royalty business, nickel hydroxide product sales and other non-solar technologies, continue to show an operating profit even as revenues declined from a year ago. Our previous restructuring continues to provide the payback that we expected. We believe this segment will continue to show operating profits as demand for nickel metal hydride batteries in hybrid vehicle applications continues to grow.

Please turn to slide 19. Before I turn the call back to Mark, I wanted to reiterate our strong financial position. We have approximately $374 million in cash, cash equivalents, as well as short term and long term investments. We have approximately $330 million of tax net operating loss carry-forwards and we are aggressively preserving capital, both by slowing our CapEx spending and reducing our operating costs to manage our production to meet a lover level of near-term demand.

Our strong financial position allows us to differentiate ourselves as a long-term winner within the solar sector, leverage our balance sheet during this economic crisis and ramp up additional capacity quickly when we see demand returning. I will now turn the call back to Mark.

Mark Morelli

Thanks, Harry. Please turn to slide 20. As I mentioned before, we continue to believe that our business model is sound and that our long-term fundamentals in our sector are favorable. Before we open the call to questions, let me summarize our view of where we stand today.

In UNI-SOLAR we have a differentiated product with value added technology that has more than a decade of field testing. Because of UNI-SOLAR’s product differentiation, we remain a leader in rooftop installations, which is the fastest-growing segment of the global PV industry.

We expect to benefit from the increased U.S. spending on rooftop solar installations. This is in part because of our products, but also because we offer one of the few solar solutions that is made in America. Our demand driven approach allows us to flex our production up or down depending on market conditions and our focus on operating excellence have led to numerous improvements in our manufacturing technology and processes.

This will further reduce our cost per watt once we return to running our plants at capacity. Additionally, we are aggressively reducing costs to preserve capital given the lower level of short term demand.

Harry and I are now happy to answer your questions. Operator.

Question-and-Answer Session

Operator

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

Unidentified Participant

Hi, this is [Terra] in for Sanjay. Did you give megawatts shipped in the quarter ASPs?

Harry Zike

No, we’re not disclosing our ASPs due to competitive reasons. I think you could probably come up with an estimate yourself. I will make some comments on the ASPs, generally. In the quarter, we saw our ASPs comedown by low single digits and as we see, this is within the guidance that we’ve given out previously because the level of polycrystalline and the level of pricing in the marketplace. So far our pricing has been able to hold relatively steady.

Going forward, we anticipate we may see further declines in ASPs. Our value proposition, our differentiation certainly holds, but depending on the level of pricing of polycrystalline our delta or our differential pricing to polycrystalline, we have to maintain that level of differentiation, that level of pricing differentiation, but as that pricing comes down our pricing may further comedown as well.

Unidentified Participant

On the last call you made a comment about being approached by the government, worried about the ability for firms to meet demand. Can you comment further on this and what kind of government-sponsored activity you are seeing?

Mark Morelli

Yes, our contacts in Washington remain quite bullish on renewables and solar. However, what we are recognizing is that these incentives in this stimulus are slow to come to market. We anticipate that this very strong stimulus package may take another couple of months or couple of quarters for it really to come to fruition.

Operator

Your next question comes from Kelly Dougherty - Macquarie.

Kelly Dougherty - Macquarie

I just wanted to follow-up on the pricing. When you talk about a differential to polycrystalline, do you look at it on a cents per watt basis or more of a percentage?

Mark Morelli

Our differential pricing to polycrystalline is really on a case-by-case basis, depending on where we are based on the specific incentives. So, I don’t think there is a standard rule and we’re not going to be giving any specific guidance due to our pricing, really due to our competitive reasons. However, we definitely have a differentiated product in the marketplace and we sell at a differentiated price to poly as well.

Kelly Dougherty - Macquarie

Maybe then can you talk to us about, what kind of IRRs you are seeing in different countries and if that plays more of an impact that maybe what the pricing is on the crystalline side?

Mark Morelli

We do see very strong IRRs. In some cases in Northern European, particularly in Germany, perhaps a little bit less than 10%. Certainly in France and Italy and there is a little bit of rooftop activity in Spain, much stronger IRRs up into the double digits. So, we don’t think that the issue that’s happening in terms of near term demand has anything to do with returns. There are some very strong government backed returns that are available out there.

We think that the major issue that’s occurring is not a pricing issue, but it’s a lack of project funds flowing to these very attractive programs due to a freeze on the flow of capital and this is one reason why we’re focusing our demand creation strategy that has this project financing element in it.

Kelly Dougherty - Macquarie

Then I had a downstream question for you that, how is that kind of changed around this morning. I’m just wondering if you could talk to us about the size and the scope of what you plan to do. Is this just a temporary thing to kind of bolster near term production or could this 10 megawatt grow into something significantly bigger than that?

Mark Morelli

Well, we are launching this project fund as we’ve announced with Enfinity. We think that this approach is very consistent with our demand creation strategy and then as I just said the demand has softened really due to the lack of this project financing.

We do not intent to be long term owners, instead of this is a build-own transfer model, but we don’t are not going to participate in this indiscriminately of our balance sheet. We recognize our balance sheet is certainly one of our strong points and we have some very specific criteria that we are looking at when we engage in this.

One of which is it has to have good financial returns; it has to have this take-out financing that I just spoke about and we are very cognizant of our use of our balance sheet and we are going to use that wisely.

Operator

Your next question comes from Timothy Arcuri -Citi.

Timothy Arcuri - Citi

First of all, you guys have said I think last quarter that there would, definitely not be any write down of the inventory. Now it’s at 150 days roughly and certainly production is being guided down pretty sizably for June. So, I’m wondering how we should think about inventory and the potential for a write off as we go into the June quarter?

Harry Zike

Let me address that. We have policies on booking allowances for inventory obsolescence and inventory reserves which we follow quarter-to-quarter. During the quarter, we did book reserves for some of the slow moving inventory had, which is earlier product. Right now, our ending inventory is approximately $27 million of what you see on the balance sheet there.

So at this point in time, we are just following our existing policy. I don’t see a need to write down or reserve the inventories any more than we have already done during this quarter. As Mark mentioned earlier, as we spur this near term demand through some of this project financing, we think there is an opportunity to have that inventory be delivered.

Timothy Arcuri - Citi

What’s that $27 million number again?

Harry Zike

$27 million is the value of our finished goods inventory at the end of the quarter. You will see that when the 10-Q is filed later today.

Timothy Arcuri - Citi

Secondly, as it relates to the take or pay deals, there have been some other instances in the broader sector where there have been some lawsuits to try to collect on those and certainly now you are being forced to cut price on those take or pay agreements and volumes are much lower than what was in those deals. So, I’m wondering, whether you are pursuing legal means if possible to basically collect on that?

Mark Morelli

Yes, there are really two approaches with our take or pay. First of all, we’ve disclosed over the last couple quarters that we have had to in some cases reallocate volume for our take or pays. Obviously as this recession has intensified and continues, we’ve had to do more of that this past quarter.

There are some folks that do take take-or-pays as per the agreement and then there are certainly no issues related to that. The two approaches are one, we try to work with our customers if it makes sense and we are able to strike deals that really make sense to both of us and, yes, we are taking some pretty strong action in some cases, upholding the agreement that we have. There are sometimes collateral associated with that agreement.

I think it’s important for us to keep our shareholders interest in mind in serving these agreements and trying to strike that right balance where we can and where we can’t then we have to pursue this with legal means.

Timothy Arcuri - Citi

So, can you give us some idea of what you might collect if you are able to be successful in these legal means?

Mark Morelli

I’m not going to disclose that. It’s certainly something that we work through on a week-by-week basis. However, there are some in some cases and ability to extract some financial penalties, but I think it’s up for us to negotiate that appropriately. Obviously, this is a very sensitive issue at the moment, so we are really not going to comment on it further.

Timothy Arcuri - Citi

Then just last thing for me, have you seen any new competition in the BIPV space? I believe that others like Suntech are now kind of entering that market. So I’m wondering, if you have seen any change in the landscape out there? Thanks.

Mark Morelli

We are seeing more polycrystalline show up on roofs as folks know that the Spanish market has declined quite dramatically and folks are trying to find space for that polycrystalline in a number of different forms. We think that this further validates our position and the fact that the rooftop is a very attractive segment and we have a very unique position in the rooftop space.

So, while we do recognize that there is increased competition. We are quite comfortable with competing on the rooftop as we think we’ve got the best solution for the rooftop.

Operator

Your next question comes from Stephen Chin - UBS.

Amar Zaman - UBS

This is Amar Zaman, calling for Stephen Chin. My first question is just to follow-up on the previous one. When you mentioned finished goods was $27 million, what percentage of that is product that was for SIT and following that is are panels made for SIT transferable to other customers?

Harry Zike

The $27 million finished goods amount, we’re not going to go into individual customers and who is assigned to that inventory. The inventory is available for all of our customers, either on their existing agreements or any of the new agreements. So, I would say the $27 million is what’s available in the megawatts of which we’ve already identified 10 of that as going into the project financing funds.

Mark Morelli

Let me add one comment to that. This is standard product that’s available here because our project financing funds, which we have already identified as we said with the Enfinity release. This inventory is really readily available for those projects that have already been identified. It’s absolutely, what I would deem as standard product.

Amar Zaman - UBS

Then if I may ask a quick follow-up, since you won’t give us sales guidance for June. Can you tell us, how business has trended overall in the month of April compared to March and then how is it trending in May?

Mark Morelli

Well, I think our near term demand really remains slow and as we said, it’s due to this lack of financing. Even though the interest in the products is very strong and the rates of return are quite strong. We’re not seeing that flow happen, it’s quite sluggish. Smaller projects are continuing to go through, but there has been a bit of a build of inventory in the channel and things have slowed down.

We are making progress in signing new agreements. We just announced, we are discussing this project funds which we think is an example of that as this is really incremental business for us. At the same time, there is really four areas that we can talk to very briefly, when it comes to what’s happening with near term demand.

The government spending is great from the United States perspective because we have a made in America product. We’re having very good conversations with the utilities and we’re quite encouraged with that. We’re serving the distributive power segment generation segment for rooftops, which is a smaller segment. It’s not the ground farms, but we have a very good application for that particularly because of our kilowatt per kilowatt hour advantage. So we are having very good conversations in terms of our demand interest.

Then we have new applications such as landfill cover, which is really a ground based installation that makes sense for us. We have a differentiated solution specifically for this ground based application and we’re quite excited about that one and then the fourth one is our developing activities with residential with certainty, which we are continuing to make good progress on.

Amar Zaman - UBS

Then just, if I could one quick follow-up. Could you give us an update on your pipeline, where it stands in terms of megawatts and the past you’ve given us, I think how much of your capacity has been sold in a given year. Could you give us an update on that?

Mark Morelli

Yes. Our pipeline remains stable, but it’s increasingly difficult to predict the timing of when the pipeline is converted into revenues. So given this uncertainty, we’re stopping to give the quarterly guidance on the pipeline number. This is also one reason, why we’re developing our project financing funds and we’re articulate in our demand creation strategy of those four points that I’ve just discussed.

Amar Zaman - UBS

Can you confirm, if there has been any cancellation in your pipeline?

Mark Morelli

There has not been cancellation of orders, there’s been push outs of the pipeline and we think given that, that it’s not appropriate for us to give the overall pipeline number because it substantially is not changing. However, we are having to shortfall on sales because these orders are in fact being pushed out. Once again, it’s the sluggishness due to the lack of project financing and this is why we’re taking the steps that we are for the near term demand creation.

Operator

Your next question comes from Brian Gamble - Simmons & Company.

Brian Gamble - Simmons & Company

Harry was also maybe you talked about lower costs for certain raw materials. You also talked about the lower use of raw materials. I was hoping you could possibly quantify that into some sort of cost trend as we look out towards next Q and then rolling into next year given that production is coming down in such a large chunk. Could you maybe balance those two things for me?

Harry Zike

Let me talk a little bit about the cost structure and how we look at that. We have the basic three components in the cross structure with materials, labor and overhead. To date in the materials segment, we’ve achieved about a 15% total cost savings through the first nine months. We continually also renegotiate all of our supply agreements.

Now, remember a good chunk of our raw material here is basic commodities and when you’re in a recessionary environment it gives you an opportunity to go out there and renegotiate these contracts, which is what we are doing. So we’ve seen more potential runway in the commodity prices to get those down even further.

Additionally, as Mark mentioned before in the release, our material utilization has improved dramatically from where it was even at the beginning of the year. Less material into the process means, of course cost savings. We’ve increased our deposition lines. We’ve improved our cycle times by about 50% and improved fourth cell life cycle time as well cycle time as well during these nine month periods of time.

On the labor side, we have already announced back in Q3 that we had a furlough of two weeks for the primarily all of the people within the company that’s has reduced a good chunk of our direct labor costs and last week we announced that we would extend this furlough for three to four weeks across most of our manufacturing operations it’s another cost savings we have on the labor side.

We also announced because of the downturn, we will do restructuring. Our Auburn Hills one and Auburn Hills two campus is being now restructured. We have declined, dropped the associates there by about 70 and we expect savings of about $4 million from that in the coming year. Additionally, we’ve targeted more cost downs in the labor side. We want to get 20% out of our total personnel costs in the fourth quarter.

Now, the issue you’ve got, when you have all these savings is, because our manufacturing facilities are not running at full capacity, there is the under-absorbed costs that need to be, of course, absorbed into the per-unit product cost and that’s overshadowing all of the savings that we have just talked about.

So, we are getting the savings. They are being overshadowed slightly by the under-absorbed overheads, but they are both in the materials side and the labor side and as well in the overhead side.

Brian Gamble - Simmons & Company

So, the overshadowing you are essentially saying a slight increase in your overall costs as we look forward over the next couple of quarters?

Harry Zike

Yes, the net costs will in fact go down, but the under-absorbed, when we produce somewhere between the mid teens to approximately 20 megawatts, the under-absorbed overheads will overshadow those cost declines we are getting.

Brian Gamble - Simmons & Company

Then as my follow up, when you look at ASPs you mentioned seeing low single-digit declines for the quarter for you guys. I don't want to try to peg you on those, but what are you seeing in the poly market?

I know that as those come down you have to adjust. It seems like some of the numbers that we are hearing from the poly guys quarter-on-quarter are down pretty significantly; 10, 20, even north of that sometimes on a percentage basis. Are you seeing those same sorts of declines or when people talk about those in general those numbers hold up, but when you look at the residential space as your niche those declines are a little bit more mitigated?

Mark Morelli

We have not recognized those declines as we had not anticipated them based on our value proposition that we are selling. Keep in mind; we are selling into a specific application on the rooftop space where our products are well suited. So, we have not recognized that and I think we’ve been pretty accurate in giving the guidance there.

Going forward; I think it just depends on where polycrystalline goes. I think up until the levels we have seen up until now we’ve relative stability and we do sell at a pricing premium. However, if it continues to go down further and I cannot predict what will happen with polycrystalline in the marketplace.

There are other folks that are better at that than we are, but we will have to recognize a commensurate price increase going forward at perhaps the same amounts as a general guide. But once again, we have not seen the kind of numbers you’ve talked about on the phone.

Residential is not really a segment of market we are serving now. We are piloting some products in the residential sector. We sell mostly in the commercial building and rooftop space with the unique value proposition for our product.

Operator

Your next question comes from Colin Rusch - ThinkEquity.

Colin Rusch - ThinkEquity

Can you talk about the cost reduction program and the arc of it as you’ve slowed down the ramp and obviously the benefits of scale aren’t going to be worked into the cost structure? Can you just walk us through, what we might expect over the next four quarters and then over the next 12 quarters?

Harry Zike

Let me say a comment about our path to grid parity in terms of cost. We think, particularly with these recessionary times, we essentially have commodities in terms of our overall materials that we use and we’re beginning to see also greater declines in our commodity pricing, particularly as we’re substantially out of the fact that we had single source supply.

So, we’re on a pretty good path to our grid parity numbers that we articulated in the past and hopefully may even be in a situation of being able to beat those. So longer term, I think it’s great. In the short term, given the fact that we’re not producing at capacity, these things are not showing up in our numbers, but they are absolutely there. We are very aggressive in getting the costs that are available to us and as we get our production up towards our capacity numbers these will quickly drop to the bottom line.

Colin Rusch - ThinkEquity

Can you give us a little bit more guidance on, how we should think about operating expenses over the next four quarters and kind of where they’re going to level out? Are we thinking about roughly $10 million a quarter or going to be able to get it lower than that?

Harry Zike

I think you are talking about the SG&A line or…?

Colin Rusch - ThinkEquity

Yes.

Harry Zike

On the SG&A line, what we’ve decided to do is, that we will invest in the sales and marketing segment of our business to build capabilities as we look into the new market channels. For example, in the utilities sector as well as in the government sector. So, you will see on the sales and marketing side, our costs in that area will go up slightly quarter-on-quarter.

On the G&A line, we are cost cutting the G&A line dramatically. We have targeted a 20% reduction across all of the G&A lines. By the way, as well as the cost of goods sold line as well. So, those costs will be coming down. So on average, we would say somewhere between $10 million to $14 million would be an average run rate for the foreseeable future.

Colin Rusch - ThinkEquity

Then last quarter you talked about, initial conversations with the utilities in aggregating rooftop systems. Can you give us an update on, where conversations are there and how much demand do you see and what the velocity of that demand might be over the next year or so?

Mark Morelli

Certainly; we are in active discussions with utilities, but as we all recognize, these are long lead time deals. We have hired some new people with deep sector experience in utilities and we are opportunistic that we have a real opportunity here and as you said, Colin that these are really for the rooftop distributed power generation market. It’s not for the ground-mounted solar farms, where there is a lot of folks that are competing in that space. So, we’re going to take advantage of the unique attributes of our product to sell that appropriately.

Interestingly enough, in our conversations with the utilities, there is two things that kind of stand out other than our distinctive value prop is that we generate higher kilowatts per kilowatt hour and utilities are obviously interested in that. We also outperform other solar panels under high heat conditions and this is typically, when peak electricity prices are the highest. So, to give a little bit of color on when it will occur, we hopefully will have some announcements in the near term, but this will take sometime to gain traction in terms of scale.

Colin Rusch - ThinkEquity

If I could take one last question; are you getting any indication from your roofing customers about trends in terms of new roof builds versus patches and what they are seeing in terms of a turnaround with people rather than just patching their roofs are going ahead and re-roofing their entire roofs?

Mark Morelli

The re-roofing market, while it has comedown in this recession, still represents a fairly sizable business and it continues to go forward. We think, with some level of good activity I would say. New construction, as you know is certainly off and it’s probably not new construction, but folks are quite actively engaged in terms of re-roofing. As you know, many times you can put a roof on top of an existing roof instead of happen to take the other roof out.

In the case of Italy, they actually offer incentives where you can apply for the removal of asbestos. There is a lot of asbestos used in Italian building practice over many years and the government wants to remove that asbestos. So part of their feed-in tariff and their tax code allows for the removal of the roof and the removal of asbestos and get that paid for the government. So we see, particularly in the Italian market, that to be quite a strong driver as well.

Operator

Your next question comes from Steve O’Rourke - Deutsche Bank.

Steve O’Rourke - Deutsche Bank

First, just a clarification on a comment you made previously. Is it fair to make the assumption that business so far in this quarter is roughly the same or not picking up over calendar Q1?

Mark Morelli

I think the demand in the market continues to remain slow. So I think that’s appropriate to reiterate that fact that we anticipate fairly slow demand in the near term.

Steve O’Rourke - Deutsche Bank

Couple other questions; how should we expect CapEx per-watt to trend? You talked a lot about material costs, but capital spending per-watt going forward?

Harry Zike

Yes, you may remember that back when we had talked during our investor day back when we did a capital raise we were on a path to get the CapEx per-watt down to less than $1 per-watt.

The CapEx per-watt that we now experienced so far remains on that path, but I also want to reiterate that we have stopped all of our CapEx spend, both in the remaining part of Greenville and Battle Creek. So you will see a substantial reduction in or CapEx spend going forward.

Nevertheless, through our operationally efficiencies we remain on that path to get our CapEx per-watt down to the targeted level of about $1.

Steve O’Rourke - Deutsche Bank

One last question, how much of the 10 megawatt project fund is fully financed now?

Harry Zike

Right now in the 10 megawatts, it’s a number of projects that are in the 10 megawatt; each is handled on a case-by-case basis and we have indications in our discussions with Infinity that they have a certain amount of the financing already lined up, but the specific amounts we are not giving guidance on yet.

Operator

Your next question comes from Paul Clegg - Jefferies.

Paul Clegg - Jefferies

Obviously, SIT is for sale at this point and without asking you if you are going to buy them, I know you couldn’t answer that, how much have you looked at the pros and cons of a vertical strategy with respect to your ability to perhaps protect margins in this declining price environment?

Mark Morelli

Well as you can see from some of the announcements we are making on this earnings call is that we are looking at further steps down in the channel and where it makes sense for us, obviously in a recession like this you want to be very close to your customer, to your end user.

We are spending a lot more time with our customers and we are trying to figure out ways by in which we can work with our channel partners, especially for markets such as the utilities segment, which is as you know the pricing tends to be quite low and the volumes quite large.

How can you package up solutions and take out more of the balance of system costs; the total installation is a good example, which we are actively engaged in. This project financing, on a case-by-case basis may make sense. So, I think there is number of activities that we are certainly thinking through.

Our ability to leverage better applications expertise for our projects and helping to work with both project management; these are all areas that we are very interested in further being engaged.

About SIT, I know you didn’t ask the question directly, but think it’s important for us to know that throughout this process we’ve really been well informed of their situation and they remain an important customer to us. However, as a total percentage of our overall sales it has declined and we fully stand behind our products and certainly with our end-users and our customers to make sure that there is no disruption.

Paul Clegg - Jefferies

Can you say what percentage SIT was for the quarter?

Mark Morelli

No, we are not disclosing any specific customer percentages in our basis, but as I did say, as the overall percentage it has come down.

Paul Clegg - Jefferies

And to understand correctly that at this point you have not actually had to fund under any LCEs due to customers’ not taking delivery?

Harry Zike

No, we have not had to fund SIT, if that was your question.

Paul Clegg - Jefferies

Not SIT, but anyone in fact at this point know, you’ve been in negotiations with certain customers, several customers at this point are not taking volumes. I would assume that there are more than one customer not taking volumes that were originally designated under their contracts. So you made the decision not to fund under LCEs and to actually move out of those volumes?

Mark Morelli

We have seen a bunch of interesting things occur in our channels to market. In some cases we have seen some folks go out of business; we have been able to manage that appropriately. In some cases folks are doing very well, their business model is sound. This really tests their business model and you see people actually taking more volume. So, we have seen really a pretty wide variety of things. Obviously, on a case-by-case basis, we want to work with folks with our shareholder interests and our shareholder value in mind when we strike deals and we work with people appropriately.

Operator

Your next question comes from Rob Brown - Craig-Hallum.

Rob Brown - Craig-Hallum

Just touching on CapEx, what is the CapEx rate if you stop production? What will that continue to be on a maintenance basis?

Harry Zike

Our CapEx runs about 10% of our total cost per watt. With stopping it we expect that would go up slightly from some of the unabsorbed overhead. So, it would be in the range of 10% to 15%, when we looking at our cost per watt basis, but the CapEx spend will comedown dramatically as you look forward into the fourth quarter because we have stopped substantially all CapEx activities.

Rob Brown - Craig-Hallum

On the dollar basis is it sort of $10 million to $15 million a quarter? Is that a good number?

Harry Zike

In the past quarter, Q3 when you take a look, we had actually added about $90 million in CapEx purchases during the quarter. So, it’s going to comedown substantially from that number in Q4. So, I think you have to look quarter-by-quarter. Our ramp for this year was more backend loaded. That’s why you see a higher number in Q3 than you would in Q1 and Q2. As I said before, Q4 CapEx will be down substantially from that $90 million.

Rob Brown - Craig-Hallum

Then also can you provide just a little more detail on your Enfinity deals that, how much equity participation do you get and is there any cash investment on your part or is it only product?

Mark Morelli

For the 10 megawatts that we have announced it is only product. There will be no cash investment in those project financing. It’s on an individual project-by-project as we contribute into the projects. There is a high likelihood that we will have substantially a good chunk of the equity ownership in those projects in the beginning. So, that would windup being consolidated.

Operator

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

Rob Stone - Cowen and Company

I wonder if you could just put a little more color on the impact of the furloughs. Does that show up principally in cost of goods sold or was there some impact on other expense line items?

Harry Zike

Let me comment on the furloughs. The furlough we had in the last quarter, which was approximately two weeks, most of that shows up in the cost of goods sold line because it involved a lot of the associates in our factories. The furlough that we announced last week, just three to four week based upon manufacturing location.

Rob, that as well will show up mostly in the cost of goods sold line and to say mostly the majorities is there, because majority of our workforce is in the manufacturing side. Having said that, that’s announcement we did last quarter also affected the SG&A folks because we had asked everyone to take that furlough. As we look into Q4 with this furlough, there will be some savings as well on the SG&A line, but the majority is in cost of sales.

Rob Stone - Cowen and Company

So, going forward expense reductions you’re looking for in G&A are, I think you said a 20% reduction in personnel costs? Are you expecting a further reduction in force then?

Mark Morelli

That’s part of the restructuring comment I raised earlier today. Of course, as we have a demand driven expansion, we will reduce our workforce and reduce all of our other costs as well by the way, not just the workforce to meet that demand driven expansion. That will result in a restructuring charge for us in the fourth quarter. So, the answer to your question short wise is, yes.

Rob Stone - Cowen and Company

I’m assuming since you’re slowing down CapEx that we shouldn’t expect any preproduction expenses for a while now as well?

Harry Zike

Yes, that’s true, Rob. Our preproduction is also coming down dramatically. I think we originally had guided sometime early in the year about seven to nine. You’ll see that number is already down dramatically and will continue to go down in Q4.

Rob Stone - Cowen and Company

A final question, if I may. What is your capacity at the moment or where do you expect to finish the year in terms of capacity since you’ve deferred some of the Greenville expansion?

Mark Morelli

Capacity, Rob at the moment is approximately 178 megawatt nameplate.

Operator

Your next question comes from Satya Kumar - Credit Suisse.

Satya Kumar - Credit Suisse

If you were able to get your utilization back to 100%, where can you take your costs down to assuming you don’t expand beyond this point?

Mark Morelli

We are not going to guide to that specifically, but if you go back and look at where we had discussions in our path to grid parity, we know with increasing volumes that we can see a very rapid decline in our cost per-watt. So we anticipate, we will have a very competitive solution as we approach grid parity.

Satya Kumar - Credit Suisse

I think at the Analyst Day you had talked about Mark, getting down to $1.10 cost per-watt and at that time I think you were close to a $2 cost per-watt level. Majority of those cost declines, I want to say more than two-thirds of it was from direct materials and efficiencies. So I’m just trying to get a sense as to how close you can get to that target given that scale was not as much a factor as materials and efficiency was?

Mark Morelli

Yes, I think some of the assumptions there is that we are running our production close to our build down capacity. So what’s essentially happening is you are not picking up that absorption of some of that overhead that’s there. So, if you go back to that and if you assume we starts running our factories closer to our actual capacity then you are going to pickup those benefits.

A lot of that is in materials and we are seeing those benefits flow to the bottom line. The problem is its being masked by these overhead that’s not being absorbed through this volume that we will need to get in the near term. So that’s why we have stated that our strategy is really to work on demand creation and the points that we’ve laid out here in this earnings call.

Satya Kumar - Credit Suisse

How do you think about your strategy on pricing? Do you look to maintain a positive gross margin or do you look at it as a market based pricing and you are a price taker? Do you expect to price on sort of a marginal cost basis ignoring the sort of the under-absorption in non-cash charges?

Mark Morelli

First of all, we have contracts with the price in it and that serves as a basis, as well as the fact that we look at our pricing differential over polycrystalline and what that means for our customer, but certainly we would expect well into the positive gross margins in terms of our pricing.

Satya Kumar - Credit Suisse

What portion of your March sales was the only BIPV channel where you have more price protection?

Mark Morelli

As we’ve said in the past, it tends to really be true here today, is that about 70% of our volume is going in to the BIPV markets and we certainly see that and we say BIPV is really a sweet spot in the market and we certainly see that occurring today.

Satya Kumar - Credit Suisse

Lastly, can you give an update on the Ovonic Memory segment? Is there any customers there ramping production and any possibility of improved royalty revenues in this segment?

Harry Zike

We don’t think that there will be substantial royalty revenues in the near term, but there are a number of folks that continue to work on this. There is some separate announcements that have gone out. There continues to be investment by some pretty major players, such as Samsung, that has been quite active in this space.

So we are hopeful that this will be a good investment for folks. It’s very difficult for us to guide and that’s why we haven’t been providing guidance on in the past. But we do see continued activity there, as folks are looking at this solution as a new way of bringing the cost down for memory as well as some additional features that it adds.

So net-net, we think it represents some positive upside for the future, but I would not expect anything in the near term.

Operator

Your next question comes from Jesse Pichel - Piper Jaffray.

Jesse Pichel - Piper Jaffray

Are there any obstacles that would prevent you from say, taking $0.50 out of your cross structures as volumes improve and are no longer hit with fixed absorption issues?

Mark Morelli

Absolutely not and we think that number you are talking about is certainly on the order of what we are seeing as quite capable as the volume quickly comes back.

Jesse Pichel - Piper Jaffray

Because that would put you in the neighborhood of the ASP declines witnessed across the supply chain so that would be great. UNI-SOLAR had a very high profile project in Beijing and a lamination entity there in China. Do you think you can capture any Chinese subsidy, if that market should pick up?

Mark Morelli

In fact I just recently returned from China. We signed a JV sometime ago and I was there touring our building out of a factory. We are starting with initial 15 megawatt and that will be in production in October of this year.

Let me be clear, this is volume specifically for the Chinese market and the fact that there is Chinese incentives there that really seem to be in place at the moment that they really have to serve that from locally manufactured goods and this certainly will qualify for that. Our partner there is a very strong utility player that is very well connected with the government and we anticipate that volume will be soaked up in the Chinese market.

Jesse Pichel - Piper Jaffray

Once upon a time you talked about other products in the pipeline. Have you thought about putting your triple junction on glass and what type of efficiency may that have?

Mark Morelli

We haven’t. That’s not an area that we’ve explored in terms of it being among glass. We are currently really focused on our flexible footprint, but if you think about it, we’re also finding new opportunities for this project where other glass based product does not compete. An example of that is we talked about that these landfill covers. It’s a very sizable market, if you go out there and study the market for landfill covers.

This is where glass-based, rack-based system does not sit well because the ground shifts and a flexible solution is absolutely the right way to go. Interestingly enough, we use the same technologies we use today because that’s a membrane that goes over the landfill. We bond to that membrane the same way as we bond to a roofing membrane in the commercial space. So, we’re leveraging a lot of the same technologies to open up new segments to the markets.

Jesse Pichel - Piper Jaffray

My last question is, maybe this was disclosed in your Q or K, but can you give us your particular exposure to Italy and France?

Mark Morelli

About 80% of our sales this past quarter were to Europe and within that European piece about 40% went to France and 25% to Italy. So, a lot of it may shift a lot from quarter-to-quarter. Overall, it’s still a high percentage of Europe as the United States has yet to pickup due to the stimulus bill, but you see some shifting from quarter-to-quarter based on what projects are going through.

Jesse Pichel - Piper Jaffray

Would you say that those two markets France and Italy, continue to grow or do you think that those markets are now experiencing some slowdown as a result of the credit crisis over there?

Mark Morelli

Well, I think in near term there has been some slowing because of the fact that some of the projects are not going through, but overall these are great growth markets. Italy is a fantastic market for us. We’ve got a great solution for that market. It’s going to be one of the first markets that reach grid parity and France as well.

We continue to gain traction in those markets and further penetration. There was a great show last week in Verona, which we presented at Verona, Italy that we presented at. We’re getting a very, very warm response in those two markets.

Well, thanks again for joining on today’s call and for your continued interest in ECD. We remain confident that we’ve got the right products, the right people and the right strategy to succeed in the long run. Most importantly, we also have the financial strength to get there. Thank you for your attention and this concludes today’s call.

Operator

Thank you. This includes today’s conference call. You may now disconnect.

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