Evergreen Solar Inc. Q2 2009 Earnings Call Transcript

Evergreen Solar Inc. (ESLR)

Q2 2009 Earnings Call

July 30, 2009 05:00 pm ET

Executives

Mike McCarthy - Director of Investor Relations

Richard Feldt - Chairman, President, and CEO

Michael El-Hillow - CFO

Terry Bailey - SVP, Marketing and Sales

Analysts

Sanjay Shrestha - Lazard Capital Markets

Min Xu - Piper Jaffray

Adam Lilling - UBS

Al Kaschalk - Wedbush Morgan

Robert Lahey - Ardour Capital

Hari Chandra - Deutsche Bank

Timothy Arcuri - Citi

Theodore O'Neill - Kaufman Bros

Jeff Davis - Waterstone Capital

Chris Blansett - JPMorgan

Jesse Pichel - Piper Jaffray

Burt Chao - Simmons & Company

Presentation

Operator

Good day everyone and thank you for standing by and welcome to Evergreen Solar's Second Quarter 2009 Conference Call. Today's call is being recorded and webcast. At this time for opening remarks, I would like to turn the call over to Mike McCarthy, Director of Investor Relations of Evergreen Solar. Please go ahead.

Michael McCarthy

Thank you and good afternoon everybody. I am joined today by Ric Feldt, Chairman, President, and CEO, Michael El-Hillow, CFO, both of whom will be making opening remarks. Terry Bailey, Senior Vice President of Marketing & Sales will join them for the Q&A portion of the call.

Before we begin, we would like to remind everyone that statements that are made in the conference call, that are not historical facts, such as those dealing with future financial performance and growth are forward-looking statements under the Private Securities Litigation Reform Act of 1995.

Future performance and financial results of the company will differ from those expressed or implied in any such forward-looking statements due to various factors. Such factors include, but are not limited to those described in filings that the company makes from time-to-time with the Securities and Exchange Commission. The company undertakes no obligation to update these statements.

I will now turn the call over to Rick for his review of the second quarter. Rick?

Richard Feldt

Thanks Mike, and good afternoon everybody. I'll begin today's call with a brief overview of the solar market, after which I will update you on our progress at Devens, and then review our contract manufacturing arrangement with Jiawei in China.

As we expected, product demands increased sequentially, over quarter one, and we see that continuing into the third quarter. However, pricing continues to deteriorate and credit markets remain largely frozen, as our customers seek alternative financing for both large and small projects.

Both we and they believe that as the global economy begins to rebound the need for reliable and competitively priced sources of renewable energy will increase. At Evergreen, we are continuing to enhance our ability to supply renewable energy on a global scale at a competitive cost, and are investing today in the face of these challenging economic conditions.

During the quarter, we produced 23.6 megawatts and sold 23.2 megawatts at an average selling price of $2.70 per watt. This compares to the 18.2 megawatts produced and the 17.3 megawatts sold in the first quarter at an average selling price of $3.13 per watt. Looking to the third quarter, we expect that Devens will produce and ship between 27 and 33 megawatts, again depending on market demand. As no other quarters, we continue to have the ability to produce more product than the market currently will take. Operational improvements and cost reduction are our primary focus at Devens. Each of our wafer cell and panel fabs have yield in excess of 90%. And we have room still for future improvements as our employees continue to move up the learning curve and we fine tune the operations of our equipment.

We are specially pleased and proud of the performance of our wafer fab, which uses our proprietary Quads, String Ribbon wafer technology. We are currently manufacturing wafers that are about 190 micron thick. We have a number of furnaces now producing wafers that are 170 microns. We have increased our ribbon growth speed from the original design intend of 20 millimeters per minute to 22 millimeters per minute on most of our furnaces and 24 millimeters per minute in pilot. So, we have increased the productivity of Quad furnaces by 10% to 20%.

Over the next 12 months, we believe we can continue to make our wafers thinner and grow them faster, further reducing our silicon usage and production costs. We currently use about 4.5 grams of silicon per watt, which is less than 50% of the industry average for poly-crystalline wafers. At $98 per kilo, our current average long term cost of silicon, this equates to a full yielded silicon cost of about $0.40 per watt. We are on track to meet our $2 per watt goal when the factory is running at the 40 megawatt rate per quarter.

Beyond our $2 per watt target, we have identified a variety of cost improvement programs including thinner wafers, higher yields and silicon at around $50 per kilo that could further reduce our cost by as much as another 25% to about a $1.50 per watt over the next two years. This cost reduction programs will allow our Devens facility to remain competitive in the market that is expected to continue to experience price declines in the near future.

Unfortunately the client of panel prices will continue to place financial pressure on Devens. However, we believe that it is important to have a major manufacturing presence in the United States as this market begins to grow at a substantial rate over the next few years, supported by the incentives that are already in place.

Our recently announced agreement with the United states Export-Import Bank demonstrates that made in USA is important and can provide installers globally, a cost effective source of funding. But, once again the industry needs a more relaxed financing environment from commercial banks especially in the US in order for large scale projects to resume in earnest once again.

Now, I would like to turn to China. Earlier today, we announced that we had signed a final agreements with Jiawei and the Wuhan government and are now executing on a wafer facility expansion in China.

There are two important points I would like to focus on. First, is around capacity expansion. For a total investment of about $50 million, $17 million of which will be provided by Evergreen and $33 million by the Wuhan government, we will construct a new Wafer Fab based on our Quad furnaces to support 100 megawatts annually of low cost wafer capacity.

Jiawei make a similar investment supported by the Wuhan government and process our string ribbon wafers into Evergreen solar branded panels on a contract manufacturing basis. We will reimburse Jiawei for its cell and panel conversion costs, plus a totaling fee. The actual price paid to Jiawei will be negotiated each year.

We expect to ship the first panels produced in China by the spring of 2010, and reach full capacity of 25 megawatts per quarter by early 2011. We will be leveraging China's low cost manufacturing base to reduce our production cost. At the full capacity of 25 megawatts per quarter of this first facility, we estimate that our production cost will be in the $1.40 to $1.50 per watt range at a silicon price of about $25 per kilo.

Similar to Devens, as additional efficiencies are realized and the price of silicon is settled at about $50 per kilogram, we believe we can push this number down to around $1 per watt level by 2012. The second point to understand is the physical presence inside China that Evergreen will now have. The demand for energy in China during an economic upswing will have a considerable impact on fossil fuel supply in demand dynamics.

As are many governments around the world, Beijing is actively providing alternative energy investment incentives, as it seeks to reduce its dependency on fossil fuel generated electricity and to provide for renewable low cost and non-polluting alternatives to feed its industrial base.

The performance of Evergreen's product position us well to serve the growing demands of China's energy consumption. Under the China agreements, our part is intend to further expand production by another 400 megawatts, taking installed capacity to about 500 megawatts of low cost manufacturing by the end of 2012, which again, will be determined as market demand warrants.

Our expansion China serves as a crucial part of the foundation being set in place to support our long-term growth profitability and technology development strategy. Before turning the discussion over to Mike, I would emphasize that we will continue to match our production to what we believe to be market demand.

Our financial market positions are good with our subcontracting agreement with Jiawei, we remain confident in our ability to be well positioned when the industry return to significant growth. With that I'll now turn the discussion over to Mike.

Michael El-Hillow

Thank you, Rick, and good afternoon again. Today I will discuss our second quarter 2009 financial results, provide updates on the economics of Devens, Sovello and our capital spending plans for the rest of this year.

Products sales for the second quarter of 2009 were $62.7 million, an increase of over 15% from the first quarter of 2009 of $54.4 million. During the quarter, we shipped approximately 23.2 megawatts compared to 17.3 megawatts in the first quarter.

The sequential increase in product revenue was due to the approximately 30% increase in volume from our Devens facility, offset significantly by 13.7% decline in our average selling price.

ASPs during the second quarter decreased to $2.70 per watt, from $3.13 per watt in the first quarter of this year. ASPs for panels have been [roughly] declining over the past several months, and we expect there will be a further pricing pressure for the remainder of the year caused by high inventory levels and continued tight credit markets.

During the second quarter, approximately 61% of our product was sold in Europe, 24% in the United States, and 15% in Asia, compared to approximately 80% of products to Europe, and 20% to the US during the first quarter.

Fees from Sovello, our joint venture with REC and Q-Cells were $1.1 million in the second quarter of 2009 compared to $1.4 million for the first quarter. Fees decreased sequentially due to lower sales volume and selling prices.

Gross margin was 1.9% for the second quarter, up from 1.2% in the first quarter. Gross margin increased sequentially due mainly to improved overhead absorption and improved yields has now become increased production at our Devens facility, which as Rick noted continues to ramp in line of our expectations.

Our manufacturing cost per watt was $2.70 in the quarter compared to with $3.19 in the first quarter, as we continue to see the benefits of manufacturing improvements and higher throughput.

R&D expense was $4.4 million for the second quarter 2009 similar to the first quarter. We will continue to invest in R&D primarily in our Quad wafer technology in improving cell conversion efficiency.

The programs aimed at achieving our target of total manufacturing cost of about $1.50 at Devens and $1.00 per watt in China by 2012. SG&A expense was 6.7 million compared with 6.4 million in the first quarter of the year. The sequential increase in expense was driven primarily by cost associated with attending major trade shows during the quarter. Facility start up cost associated with our Midland string plant and initial cost associated with China were approximately 687,000 in the second quarter.

Substantially lower than the first quarter amount of 3.5 million, which is primarily associated with Devens? There were no start up cost related to Devens during the second quarter, as both phases are now in operations. Start up cost will increase in the third and fourth quarters, as we ramp our Midland string facility, increased build out activities associated with our expansion into China. In total, we expect start up cost will be in the range of about $7 million for the remainder of 2009.

During the second quarter, we incurred $825,000 related to the Marlboro facility shut down most of which relates to cost of moving equipment out of the facility, occupancy expenses and depreciation expense. We expect to incur this cost until the lease on the facility expires in mid 2010. Our operating loss, which includes all the startup expenses and restructuring charges was $11.5 million for the quarter compared to $59.3 million in the first quarter, which included $43.9 million in charges associated with the write off of a loan receivable, and related interest from our silicon supply contract with Silpro.

On a pro forma basis our operating loss is $10.7 million for the second quarter as compared to $13.6 million in the first quarter. This represents a 22% improvement even on the phase of a 13.7% decline in average selling prices. We're continuing to make significant progress with our Devens facility and seeing real benefit from our deployment of the proprietary Quad technology introduction there.

Other expenses were $3.5 million in the second quarter, which consisted of foreign exchange gains of $1.7 million, and net interest expense of $5.2 million. Other expenses in the first quarter of 2009 were $3.9 million, which consisted of foreign exchange losses of 699,000 and net interest expense of $3.2 million.

Non-cash interest expense of approximately $2.9 million is included in the $5.2 million net interest expense recorded in the third quarter related to the amortization of debt discount associated with our outstanding convertible notes.

We reported an equity loss in Sovello for the second quarter of $5.3 million compared to $1.3 million for the first quarter of 2009. Sovello's net loss increased sequentially as a result of both lower sales volume and lower selling prices.

As we have discussed, Sovello was in the process of building its sales and marketing infrastructure in order to function as a standalone company to market and sell their own product under the Sovello brand.

Transition to sales and marketing activities from one company to another and rebranding in any environment is difficult, and the given the turmoil experience in the solar industry in the past six months, this transition occurred at an extremely challenging time.

As such it proved very difficult for Sovello to react quickly to the rapidly changing market, which directly contributed to the decline in sales. Sovello is ramping its third manufacturing facility in Thalheim, Germany, which uses our Quad technology and is expected to begin production this quarter.

The three shareholders expect the sales volume will improve substantially in this quarter. Net loss for the second quarter was 20.3 million or $0.11 per share versus 64.3 million or $0.40 per share in the first quarter of 2009. Weighted average shares for the second quarter were 180.7 million, weighted shares for the first quarter of 161.9 million. The increase during the second quarter was due to our successful common stock offering completed during May 2009, in which we issued 42.5 million shares for total net proceeds to 72.8 million.

I’d like to now provide you an update on Sovello's bank debt situation. Sovello has been in violation with bank covenants since the end of last year. Sovello management and the shareholders have continued negotiations with the bank syndicates lead by Deutsche bank to restructure Sovello's obligations under their loan agreement. As a reminder, each shareholder has agreed to the following. A guarantee above €2, 10 million of Sovello's repayment obligations under the loan agreement, and to provide a liquidity assurance of Deutsche bank on behalf of Sovello's through August 15 2009.

Other than for payments that might be required pursuing to their loan agreement. The bank Syndicate has recently after each shareholder putting additional €2 million into escrow to continue good faith negations in restructuring Sovello's debt, which was made by the shareholders last week. Based on its current business plan, we did not expect the liquidity assurance we require the shareholders to advance significant additional funding to Sovello.

Now I’ll discuss our cash situation and capital needs for the remainder of 2009. From a liquidity stand point we ended the quarter with cash, cash equivalence and short term investment of about $86 million. To the end of this year, our major capital related cash needs are about $55 million as follows. Capital required for our China expansion of about $17 million. Completion of Devens of about $18 million, first phase of our Midland string factory of about $8 million, sustaining capital of about $5 million and debt service of about $7 million.

Regarding our China factory, we expected total cost of the facility will be approximately $50 million of which $33 million will be funded by the Wuhan government as Rick pointed out. Evergreen Solar can pay the fund back at anytime through July 2014 at an interest rate of 7.5%. So in effect, we have a five year bullet loan with no prepayment penalty.

Assuming the industry conditions, it allows us to keep Devens facility at a minimum of 75% capacity or 30 megawatt per quarter. In the falling prices that we're seeing, stabilizes about $2 to $2.25 per watt, we believe that we have sufficient cash to meet our operating and capital needs.

As we have said recently at about an ASP of $2 and a quarterly capacity of 30 megawatts, we are at about operating cash flow break even on a quarterly level. This completes our prepared remarks. I will now turn the call over to the operator so that Rick, Terry and I can respond to any questions you might have.

Question-And-Answer Session

Operator

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions). We will take our first question from Sanjay Shrestha of Lazard Capital Markets.

Sanjay Shrestha - Lazard Capital Markets

Good afternoon guys. Couple of quick questions. So, now with the, sort of promising, sort promising out of the cost trajectory with your Jiawei contract manufacturing relationship, how does that sort of change your expansion thought process with Devens beyond 40 megawatt per quarter run rate? And then also, how much more you guys choose to or plan to sort of putting with the Sovello relationship, given that that cost structure is probably never going to be able to rival the cost structure you can get in China?

Richard Feldt

Sanjay, this is Rick. We have, we [barely] made the investment in Devens, so we don't really plan on increasing our investment in Devens beyond what we've already done. Our focus really will be on China, and so for future expansion like anything to change, if panel pricing rebounded dramatically, there were substantial incentives for US made product et cetera. There could be conditions under which we would further invest in US manufacturing, but unless the world change a lot in it's current state, our plan would be to expand mostly in China.

Sanjay Shrestha - Lazard Capital Markets

Got it. And a few more, if I may. So you guys just announced on Tuesday about your cooperation of the Export-Import Bank of US lowering just loan for solar project outside the United State. That talks about potential opportunity of 19 megawatt. What sort of a time frame are we talking about for that?

Terry Bailey

Yes, Sanjay this is Terry. So the timeframe depends upon the type of project that that's being thought about. It can be anywhere from four week to three months for it go to the system. Generally speaking they go through fairly smoothly, while we put into place was an easy way to work with our customers to help them through the paper work and get it all done, and working closely with Ex-Im Bank, so they know what to expect is on the way. But depending upon size and complexities four weeks to three months.

Sanjay Shrestha - Lazard Capital Markets

Okay, one follow up on that then. Can you update us on your prior very impressive backlog that you guys had, given that the world and change that we've gone through with the ASP reduction, how firm those commitments are still at this point in time? And two can you also update also on your silicon position as to given what's going on also on the spot silicon market and is there any risk for you guys to potentially have to write down or potentially re-negotiate your existing long term silicon contract?

Terry Bailey

This is Terry again. On your question with regards to the backlog. So, all that backlog is still in place. Obviously, backlog was calculated at the price at the time that the contracts were signed, and that's changed now. So, it's gone down by roughly the percentage decrease in pricing, but they are all very firm. We pick the customers carefully, and while everyone is watching more closely, there is no issue at this time with regards to the latest round of contracts that we signed.

Sanjay Shrestha - Lazard Capital Markets

Great. One last question, and I'll hop back in the queue. Mike, I couldn't catch all of it, when you were going through the cash requirements for the remainder of 2009. Can you give me those numbers one more time?

Michael El-Hillow

I certainly can. It starts with investment in China, $17 million, Devens $18 million, the string factory, $8 million, sustaining capital, $5 million, and debt service of $7 million.

Operator

We'll go next to Jesse Pichel of Piper Jaffray.

Min Xu - Piper Jaffray

Hi. This is Min Xu for Jesse Pichel. Thanks for taking my questions. Two questions. First, what is the depreciation and amortization in the quarter? Second, you mentioned the market opportunity in China, have you participated in any bids on projects in China? Thanks.

Michael El-Hillow

$10 million.

Min Xu - Piper Jaffray

You mentioned the market opportunity in China, have you participated in any bids or projects in China?

Terry Bailey

Min, this is Terry. As you probably are very well aware, the projects in China will likely be fulfilled with Chinese manufactured products. So, it's our full intend in working with Jiawei that we will participate in those bids with Chinese-based product, and so we will move in that direction. Now, that the documents are signed, we are able to begin to engage.

Operator

We will next to Burt Chao of Simmons & Company.

Burt Chao - Simmons & Company

Hi, guys. Just a couple of quick housekeeping. What was conversion efficiency in the quarter for your product?

Terry Bailey

Self conversion?

Burt Chao - Simmons & Company

Yes.

Terry Bailey

It’s still around 15%. It hasn’t moved much. We do expect, again, over time when Devens is back and positive, and everything is running well to get into the mid 15s, and then got plans in place to get to the 17%, 18% in the next couple of years. We are pretty much where we were last call.

Burt Chao - Simmons & Company

Okay. Great. Other than just dividing your production by the stated capacity, is there anything in that would change capacity factor? I mean, I think it's pretty straight forward calculation. There is nothing in there?

Richard Feldt

Again, we are able to produce more product than we currently are able to sell. So, Devens this quarter will be, as Mike and I said between 27 and 33, because we think that what we can sell. When we'll test it, we'll get that up to 40 megawatts. We are hoping to be testing sooner or later, but right now it looks like 33 megawatts is upper end what we believe is sellable at prices that still stay above two bucks a watt.

Burt Chao - Simmons & Company

Okay, great. Just touching on polysilicon real quick. You guys had mentioned, and I may have misheard them, but long-term kind of blended cost of polysilicon contracts is around $90 a kg, and you said in China, for that dollar per watt number, you needed to be around $50 a kilogram. Is that right?

Richard Feldt

That’s right. Our cost will go down annually, and just as we have a take-or-pay contracts with our customers. The silicon producers likewise understand as the spot price and market price drops, they will have to renegotiate, and we believe that will happen. So, right now, you can get spot pricing around 70 bucks, but it is not that widely prevalent.

However, if a lot of products, a lot of silicon becomes available at $70, $60, we believe we'll be able to get lower prices in our long-term agreements.

Burt Chao - Simmons & Company

Okay. Mike, you had mentioned, the dollar per watt or dollar per cubic gram number for polysilicon in China; now that would get you to kind of the $50. I thought I heard 25?

Michael El-Hillow

No, it was 75.

Burt Chao - Simmons & Company

Okay. 75. Okay. Wonderful. I appreciate that. So, with spot pricing at 70 as you just mentioned, I mean, has that come up, because we had heard previously $50 to $60 numbers or is that just kind of really small quantities?

Richard Feldt

We think that's really small quantities. We are out in the market, we are pinging it regularly. We do make some spot purchases just to keep abreast of what's occurring, but at this point, we saw the major suppliers that we are in constant touch with, we don't believe that there is a lot of product available at 50 bucks.

Burt Chao - Simmons & Company

Okay. Great. Then just kind of the last question around the Chinese agreement. With the Chinese cost being significantly better than that that you can achieve in Devens effectively at the beginning of next year, and then in the kind of two year timeframe for a dollar per watt, and also with this export-import agreement, would it eventually makes sense for you to export everything that you make into Devens?

Also, if the US market takes off for you actually to import that from China given the lower cost, because if you're going to secure the financing for exported products banned in the US versus Chinese products, is that something that's under consideration or is that little too much work for getting what we need out of this agreement?

Terry Bailey

I'm writing down that idea. So, clearly, when you have global manufacturing, you want to balance a whole lot of things, it includes cost of shipping, customer desire to buy it in the country-made, cost and financing and everything, but that's an interesting idea, and I will pay close attention to it.

Burt Chao - Simmons & Company

Okay. And do you anticipate that the Chinese products, even though it is Evergreen branded effectively Evergreen sourced, would command bit of a discount compared to the US or even in the Sovello made products from a pure dollar per watt basis?

Terry Bailey

No, we don't. We'll be very careful about that. The product will go through the same qualification testing,. It will go through the same internal quality control, same end of line, same reliability testing et cetera, et cetera. So, we don't expect, and we've had lot of discussions with Jiawei about, the need to maintain the same standards and specifications that we do in Devens.

Burt Chao - Simmons & Company

Okay. So, from a bank financing standpoint in Europe, you haven't heard any push backs, say from the German bank saying that, a US based Evergreen patent module would be a differently financed than a Chinese one?

Terry Bailey

What the criteria for is primarily the level of quality that they expect to see in a panel actually, especially with regards to the warranty and performance over the lifetime. We are well respected in that area and the product from Jiawei will be as well. So, in top tier companies, I wouldn’t expect to see any difference there.

Operator

We’ll go next to Stephen Chin of UBS.

Adam Lilling - UBS

Yes. Hi. This is Adam Lilling for Stephen Chin. Are you seeing any pent-up demand from the United States on large scale projects now that’s a Treasury Grant Program has being clarified? Also, what’s your view on when the Department Of Energy will announce its loan guarantee details? Do you think it will be fourth quarter or first quarter of next year?

Terry Bailey

This is, Terry. That’s a tough question. So, absolutely, there is pent-up demand. There is a good pipeline of projects that have been waiting for clarification on a number of fronts in the US. So, there were some releases made today which is primarily not for standard product going into large projects. I would expect that that would occur. I hope sometime by the early fourth quarter but, you can’t really tell but it's expected that is coming and generally we know the form of it, and that should be a big boost.

The Treasury Grant Program, again, there is some final releases to be done on that, but large degree small commercial and residential programs will really benefit from that being physically in place, but there is a lot of excitement and pent-up demand, and that will be well taken advantage of as soon as the final clarifications are made.

Adam Lilling - UBS

Sure. Thank you.

Operator

We’ll go next to Al Kaschalk of Wedbush Morgan.

Al Kaschalk - Wedbush Morgan

Good afternoon, guys. Just a clarification really on the planed production for Q3 of 27 to 33 megawatts. That’s up I guess almost 20%. So, is that part due to your availability to produce more or have you really seen sort of the improvement in the market marginally that, you really have that market to sell if you can make 40 megawatts. Maybe you can just touch upon that a little bit?

Terry Bailey

Yes, again, we are pacing production now based upon what we think we can sell. So, conditions are better at the summer installed season, the order rate is higher. So, we think that we'll sell between 27 and 33 sets that we will make. Devens once more. Devens had more capacity in quarter two than we exercised it to produce. It has more capacity in quarter three than we're going to exercise to produce. This is really now a function of market demand.

Al Kaschalk - Wedbush Morgan

Are there other things you maybe can do relative to even some of your competitors to help jumpstart some of the demand on your side, in addition to the financing? I mean, clearly though the broader market has kept a lid on demand for everybody, but just looking at your product relative to others, which you are able to produce versus which you could a couple of quarters ago?

Terry Bailey

Right now, as people dropped prices, demand doesn't go up. So, this market does not have the elasticity the most markets tend to have. So, people are dropping prices to move inventory not because of increasing demand. Until credit starts to flow, we don't believe there is much more we can do.

We are more or less a fast follower on pricing. I mean pricing has just dropped like a rock in the last three quarters as you know. It was close to four bucks a year ago, and now it's well under three bucks. So, we are hesitant to be the price leader, to remove a little bit more product if we dropped our price below two bucks a watt probably, but at this point we are not anxious to do that.

Al Kaschalk - Wedbush Morgan

Okay. Thanks a lot. Continue the improvement.

Operator

We will go next to Adam Krop of Ardour Capital.

Robert Lahey - Ardour Capital

Hi this is Robert Lahey speaking on the behalf of Adam. Could you guys comment real briefly on the noise control issue with the neighbors up in Devens, as typically when you would expect to get a final CEO and what sort of the online cost of the experience would be and how that would be treated?

Richard Feldt

Sure, so as we started ramping up the factory, we found unfortunately that we are exceeding the local noise requirements, which by the way are more severe than the State or the DEP requirements. Nonetheless we were not in compliance, so we've had a real [crash] program over the last month or so to achieve compliance. We took our first confirmatory set of readings last Saturday morning and found that we were at about 38 db in the quite hours of the morning, which is what compliance levels are.

That's not to say that there is not more work for us to do. We have agreed to do "stress test", making sure all the equipment is running at maximum so that the neighbors and the Devens Enterprise Commission can be certain that we won't exceed the local noise requirement. But, we are well on our way to solving the noise problem.

Michael El-Hillow

And one other thing from the standpoint of the cost, this factory has been opened up in two phases and we have gradually increased production. Quite frankly it's hard to design sound controls in a factory where you're expanding production routine basis, and this is the really the first factory of its type quite frankly in the world. The (inaudible) of the Quad technology and so the cost we're going to incur, which will be in the neighborhood of $2.5 million to $3 million, quite frankly they've always been kind of in our plans per say, but there was no reason to put in the additional sound protection material that we're putting in now until we actually saw the plant functioned. And the amount that we've talked about the $2, $2.5 to $3 million dollars is included in the $80 million that I talked about earlier about our usage of cash to rest of this year, so it will be cost of building Devens.

Robert Lahey - Ardour Capital

Okay. Great, thanks. And can I ask real quick to your inventory guys at the end of the quarter, can you break that down a little bit in terms of our working progress versus finished goods.

Michael El-Hillow

It's $29 million dollars of inventory, and I think it's about $17 million of raw materials and about $5 million to $6 million of both whip and finished goods in a ballpark, its mostly raw materials.

Operator

We will go next to Hari Chandra of Deutsche Bank.

Hari Chandra - Deutsche Bank

Thank you. While you provided the cost targets for 2010 and 2012, I just wanted to know what gross margin targets are you working with and are they realizable given the price implosion that you are seeing in the market.

Michael El-Hillow

Well, we've always try to put as a target of 30% gross margin and that envisioned ASP is going down quite frankly to low as a $1.75, we get our cost down to $1, we can deliver very attractive gross margins. What's interesting that's going on and Terry lives a day-in and day-out, is that prices that are in the marketplace are really hurting a lot of the manufacturers, but there is a lot of money being made, somewhere in the supply chain yet because of incentives.

This is an industry, which is going through a tremendous growth but new entrance, so along the 22, 0:00:55.3 [show] as soon as some semblance, let's say a reasonable that comes in, you think that the prices would stabilize in the $1.75 to $2 range and many people thought we wouldn't get there until 2011 and 2012, but that would be where our operating model says, pricing going down to about this $1.75 range and then you combine Devens cost and China cost, you would have an average cost of about $1.20, so that will give you a gross margin in the neighborhood of about 25% to 30%.

Hari Chandra - Deutsche Bank

And do you see any time line in terms of Sovello monetization or some other way to extricate yourself out that so that you can get some money out of it?

Michael El-Hillow

Would you repeat the question please?

Hari Chandra - Deutsche Bank

Is there any time line or any thoughts on Sovello monetization or anyway for you to extricate yourself out of that?

Michael El-Hillow

Well, Sovello just hit a rough patch because of the sales transition. So, I'd say monetization is being hurt by two things number one the recent misstep that we had over there, but number two this is not a time to be going into the capital market. So, I'd say that nothing is going to happen near term there.

Hari Chandra - Deutsche Bank

Okay. Follow-up on to monetize, does it entail Evergreen Solar to tap the markets again for it's operational needs? And of course you have given some cushion in terms of your cash and capital requirements as such. But, does it entail that you will be hitting the capital markets again sometime by the end of the year or next year?

Michael El-Hillow

Well, as I said you got to decide where prices are going to stop sliding to. At $2 a watt and three quarters capacity, we are fine, we don’t burn cash. If prices go much lower than that you can do the math, every $0.10 we lose is $0.10 coming out of cash. So, we are seeing a slow down in the decline of selling prices that seems to be real. This last quarter, as we said we sold it about 270 a watt. It’s going to be continued pricing pressures, all things being equal assuming that things just don’t get totally irrational, no we should not be going back to the capital markets in the near term.

Operator

We will go next to Timothy Arcuri of Citi.

Timothy Arcuri - Citi

I was just wondering what you have assumptions near-term are for ASPs kind of like the third quarter outlook, lets assume in production level there, is that 27 to 33 megawatts?

Michael El-Hillow

Between Q1 and Q2, the ASPs went down about 13%. We say we believe it is going to slowdown, so we'll tell we think it's going to be below 13%. Short of that we really don't know, I'll tell you we're hearing a lot of anecdotal information in the marketplace about pricing, but you have to Terry, lives this day and day out. You got to sit through what's real and what we're getting from the marketplace to try to drive prices down. So the returns of are so substantial, you think that people would start cutting prices, but just if you use a less than 13% you should be safe.

Operator

We'll go next to Theodore O'Neill of Kaufman Bros.

Theodore O'Neill - Kaufman Bros

Thank you. Of the shipments in the quarter, you quantify like how many of - what percentage of that was paneled that 200 watts or higher?

Richard Feldt

Yes. For the vast bulk of it was 200 watts or higher. We make very little products that's below that.

Operator

We'll go next to Jeff Davis of Waterstone Capital.

Jeff Davis - Waterstone Capital

You know can I get cash from operations in the quarter and CapEx for the quarter?

Michael El-Hillow

Sure. Just give me one second here.

Jeff Davis - Waterstone Capital

Why are you getting at the 7.5% financing from the Chinese is that just a unsecured loan?

Michael El-Hillow

No, no. It's secured by the equipment in China.

Jeff Davis - Waterstone Capital

Okay.

Michael El-Hillow

So during the quarter cash from operations was negative $17.8 million and CapEx was $28.4 million.

Jeff Davis - Waterstone Capital

How much of that cash from operations was working capital, what was funds from operations before any changes in working capital?

Michael El-Hillow

I tell you what, I'll send you an e-mail afterwards. I'll give you those numbers through e-mail, okay.

Operator

We'll go next to Chris Blansett of JPMorgan.

Chris Blansett - JPMorgan

Hi, quick question on maybe a little more color on the financing markets. How much of the problems you think are just lack of financing and how much are maybe financing it, a rate that maybe unpalatable?

Terry Bailey

Yes, this is Terry, Chris, so it's interesting. There things are moving around, so for a little while there was no financing available, people were just too conservative to want to put money until they see how things came down. Then I think frankly as the slowdown recently has been read, people waiting to see when the price would start falling. And that’s about the change, because this is the season especially in Europe when the installations must be done and they have to be completed this year to get the maximum feed in tariff.

So that’s why there is a general feeling that a lot of this is going to break loose now. And then we will see what the market is really like. The returns are excellent. They are in the double digits in many cases back to where they were at the levels when the industry really took off. So it's not that and where we are seeing that moneys are becoming available, now those moneys are looking for projects that are ready to go on the ground and be completed in a time frame to get the maximum feed in tariff.

Chris Blansett - JPMorgan

One more question, it's related to the Export-Import Bank. It seems that they have been able to finance export products for quite a long time for renewables and I’m just trying to understand why this avenue has not been utilized before, is there are specific reason?

Terry Bailey

The financing was readily available without Export-Import Bank financing. So, now it's a much more needed option and so there is a lot more attention being paid to it. Before it was easy to get financing in Europe especially, because there was ample money looking for places to put itself. So, it’s really a need.

Chris Blansett - JPMorgan

And then one last question for me. If you assume that a customer of yours did get full financing from the Export-Import Bank and when you take into account there ability to do partial funding of the system installation. What’s your estimate of how much of that total project financing would be done through the Ex-Im bank?

Terry Bailey

So, the rules are fairly clear. Just take for instance number, 10 million panels that went over or US made equipment, then 80% of that is covered by Ex-Im Bank and an another 10% or 30%, forgive me, of the remaining expenses inclusive of labor to put the project in the ground can be covered as well. So, you could get prints on the $10 million of US panels going there. You could get about $11.5 million in total money loaned out for the project.

Michael El-Hillow

Operator, would you please hold for one second. I just want to answer an earlier question from a caller. The change in working capital we talked about or the net cash in operation was $17.8 million, $18.3 million was used in working capital, and the remainder was a positive $500,000. So, most of it came from changes in working capital during the quarter. So, please go the next question now.

Operator

Thank you. We will go to Jesse Pichel of Piper Jaffray.

Jesse Pichel - Piper Jaffray

Hi, good evening gentlemen. Few questions, is there anyway to lower or eliminate the loss in Sovello? What is your strategy there?

Rick Feldt

In the short-term, Sovello has severely cutback on production. They have furloughed many of the employees. Under the German system, the government will pickup the bulk of the salary for an extended period of time. So, in the short-term, it is just pullback on production, furlough employees, don't burn any cash, and don't incur expenses.

Longer term, Sovello has the same opportunity, to get cost down to the same $1.50 we talked about in Quad, and doing the right thing to save. However, anyway, the short-term strategy is to hunker down and stop spending money until market conditions change.

Michael El-Hillow

Jesse, one other thing. This is Mike. May be, it'll take some time, but the fact is, they are an awful lot of solar related jobs in Germany, and you are starting to get some pushback from the German companies towards their governments to try to protect the jobs that are there, creating the jobs, and it's a big market.

So, I think there's a possibility, if the German government gets some traction, then companies that are based in Germany get some traction. They are not looking for protection, but there is a lot of just product comes from all over the world that’s just damaging these, I'll say, 'secular economies'. So, in time, and I think you've seen some of that come out recently from Germany.

Jesse Pichel - Piper Jaffray

Any idea if Sovello has much excess inventory out in the channel?

Terry Bailey

Jesse, I'll try and answer that. Although we've begun to treat the company separately, so I don't share directly a lot pricing or inventory information, but I expect that they don't have a lot in the channel.

Jesse Pichel - Piper Jaffray

Okay. Terry, since I have you there, what if we were to assume that the pricing for Chinese panels goes to 1.80 US a watt by Q4, then what is your strategy. Do you envision having A two tier pricing structure. One for US products and one for China products.

Terry Bailey

If it goes to that price in Q4 this year, we only have US product. So, we won't have a two tier pricing strategy until such time as we have product to even consider that. If Chinese pricing goes 1.80, that's a broad number, because there are different tiers of Chinese manufacturers with frankly different quality level, and different performance level.

So, as you are well aware, we put a lot of things into our product to result in very high kilowatt hours per kilowatt installed performance and some other advantages which we do see overall installed system price. So, we have always, and we expect to continue to get a premium based on mathematical calculation of benefit out of that. Or if drops to 1.80, then will increase the pressure on pricing of all other manufacturers in order to come down. I don't know to what degree, Jesse.

Jesse Pichel - Piper Jaffray

So, at this point, you are kind of half way I guess to your ramp I would say. Do you anticipate a problem moving the volume or really it's just a question of price? I guess what I am asking, is it contracted, those volumes?

Terry Bailey

Next year we have under long-term contract, 160 megawatts of product. Devens, at it's full production capacity 160 megawatts of product, which is one of the reasons we are anxiously building more factory capacity in China in addition to the lower cost structure.

So, we would expect to be able to move the product, what the pricing will be has to be determined by the market.

Operator

We will go next to Burt Chao of Simmons & Company.

Burt Chao - Simmons & Company

Hi, guys. Just touching up on Jesse's question regarding Sovello. I mean, already seeing Q-Cells have recently has been challenges in their core businesses. they've also shown the trends where it's diversifying outside of their home countries that is Norway, Sweden or Germany. If that being the case and they eventually start scaling back their European operations and Sovello, let's go out there and say potentially you can't get their cost down quite as much as you can even get down at Devens.

Have you had conversations among sub-partners about what a longer-term, kind of worst case scenario strategy would be for Sovello? I guess as Jesse pointed out, it's one of those things I think the cash burn there is a little worrisome, because amongst other things it seems like all the other segments are on the up and up, while Sovello seems to be continually kind of a nagging issue.

Michael El-Hillow

This is Mike. It is such a tough question to answer, not just about Sovello, but about manufacturing any country is considered high cost. If at the end of the day, all manufacturing is going to be in China, then you are right, there will be every US based operation will shutdown in a few years. Every German operation will shut down in a few years, whether it's Sovello, you know the other names. We're going to assume that's not going to happen because it’s never happened in any other industry in history.

So, companies have got to keep a strong balance sheet, understand that during this time I'll say of transition, there is going to be some displacement. But, on a longer term, we believe at Evergreen you need to have a position, a manufacturing position in every major region. Not so much market but our Devens serves us North America, Sovello service Western Europe and then China service Asia.

Near term as a problem we are all facing it. So, the partners are talking about it, the partners are still committed to making this happen. But, we have also got to be sensitive to what’s happening in geographic regions. This is an incredibly tough time. You are not going to find many industries where prices have gone down 35% in the space of 12 months and that’s we're facing right now.

And we we're just trying to make it to the lowest [specimen]., that’s the best we can do to explain the situation.

Burt Chao - Simmons & Company

Okay, no that makes a lot of sense. One quick question have you done any research on maybe of a per watt basis? Or when you produce the model in China what you think that kind of flat shipping rates to today? What it would cost you on a per watt basis just to throw that on a boat and ship it to the West coast of the U.S. I mean, do you have an estimate on that?

Terry Bailey

Yes, we have precise estimates. So it's on the order of $0.03.

Burt Chao - Simmons & Company

Okay. As $0.03 of what, I mean that makes a lot of sense for you even to distribute to Europe. I mean at that point, when this will become a conflict between you, completely understanding that Sovello is its third entity, but you know, as Mike you highlighted that you want to keep a manufacturing base.

But they cost you $0.03. I mean for Evergreen to set up a warehouse whether it’s in the U.S. or Chinese modules or in Europe for Chinese or U.S. modules. I mean, do the economics still in the short-term make sense for you to -- sorry I guess getting to the end of the question how long is the German [furlough] program around, and how long are you able to kind of maintain this low level of cash burn as oppose to, if you had to pay for those employees or you need to pay for severance cost?

Michael El-Hillow

Well, getting into the particular just let's first talk in the boarder issue. All of us should better side, how the product is going to be fulfilled. If it’s just going to be low cost one region that’s why we are going to China. So, give us sometime there is no doubt it's difficult for U.S. companies and German companies or anyone who is in China. So, right now that the cash burn is not so significant that we have to overreact, but management teams will have to make decisions over the next six to nine months how they are going to operate.

I'll get back to what I said earlier, I do not believe that these economies where jobs are at risk are going to allow one sovereign industry to dominate industry. It didn't happen in semiconductor or semiconductor capital equipment, which is probably the best parallel. You go back to the mid 80s when the Japanese try to take over the semi industry. The United States form the trade organization and that would drove the growth of semi in the United States, its same parallel here. I'll say the Western Countries get support from their government and right now what we see is certainly United States is coming but it come slowly. It will be a very interesting six to nine months.

Burt Chao - Simmons & Company

Great, thanks Mike, thanks guys for the follow up

Michael El-Hillow

Thank you all for attending and we'll report the target at the end of the third quarter

Operator

That concludes that today's conference call you may now disconnect.

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