Energy Conversion Devices Inc. F4Q09 (Qtr End 06/30/09) Earnings Call Transcript

Energy Conversion Devices Inc. (ENER)

F4Q09 Earnings Call

August 27, 2009; 10:00 am ET

Executives

Mark Trinske - Vice President of Investor Relations & Corporate Communications

Mark Morelli - President & Chief Executive Officer

Harry W. Zike - Chief Financial Officer

Analysts

Jesse Pichel - Piper Jaffray

Colin Rusch - Thinkequity

Satya Kumar - Credit Suisse

Vishal Shah - Barclays Capital

Paul Clegg - Jefferies & Co.

Brian Gamble - Simmons & Company

Peter Kim - Deutsche Bank Securities

Robert Stone - Cowen & Company

Kelly Dougherty - Macquarie Research Equities

Analyst for Timothy Arcuri - Citi

Presentation

Operator

Welcome to Energy Conversion Devices conference call to discuss the company’s fourth 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.

Mark Trinske

Good morning everyone and thank you for joining us on our fiscal 2009 fourth quarter and year end earnings call. Participating on this call are Mark Morelli, our President and CEO; and Harry Zike, our Vice President and Chief Financial Officer.

This morning’s presentation will include the use of several slides. We will be controlling these slides and providing commentary on each. A downloadable copy of the slide presentation and our fourth quarter earnings press release are available on our Web site at www.EnergyConversionDevices.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 Web cast 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 the date of this call, believes to be reasonable and appropriate. We caution you that the facts and conditions that may exist in the future could vary materially from those upon which these statements are base. Please review the risk factors identified in the ECD filings with the SEC, including our most recent 10-K, which was filed this morning, and recent 10-Q.

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

Mark Morelli

Please turn to Slide 3. Fiscal 2009 was a challenging year for our business, as we had to respond to rapid changes in the marketplace. In the first half of the fiscal year we experienced robust demand for our products, invested capital to implement our demand-driven expansion plan, and demonstrated our ability to scale our capacity on a cost-effective basis.

There was then an abrupt deterioration of demand in the second half of the year, so we moved decisively, not only to reduce production and suspend expansion, but also to change our business model to focus more deliberately on demand creation. We are still experiencing continued softness in our core market, building integrated photovoltaics on commercial rooftops.

We have the greatest competitive advantage in this segment and it's been the primary driver of our business model to date. However, progress in this segment continues to be delayed as a result of construction slow-downs, capital improvement deferrals, and financing constraints, causing a sharp decline in demand.

Our actions in the face of declining market conditions impacted our financial performance in both the third and fourth fiscal quarters. We carried the burden of excess capacity by running our facilities at sub-optimal levels to preserve capital. This negatively impacted earnings but also contributed to assuring positive cash flow for the fiscal year.

We also chose to preserve our proven growth capabilities so that we can effectively scale our business when market conditions improve. Harry will speak to the details of our financial performance in a few minutes, including several specific items that contributed to a net loss for the quarter of $15.8 million, or $0.37 per share.

Please turn to Slide 4. We have completed our acquisition of Solar Integrated Technologies (SIT) and are now in the process of integrating the two businesses. As many of you know, we are a leading supplier of solar components of the building materials market and SIT is a leading solar roofing provider.

SIT was spun off from one of America's largest roofing companies in 2002 to focus on solar opportunities and is now a leading expert on rooftop solar solutions. They have long understood the unique requirements of the rooftop space and have incorporated this knowledge to develop and install the right roofing solutions. Since the company's inception, SIT has completed more than 350 rooftop projects in 16 countries.

We are now combining our two companies to form the world's leading solar rooftop company, offering turnkey solutions direct to the customer.

Please turn to Slide 5. The left side of this slide highlights some of the capabilities that have made us a recognized leader in the BIPV market. We are continuing to enhance our relationships with key channel partners in the building materials industry around the world, like Johns Manville, with whom we recently announced a new supply agreement.

These channel partners are incorporating our differentiated product in cost effective building materials that customers value for high-quality, low-impact commercial roofing solutions.

The right side of this slide highlights new capabilities we are implementing to transform our business to compete more effectively in the rapidly evolving global rooftop solar market. The SIT resources and expertise are helping us to accelerate our progress in many of these areas, especially transitioning from a single, component-focused business to a broader systems approach and expanding our addressable markets, both in terms of product applications and geographies.

These additional capabilities are also strengthening our BIPV core business as we share our expertise with our channel partners. This knowledge sharing will assist them in their product-development efforts and reduce their balance of system costs, which will further enhance their competitiveness, which will further enhance their competitiveness and profitability.

Please turn to Slide 6. Increasingly, customers are appreciating the importance of levelized cost of energy, or LCOE, as a key buying criteria. This is positive for us because we are lowering our total systems costs to improve LCOE for rooftop projects.

As this slide shows, at the beginning of fiscal 2009 our fully-installed system cost was about $6 per watt. This was at a time when we were principally focused on reducing our laminate costs, a single lever in the LCOE calculation.

By the end of the year, we addressed another LCOE lever, balance of system cost, to improve the fully-installed cost to less than $5 per watt, with certain channel partners on large rooftop projects. Now that SIT is part of our business, we see a near-term path to lowering system costs down well below $4 per watt, and eventually lower.

The price war in the polysilicon market, initiated by some of the Chinese firms, is impacting global module costs, one of the key LCOE drivers. We are adjusting our laminate pricing in light of these market conditions and our product differentiation allows premium pricing and BIPV applications for low-impact rooftop solutions of value.

In addition, we have capabilities to reduce total installed system cost to provide a more cost-effective solution on large rooftop projects. Commodity module companies that are not down-stream capable must compete solely on module cost.

However, system cost is only one part of the LCOE equation. Energy yield is also important, and an area in which we also have a competitive advantage. For this, please turn to Slide 7.

One of the key technological advantages of our laminate is their ability to generate more energy and real-world conditions over traditional polysilicon modules, another key component of LCOE. This slide shows one of many examples where we beat the competition by 10% to 40% in terms of energy yield. We outperform other technologies because we generate power in low and diffuse light conditions and perform better at higher temperatures, like those you might find at midday when the sun is at its peak.

Our energy advantage is another key lever in the LCOE equation that works to our customers' benefit. When factored in with the system cost levers we now have at our disposal, we can offer large-scale solutions that compete on both price and installed poly.

Please turn to Slide 8. In the first half of fiscal 2009 we grew capacity to meet strong demand, consistent with other solar companies at the time. In the second half, we carried that burden as we ran our factories at sub-optimal levels. Our fourth quarter 2009 cost per watt increased quarter-over-quarter to $2.09 per watt, reflecting our production furloughs to reduce our quarterly production to 25 megawatts.

We have demonstrated our ability to bring costs down by ramping our technology and running our factories efficiently. We expect to run our factories at 42 megawatts by the end of this fiscal year which, when combined with other cost reduction initiatives, will reduce our cost per watt over 25% to approximately $1.50 per watt.

Now let me address our demand creation activities to improve our sales volume. Please turn to Slide 9. We are an industry leader in the commercial BIPV rooftop market and we are now expanding our approach to include additional rooftop applications that meet customer needs. This photo shows a 1 MW (MW) building-applied, or BAPV, rooftop installation in Germany. Here our laminates are bonded to a light-weight support that attaches to the roof without any penetrations. This tilt application enhances the energy yield of our product and improves our LCOE while still delivering a low-impact rooftop solution to meet the buildings structural requirements.

Through the SIT acquisition, we can now offer a low-impact, tilted BAPV solution, like the one shown on this slide, to address specific customer needs in the rooftop solar market.

Please turn to the next chart. Another developing market for us is U.S. military installations. This photo shows a system installed by SIT on the roof of a naval building in Guam. Our Uni-solar laminates are on more than 10 rooftop installations for U.S. military applications in the U.S. and abroad.

There is now substantial U.S. stimulus money directed toward this segment and we believe we will expand ourselves to this market because of our proven experience, product differentiation, and cost.

Please turn to Slide 11. This slide shows an installation of the roof on a high school in Naugatuck, Connecticut, which is representative of the addressable rooftop space on the hundreds of thousands of schools, administration facilities, and other federal, state, and local government buildings across the United States.

We believe we are well situated to benefit from spending under the U.S. government and DOE Renewable Energy Grants Programs for these rooftops, especially given our status as one of the few American solar companies with the fully-made-in-the-USA product. In fact, we were recently awarded a large rooftop project for a California college, funded in part by government incentives.

Please turn to Slide 12. We are also concentrating on expanding our presence in the U.S. utility market and with the acquisition of SIT, have turnkey solar solutions. We have a presence in this market today as evidenced by this 1.1 MW system owned by Portland General Electric, but we believe our acquisition of SIT, our continued work with AGT, and other channel partners, and our competitive LCOE will enable us to capture a larger portion of this market. We are currently in discussions with a number of U.S. utilities to deliver rooftop solar solutions.

Please turn to the next chart. We are also poised to enter the U.S. residential market. We have previously announced relationships with Certainteed[ph] and SRS Energy and this slide shows the SRS product installed on a home in Bermuda Dunes, California. We have products in product installations now and we expect to roll out residential solar roofing products in early calendar year 2010.

The key message here is that the U.S. residential market has the potential to be large and we believe it favors our integrated solutions with superior aesthetics.

Please turn to Slide 14. This slide shows our facility in Tianjin, the third largest city in China. As a reminder, our partner is the city's principal electrical utility and the joint venture will be manufacturing our laminates for sale into the Chinese domestic market. The manufacturing facility will begin operations in October and we are encouraged by the demand potential in the Chinese market. We expect our joint venture to share in the growth of this market, beginning this fiscal year.

I will now turn the call over to our CFO, Harry Zike.

Harry W. Zike

Please turn to Slide 15. The first half of the year showed strong revenue and earnings growth over the comparable period in fiscal 2008, however, sales and earnings in the second half of the year were constrained by a number of factors relating to the slower global economic environment.

Lack of financing for BIPV and roofing projects, and aggressive competition from polysilicon products for price-sensitive projects, affected our second-half sales. In response, we took deliberate steps to reduce our production levels to better match anticipated demand and to preserve strategically important capital, at a time of capital market uncertainty.

We reduced our operating costs through production furloughs, lay-offs, reductions in SG&A costs, and a consolidation of certain of our operations between our Auburn Hills facilities. We incurred restructuring costs of $1.7 million in the quarter and we expect to eventually benefit from annualized savings of more than $4.0 million per year.

Our working capital decline in fiscal 2009 primarily reflects the doubling of our capital spending compared with last year. We spent a total of $242.0 million expanding our capacity in our Greenville, Michigan, facility and Brograna, our new facility in Battle Creek, Michigan. We now have a nameplate capacity of 150 megawatts as compared to 118 MWs in the prior year.

You may recall that in the fiscal third quarter we reduced production and temporarily halted our capital expansion projects until we have clearer visibility on demand in our key markets. During this pause we are continuing to implement cost-savings initiatives and we began consolidating and improving operations at our Auburn Hills One and Two facilities.

As a result of our cost reduction and capital preservation activities, we ended the fiscal year with more than $300.0 million in cash, cash equivalents, and short-term investments. Additionally, in spite of these challenges, total revenues for the full fiscal year were up $60.4 million, or 24%, as compared to the prior year and our net results for fiscal 2009 were up $8.6 million from the prior year.

Now operating cash flow for fiscal 2009 was a positive $11.1 million, but lower than the previous year, primarily due to higher inventory levels that accumulated in the second half of the year.

We ended the year with 23 megawatts of finished-goods inventory. Our finished goods inventory will continue to build in the first half of fiscal 2010 as a result of consolidating inventories from the SIT acquisition and the timing of certain projects. This slide summarizes our full year comparisons.

Now, I would like to focus on the fourth quarter results and our assumptions going into fiscal year 2010. Please turn to Slide 16.

The fourth quarter of fiscal 2009 had a number of items that negatively impacted earnings. First and foremost, as previously mentioned, we reduced our production by about 25%. This resulted in an under-absorption of manufacturing overhead of approximately $6.1 million for the quarter and $8.2 million for the fiscal year. As a result of this under-absorption charge, the value of our inventory at the end of the year averaged $1.88 per watt, lower than the cost of production.

We resumed production in the first quarter of fiscal 2010 as we are encouraged by the uptick in our sales proposal activity.

Second, as previously disclosed, we recorded additional restructuring charges of $1.7 million, or $0.04 a share, related to the consolidation of our manufacturing processes between our Auburn Hills One and Two facilities. Our restructuring charges for the full fiscal year totaled $2.2 million. These restructuring activities have been completed.

Third, our non-solar facility and equipment, that was previously held for sale, was written down to its net book value. This resulted in a write-down of approximately $1.2 million, or $0.03 a share.

Lastly, our bad debt allowance increased, both as a function of higher sales and our careful evaluation of receivables in a challenging economic environment for our customers. We increased our accruals for warranty reserves to reflect specific experience and a larger base in installations. We also decided to write down certain inventory whose value was not realizable as of June 30.

Those additional items added up to a combined total of $4.6 million, or $0.11. In all, these items totaled $13.6 million, or $0.32 a share, of which approximately $8.8 million are non-cash charges. Clearly, these items reduced our reported income and earnings per share for the fourth quarter. We show them here so that you can better understand the reported loss in the quarter.

Please turn to Slide 17. As you know, we completed our acquisition of SIT on August 19. As one of our largest customers, they accounted for about 10% of our sales in fiscal 2009. SIT's stand-alone annual sales for calendar year 2008 were $95.3 million, an increase of 18% over calendar year 2007. A reminder—a significant portion of SIT's revenue related to the purchase and resale of Unisolar Lamitative, which when consolidated, would be eliminated.

SIT's technical and field engineering expertise, as well as their turnkey solutions, will help us better serve our current channel customers in Europe and provide us with a meaningful exposure to our end-user customers here in the United States.

We will incur one-time transaction-related costs of about $5.0 million, which will be recorded in the first quarter of fiscal 2010. Restructuring costs related to SIT's integration will be recorded over the entire year with the bulk of these costs realized in the second and third quarters. We estimate these restructuring costs will be about $5.0 million.

We expect SIT to have a negative working capital impact in fiscal year 2010 and that the acquisition will be accretive within 18 months.

At year end our product sales pipeline was approximately $2.4 billion, which includes about $670.0 million of SIT commitments.

Please note that in the 10-K we are reporting backlog, which is different from sales pipeline. Backlog represents take-or-pay contracts, purchase orders, and other firm commitments.

Please turn to Slide 18. We estimate that total revenues for fiscal 2010, including the consolidation of SIT, will be approximately 10% to 15% above the prior year.

In fiscal 2010 we expect to produce approximately 150 megawatts of solar product. As we produce higher volumes in the coming year, our cost per watt will decline significantly.

Also, a brief update on interest expense. Beginning in our first quarter we will be required to apply FSD APB 14-1, accounting for convertible debt instruments that may be settled in cash upon conversion. For fiscal year 2010 we estimate recording approximately $14.0 million in additional non-cash interest expense based upon the requirement of this APB, which means our total overall interest expense is expected to rise to approximately $28.0 million for the full year.

Please turn to Slide 19. We have maintained a very strong financial position throughout this downturn and as of June 30, 2009, we have approximately $300.0 million in cash, cash equivalents, and short-term investments to fund our operations.

We also have approximately $280.0 million of tax net operating losses, which will continue to reduce our tax liability going forward.

We plan to strategically invest our capital with the focus on two drivers. First, cost-saving initiatives. For example, investing in new product applications and optimizing our current production equipment. And second, demand creation activities. For example, the acquisition of SIT and providing inventory for project-financing deals.

We have the financial strength to fund our capital needs as we continue to transform our business model into fiscal 2010.

And now, I'll turn the call back to Mark.

Mark Morelli

Please turn to Slide 20. Before Harry and I take your questions, let me spend just a moment summarizing our value-creation strategy. We have an advantage in the rooftop BIPV market and we will continue to build on this lead by extending our business model and introducing new products and services.

As a matter of fact, we recently won 8 megawatts of new business on 11 rooftops in Spain, which demonstrates the success we are already having in competing for large projects. On one project our laminate is light-weight with a deciding factor and on the other our customer wanted a flat installation with no roof penetrations. I both cases, Uni-solar laminates are the ideal solution.

Also, the acquisition of SIT is an important part of that new business model, as it expands our technical and field-engineering capabilities, enables us to reduce total installed system costs.

We are aggressively working on both parts of the LCOE equation, reducing our costs and continuing to increase our energy-yield advantage.

While we are excited by this evolution in our business, we do want to set the appropriate expectations that due to the long lead time of the projects and products in our development pipeline, our volume is back-end loaded in our fiscal year. We expect it will take several quarters before we see the benefits in our financial results. We have the determination, the strategy, and the resources to return to profitability.

We will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jesse Pichel - Piper Jaffray.

Jesse Pichel - Piper Jaffray

Can you repeat your backlog again? And how much of this is now take-or-pay given that you acquired perhaps the biggest take-or-pay customer?

Harry W. Zike

In the 10-K that we filed this morning, you will see there our backlog is approximately at $1.6 billion. That represents take-or-pay commitments as well as firm commitments, including purchase orders, and other contracts that we have. So it's a total of $1.6 billion. Included in that number you will see, as well, that the take-or-pay from SIT, which is approximately $570.0 million.

Jesse Pichel - Piper Jaffray

We eliminate that now from the backlog, right?

Harry W. Zike

Yes. Going forward, in our future filings, we will be taking SIT out of the backlog. But of course we will be adding our new projects as we achieve those.

Jesse Pichel - Piper Jaffray

Regarding the guidance which you say is back-half loaded, or back-end loaded, if next quarter, which is somewhat of the growth quarter in the industry, is flat sequentially how can you show growth in the December quarter and March quarter when the entire industry is really saying that those are going to be seasonally lower? Are there some specific projects there that give you that visibility or what is going to buck that seasonal trend?

Mark Morelli

We have some very good uptick in our quoting activity and particularly we see that, because we are doing direct quoting, we're at that type T, part of that seasonality is also impacted by the German market. As we know, that's one of the most seasonal markets that there is. Our exposure in our fiscal year 2010 out to Germany is only about 10%. So we're going to see less seasonality perhaps than other folks, and we do believe this is quite representative of what we see in our project pipeline.

Jesse Pichel - Piper Jaffray

And now that you have installation capacity, would you consider, or have you ruled out, potentially installing crystalline modules on rooftops, specifically those that don't penetrate the rooftops?

Mark Morelli

Certainly our installation capability has done some poly crystal and panels. Right now we are focused on the laminates but we're not going to rule out solutions that don't make sense for customers. And we're obviously going to want to be customer-driven and provide them with the solutions that make sense.

The good news of what we're talking about in today's earnings call is that we really have a very good cost effective LCOE, when you look at the rooftop solution. And our primary focus, of course, is where we're going to have a low-impact solution for the roof. This benefits because of our light weight. And as you know, low load-bearing roofs constitutes a good portion of that roofing segment. So I think our primary focus, of course, will be moving in laminates and obviously running our factories. But we're going to do what's right for the customer.

Jesse Pichel - Piper Jaffray

And could you say regarding the upticks that you see if the second half, where that uptick is most pronounced? Is it in France and Italy or in the U.S.?

Mark Morelli

Well, we see certainly good quoting activity out of Europe and our concentration for next year in England and France together is about 50% of our total sales, so we certainly have some confidence that we're seeing some of the market returning there, based on the quoting activity. At the same time we're quite excited that the U.S. market will start to show some light in the next calendar year. We know these incentive programs that have been announced and put in place have taken quite a bit of time to run through but we think by next calendar year that we're also see some of the benefit of that come through as well.

Operator

Your next question comes from Colin Rusch – Thinkequity.

Colin Rusch - Thinkequity

Can you tell us how much of the [audio break] came from the enforcement of take-or-pay agreements and from commitments?

Mark Morelli

A good portion of our take-or-pays have been negotiated, given the difficulties of the market itself. We do have some take-or-pays that are holding firm. We won't be specific on the exact volume that we deliver based on those take-or-pay agreements. The good news is that going forward, we are opening up new channels of market because in part some of our take-or-pay customers may be stuck with some inventory and at some point that may be difficult for them to move.

When we go forward into some of these opportunities that we discussed, such as U.S. utilities, such as the U.S. stimulus plan or the U.S. residential markets, obviously these are new channel opportunities for us, which we have very good product differentiation in.

Colin Rusch - Thinkequity

Can you give us some guidance on expected cash burn over the next several quarters? It looks like the cash burn from operations was about $20.0 million, a little bit over. What should we expect over the course of the year and the trend on that for the next four quarters?

Harry W. Zike

The way we look at the cash flow analysis is in the first quarter we do expect cash burn because we have the acquisition of SIT, which we spent our moneys on and we will have some of those transaction costs that we talked about. In addition, we are balancing our inventory levels. So for the first quarter you should expect to see an increase in the inventory levels because most of our sales will be towards the back half of the current year.

So purposes of modeling, we would have a slight increase in the first quarter into the second quarter, and then of course we would pick up with a decrease as the year progresses.

Colin Rusch - Thinkequity

In terms of total cash burn for the year, what's your anticipation?

Harry W. Zike

We are going to be about I would say 10 megawatts increase in inventory so it's going to be in the range of about $20.0 million, plus the acquisition costs of SIT, which was approximately $17. 0 million.

Colin Rusch - Thinkequity

And you think the rest of the business will be break-even or cash basis?

Harry W. Zike

Yes, cash basis-wise we are using the rest of the business as a break even.

Colin Rusch - Thinkequity

Can you talk about the balances system cost initiatives? I know you've been working on a number of things for a couple of years now. Can you talk about where you see those trending and how you see the savings coming in?

Mark Morelli

Our Slide 6 actually shows a pretty good yield and you can sort of roughly generate an estimate based on the scales that are shown there. But our balance in system cost we brought down to about $2.00 in the last quarter, and we see taking out another $0.50 of that. The good news with balance in system costs, particularly when we direct bond, we've got about a $0.30 per watt advantage for installations that really make sense for us there.

There are other advantages that, obviously with moving downstream in the channel, we can get. Certainly there is going to be some collapse in the margin but more importantly, there are great ways to reduce the wiring harness, inefficiencies that we see. Also getting some volume as we are bidding out jobs, by being in that downstream channel. So we see some great opportunities for that balance in system cost advantage.

So having an LCOE goal of $3.50 to $4.00 would obviously put us in a very good position to win business.

Operator

Your next question comes from Satya Kumar - Credit Suisse.

Satya Kumar - Credit Suisse

Can you give some color on what was pricing in the June quarter sequentially, what costs were doing in the June quarter and how you expect that to trend into the September quarter?

Mark Morelli

Our indices in the fourth quarter were about $2.68. And we disclosed our cost structure in the earnings call of about $2.09, $2.10. So obviously we made a decision, it was very purposeful, to shut the factories down. We did not have very good visibility at the market activity at that point and obviously past preservation was top on our mind.

Included with this acquisition, we also are confident and what we're seeing in some of the uptick on the ordering, and the anticipation of some of these markets opening up based on what we discussed in the earnings call, we think we're going to be running these factories a lot more. In fact, we don't anticipate some of the furloughs.

As you know, one of the major drivers for us to be able to get the volume up so we can drive our cost structure down. And you will see us being able to do that.

Satya Kumar - Credit Suisse

And into fiscal 2010, looking at your 150 MW guidance and revenues, are you baking in approximately a 15% to 30% price reduction in your estimate?

Mark Morelli

In terms of looking forward on ASPs, I think in the near term you can think about an ASP decline of just about 10%. The good news is that we certainly offer a pricing premium to the market and some of how we could forward in terms of ASPs, we're not quite sure. I think it also depends on what's going to happen in the market and how deep some of this price discounting goes. But very clearly, we're going to offer a premium to the market, we're going to focus on our core BIPV markets.

We're going to be a little bit more under pricing pressure when we're selling the BAPV but it opens up a very good solution where we have a low-impact solution on that roof. So we will still be able to sell at a premium but not as much. And obviously some of the BAPV doesn't have the benefit of some of the BIPV fee and tariffs as well. But we see that our pricing in the near term, as I said, is just about 10%.

Satya Kumar - Credit Suisse

And on your fiscal 2010 revenue guidance, is it possible for you to provide some more granularity between the different buckets of revenue. For example, the China JV, SIT, the U.S. governmental channels, the BIPV? How should I think about those four buckets in terms of contribution.

And also, at a high level of [inaudible] to think about system revenue as well as component revenue in 2010?

Mark Morelli

I can give this in a general sense. Our Chinese JV is really not much in the guidance that we're showing. We are anticipating a fairly slow ramp. We currently have a great ability to ramp, so it's not a function of the technology, it's more a function of how that market develops. We think that it's obviously developing quite rapidly with some of the incentives that have come out there, but obviously the JV is not tested and how we operationalize that from a go-to-market perspective, we're being a bit conservative on.

In terms of the overall systems split, and the components business, obviously just at a very high-level, we're mostly a components business as that systems business is just developing.

Harry W. Zike

Let me just add on the SIT side, SIT's revenues have been historically in the range of the mid-90s. As I said before, a good part of that was the purchase and resale of the Uni-solar Laminate. So we will be eliminating part of those sales as we consolidate SIT. Our estimation is that could be about 30% to 40% elimination.

Operator

Your next question comes from Vishal Shah - Barclays Capital.

Vishal Shah - Barclays Capital

Can you talk about your capex for the year, how much do you expect to spend in 2010?

Harry W. Zike

Last year we had spent about $240.0 million with the expansion in Greenville and Battle Creek. On the coming year we're going to reduce our capital expenditures substantially. First, I will say that we did spend, already, about $17.0 million on the acquisition of SIT and the payment of their obligations net of the cash acquired, so that cash is already gone.

In addition, we do have normal maintenance capex. This averages in the range of $5.0 million to $7.0 million per year. We additionally will be upgrading certain equipment but I think it's important to note here that we are also looking to achieve funds from certain of the government stimulus moneys that will be coming through in fiscal year 2010 and that will offset some of those capital expenditures.

So that provides a little bit of color on how we see capex in the coming year.

Vishal Shah - Barclays Capital

And if you look at your guidance 150 megawatts, what kind of [inaudible] do you have right now? When you look at first half versus second half break downs, are you looking at some government contracts that are going to get completed and can you give us the break down between the different markets, U.S. versus Europe in that mix?

Mark Morelli

Let me sort of break it down into size of installation first. In terms of what's happening in the market today, we see that our volumes on lower sized rooftop projects, they're actually moving quite well. The access to capital, while in some cases may be somewhat constrained, tends to be better than the overall solar market and we've got a very good advantage in the developed channel there.

The problem has been on the larger projects and the capital is more of an issue, and it's also much more difficult to predict the timing of these projects. So it's very difficult for us to pinpoint exactly when these larger projects are going to fall.

The good news is that we have quite a few of these in our—as we said, our pipeline is not really the right way to look at that. Our pipeline is very large, as you know, and in fact, overall, with our supply agreements, continues to grow. The issue is when do these specific projects fall. We do believe that they are in the near term and we do believe there is good visibility on them. Many of these projects, we just announced an 8 megawatts on this phone call, that will occur over the next couple of quarters. Actually, to pick the exact quarter when they're going to fall is in fact quite difficult. So I think we are confident in giving a long-term out guidance that's back-end loaded. But to pick the points exactly in the quarter for right now, given the visibility in the marketplace through this large project timing is difficult for us to precisely pinpoint.

Vishal Shah - Barclays Capital

On the balance in systems cost improvement that you've seen, it looks like you were able to reduce the cost by more than $1.00 per watt but at the same time I believe your efficiency and other margin figures were pretty much unchanged, so can you talk a bit about what really changed at the system level that led to that kind of cost reduction?

Mark Morelli

This has not been a focus for us, historically. We have not, as you know, we were predominantly, and have been, a laminate manufacturer and our business model was really focused on ramping our technology and reducing our laminate costs. And our channel partners, we were developing them. And there is a lot inefficiencies in those balance of cost numbers so it's more or less focusing on a concerted effort to bring some and take out some of that inefficiency in the quarter and taking some of the lower cost items from one market to the next.

Going forward, we think we're going to have great ability in that, particularly because when you're in control of the overall quote, you can really move to drive that cost down further.

Operator

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

Paul Clegg - Jefferies & Co.

Could you talk about the margin impact and the working capital impact of SIT in 2010? You alluded to it but I was wondering if you could a little more specific with the numbers in terms of what kind of impact it could have on both of those.

Harry W. Zike

Let me tell you how we think about the acquisitioning integration at the margin level. You know, SIT, being a systems provider, of course has a gross margin substantially less than what we did as a module seller. SIT's margins have typically been in the range of about 10% to 15% so as we integrate them into our business there will be a dilutive impact on our gross margin. I think that's clear.

On the working capital side, the model of SIT is as they do their installations around the world, with manufactured product here in the United States, there will be a need for working capital to fund those operations in a period of time. We have included in our analysis here a working capital funding in the range of about $20.0 million to $25.0 million for the current year.

As we restructure the SIT business, of course that will improve and that will happen primarily in the latter half of the year.

Paul Clegg - Jefferies & Co.

On the margin issue why wouldn't you get the downstream margin and then also get the module margin? So why wouldn't there be sort of a positive per unit impact? Or maybe there is a positive per unit impact on a gross profit per unit basis?

Harry W. Zike

We will get the module cost, obviously, because we have that today, so that will continue. You have to think about it in terms as well of pricing pressure in the marketplace, which will offset that. But we will get that, we will get the downstream margin as well from SIT. So on a per basis it will go up. On a total basis, though, because our margins were quite large in the past, it will be dilutive on our total gross margin.

Paul Clegg - Jefferies & Co.

And for our 2010 revenue guidance, how much of that is actually supported by 2010 backlog and how much of that is already priced?

Harry W. Zike

The revenue guidance we gave of the 10% to 20%, there is a part of that that does come out of the backlog, does come out of the take-or-pay agreements. As Mark mentioned before, we do have folks that are doing the take-or-pay agreements. So a good part of that is already coming out of the backlog.

Paul Clegg - Jefferies & Co.

And you mentioned about a greater than 10% reduction in ASPs in the near term. What time period were you talking about there? Is that sort of 6 months or just one quarter?

Mark Morelli

That's more like a quarterly number.

Operator

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

Brian Gamble - Simmons & Company

On the SIT integration, you mentioned gross margin impacts and restructuring that going forward, I know they've got offices in LA and Germany and most of the manufacturing, if not all of it, is done out in California. Are there any short-term thoughts on what you're going to do as far as changing up their business model and all from just a pure plant standpoint, or is that more of a wait-and-see sort of question?

Mark Morelli

We certainly have plans on how we're going to improve the operating model for SIT. The great news is that they bring some excellent applications and field expertise and what's predominately being struck here is their ability to penetrate the market segments and take that expertise and use it to also develop our out-of-channel partners. So this is the real value that we see in that business. And obviously we're going to work to streamline and take out costs appropriately.

Brian Gamble - Simmons & Company

The cost numbers that you gave on Slide 8, you're talking $1.88 in future quarters, looking at the run rates on both of those bars, the 42 megawatts on that last bar, that's more of a fourth quarter-type of number, is that the way to look at that?

Mark Morelli

Yes, that certainly is more of a fourth quarter-type number. As you also notice there, even at the same 33 megawatts we're able to reduce the cost more than we did in the third quarter. And this is not only from a volume effect but it's also from the initiatives that we're taking for lower material costs, lower overhead costs, and improved yield.

There is a big benefit that we haven't really talked about, it's yield improvement. We have improved yield over 10% in fiscal year 2009 and we still have a great ability to continue to improve that yield. So the key is that we start getting the volume back into the factories and some of these operating improvements are then going to start dropping to the bottom line.

Brian Gamble - Simmons & Company

I believe you talked about inventory change year-on-year looking ahead 2010, when you look at the megawatt guidance, comparing it to year overall, basic rates for your capacity, what is thought of what utilization from the current operating launch needs to be for the full year, to make sure you're around that 150 megawatts of production?

Harry W. Zike

The assumption is that we will produce the 150 megawatts of production. That is our nameplate capacity. So we are going to be looking to produce that full capacity on the nameplate level.

Brian Gamble - Simmons & Company

Looking back to last quarter, you talked a little bit about the Infinity co-investments and projects. Any update there?

Mark Morelli

We certainly worked a lot on our project financing endeavors and Infinity, of course, is one of them. This will take a couple of months or a couple of quarters to play out in terms of where that volume is placed. We currently have another set of ongoing activities. The good news with this project financing is that it's going to be done in a measured way. At the same time, it's a great opportunity to soak up some of this inventory that we've been talking about. So we think a balanced approach in going forward makes a lot of sense for us in terms of progress financing.

Operator

Your next question comes from Peter Kim - Deutsche Bank Securities.

Peter Kim Deutsche Bank Securities

Why was your production was higher than expected? I think that you had guided last quarter from 17 megawatts to 20 megawatts and you actually produced 25 megawatts.

Mark Morelli

Essentially what happened is as we got into the quarter we started seeing some of the visibility on some of these projects picking up in a general sense. And we recognized that we can run the factories incrementally a little bit more, even though we would be building some inventory. We can't exactly pick the timing on when some of the project are going to come in quarter by quarter.

We also have project financing we spoke about on that last question. So I think we have good visibility on that inventory. We're obviously not going to run our factories if we don't have some visibility on where that product is going to go. So we are trying to pick the right manufacturing volume based on the balance of where we see our overall pipeline coming in in the out months and quarters, to be able to try to run as best we can.

At the same time, you saw us when we didn't have that visibility, take the factories down. So I think we're pretty much on top of where we should be running at.

Brian Gamble - Simmons & Company

So you think that going forward, in the next quarter, you will build a little bit of inventory and you will run your factory at a relatively high level of utilization?

Mark Morelli

That's correct.

Brian Gamble - Simmons & Company

Did you mention what your gross margin was for the solar products?

Harry W. Zike

No, we didn't guide on gross margin or really talk about gross margin. I think it's clear a lot of the industry is under a lot of pressure on the gross margin side. Our focus now is on winning these jobs, as well as getting these projects closed and getting the factories back to full production capabilities.

Brian Gamble - Simmons & Company

You used to provide solar gross margins consistently. From now on you will not be providing that data?

Mark Morelli

We don't know that we are not going to provide it in the future. We just don't think there is a lot of focus on gross margins right now in the industry. The primary focus is to get the volume up and to drive the cost structure down, and that's what our focus is going to be on.

Operator

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

Robert Stone - Cowen & Company

I want to understand the near-term impact of the cost of what's in inventory versus loading, how that affects your margin. I think you said that the cost of your finished goods in inventory is now lower because you took a charge, so would you get a benefit from that relative to our production costs in the September quarter?

Harry W. Zike

What will happen is because we took the under-absorbed charges directly to the P&L in the fourth quarter, obviously the inventory is at a lower value. As we turn that inventory, in the next subsequent quarter, there will be a benefit, because we're clearing the inventory, of course, at a lower cost.

Robert Stone - Cowen & Company

That flowed through cost of sales in the fourth quarter?

Harry W. Zike

It is cost of sales.

Robert Stone - Cowen & Company

With respect to the accounts receivable, they are fairly high. Where should we expect DSO to run? Do you have a target in mind for maintaining that over the course of the year?

Harry W. Zike

Yes, the accounts that you are looking at at June 30 is high. Just bear in mind that we still have the account receivable in there from SIT, which will be coming out as we look into the first quarter and we consolidate that. So the DSOs will go down dramatically there. We are targeting less than 90 days, DSOs.

Robert Stone - Cowen & Company

A question on the impact of SIT. I recognize you said 30% or 40% consolidation effect from not having the laminates pass through. I imagine their pipeline of business development was impacted for a while, while they were struggling to obtain financing or figure out what to do with the company. As you think about the contribution to revenue or project megawatts, is that more heavily back-end loaded as well? Is that another one of the factors that contributes to the shape of the year, the timing of when SIT projects will start to flow through revenue?

Harry W. Zike

That's exactly right because SIT, as you know, has worked on a number of these turnkey projects so it's gearing up the timing for these projects becomes another sort of a crystal ball when you think they're going to close or when you can start giving sales revenue on those. Because remember, some of their projects do go into this percentage of completion accounting so it's not immediate any more when they sell. But that is also looking to the third quarter of our fiscal year.

Robert Stone - Cowen & Company

On 2010 capacity versus capex, if you're going to get to 42 megawatts of production in the fourth quarter, and you've got 150 in nameplate now. Does that imply that you will have to turn on some additional nameplate capacity in the fourth quarter or are you expecting yields to go up so much that you'll be running above nameplate in the fourth quarter?

Mark Morelli

We are pretty confident that we're going to be running above our nameplate. In fact, we were doing that quite a bit when we were ramping pretty hard in the first half of this past fiscal year. The issue is that we just weren't disclosing that we're rewriting nameplate. That's a practice we will probably do, in terms of that kind of disclosure. However, I think it's pretty obviously that we have a good ability to do that, based on what we've done in the past and we're going to continue as we being to ramp to do that again.

Robert Stone - Cowen & Company

So given the fact that you'll be running above nameplate, if sounds like, in the fourth quarter and apparently not planning to spend much on capex in fiscal 2010 from what you can see now, what would be the lead time to add additional nameplate capacity as you get into fiscal 2011? Can you do that pretty quickly, or how many quarters would it take to ramp up capacity?

Mark Morelli

We have a great ability to ramp our capacity. In fact, when we cut back and we did the furloughs this past quarter, we obviously could have cut back much further than that. We did not because we wanted to retain a lot of our capabilities in terms of ramping. In fact, within a 12-month period, we could bring on about a total of 270 megawatts of capacity. So we've got a great ability to ramp up when the time comes, when we're able to pull that trigger, we're going to be ready.

Robert Stone - Cowen & Company

Assuming that the second half of calendar 2010 is looking stronger than we're seeing this year, I wasn't thinking so much of keeping the people around, but the timing for equipment. If you have to turn on new lines, how much could you activate in the first half of fiscal 2011 if you're not spending on capex this year?

Harry W. Zike

The way that we look at this, we can bring on line about 60 megawatts of capacity within a 6 to 9 month period of time.

Operator

Your next question comes from Kelly Dougherty - Macquarie Research Equities.

Kelly Dougherty - Macquarie Research Equities

If you were running at full capacity today, what would the cost structure look like and maybe what would it look like if you were running at 75% or so, just to give a sense of what kind of impact we can expect as utilization starts to improve.

Harry W. Zike

We showed on the slides today that if we get up to the 42 megawatts of capacity, which is nameplate, our cost of watts comes down dramatically. Clearly, as you go less than that, it increases. Now, when we go back to where we were in the fourth quarter, which was 25% off that capacity number, that's when we start to look at numbers above $2.00 a watt. I anticipate that as we look forward into 2010 that will come down a little bit. But as you know, the throughput of the machinery is absolutely critical to get that cost per watt down.

Kelly Dougherty - Macquarie Research Equities

So today you could be about 180 if you were running at full capacity, at 33 megawatts?

Harry W. Zike

Yes, today that's our target to get it down to that second number we showed, as we get the capacity beyond nameplate.

Kelly Dougherty - Macquarie Research Equities

Given what you're doing on the restructuring side and focus on costs outside of production, how should we think about operating expenses for next year and as for throwing everything into the mix, when do you think you're going to return to the bottom line profitability?

Mark Morelli

I think part of that is how to look at the SG&A expenses and we certainly have opportunities to reduce SG&A as well as our variable expenses as well. We have got a detailed plan of how we're going to take the variable expenses out. We have got good traction on our material costs. It's about 13% out last year. We still have lots of opportunity to bring that down. Our overhead costs were also reduced by about 5% last year. So in combination, we've got a pretty good detailed plan on how we move forward there.

On the SG&A side, it's gone up, obviously to about 20% and even higher off these lower volumes. We see our longer-term SG&A running about 10% to 15% range, and clearly we should be able to take out a couple of points of SG&A by this fiscal year. And we are obviously targeting more there. The key lever here, as we said, is volume but at the same time, we are going to have to be taking costs out.

Kelly Dougherty - Macquarie Research Equities

So when you put that all together, when do you think you can return to profitability?

Mark Morelli

We think that within this fiscal year, it's going to depend a lot with happens with the market pricing. If you see the market pricing to the rates that we've seen so far, certain profitability is achievable by the end of the fiscal year. If these market pricings intensify and that there is no moderation of that pricing, obviously it's going to be very difficult for us to achieve profitability by the end of this fiscal year.

However, even with the most Draconian pricing strategies, we will be operating at a positive cash flow by the end of the year.

Operator

Your final question comes from Analyst for Timothy Arcuri – Citi.

Analyst for Timothy Arcuri - Citi

If the backlog is $1.6 billion and we take out $600.0 million of that for SIT, can you give us an idea of the mix of take-or-pay and the firm commitments within that remaining $1.0 billion number?

Harry W. Zike

Just to be clear on this one here. We had $1.6 billion in backlog. The backlog is a defined term which is primarily the firm commitment. SIT was about $0.5 billion of that. So if you were to net out SIT you are around about $1.0 billion. All of that is firm commitments, either through take-or-pay agreements, purchase order, or other type of agreements that we have that are firm in nature.

Analyst for Timothy Arcuri - Citi

Can you tell me what portion of that is take-or-pay?

Harry W. Zike

A substantial portion remains take-or-pay, of the $1.0 billion.

Mark Morelli

Thanks again for joining on today's call and your continued interest in ECD. We look forward to talking with you in the future as we make progress for turning our company into a leading provider of cost-effective rooftop solar solutions.

Operator

This concludes today’s conference call.

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