Evergreen Solar Q3 2009 Earnings Call Transcript

Evergreen Solar, Inc. (ESLR)

Q3 2009 Earnings Call

November 5, 2009 8:30 AM ET

Executives

Michael McCarthy - Director of Investor Relations

Richard M. Feldt - Chairman of the Board, President, Chief Executive Officer

Michael El-Hillow - Chief Financial Officer, Secretary

Analysts

Jesse Pichel - Piper Jaffray

Mark Bachman - Pacific Crest Securities

Steve O'Rourke - Deutsche Bank

Burt Chao - Simmons & Company

Sanjay Shrestha - Lazard Capital Markets

Chris Blansett - JP Morgan

Henry Vaskavunik (ph) - CRT Capital

Kelly Dougherty - Macquarie Research Equities

Amar Zaman - UBS

Aaron Husock - Lanexa Global

Robert W. Stone - Cowen & Co.

Timothy Arcuri - Citi

Vishal Shah - Barclays Capital

Presentation

Operator

Good day everyone, and welcome to Evergreen Solar's third quarter 2009 conference call. Today's call is being recorded and webcasted. At this time for opening remarks I'd like to turn the call over to Mike McCarthy, Director of Investor Relations. Please go ahead, sir.

Michael McCarthy

Thank you and good morning everyone. I'm joined today by Rick Feldt, Chairman, President, and CEO, and Michael El-Hillow, COO and CFO, both of whom will share some brief prepared remarks prior to taking your questions.

Before we begin today's call we'd like to remind everyone that statements made in this 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'll now turn the call over to Rick for his review of the third quarter. Rick.

Richard M. Feldt

Thanks Mike and good morning everyone. I'll begin today's call with a brief overview of the third quarter, after which I'll update you with our view on the near-term market outlook and then review our progress in China.

Once again we shipped a record amount of product this quarter due to the continued successful ramp of our Devens facility. Shipments during the quarter increased to 31.3 megawatts, that's a 35% increase over the second quarter of 23.2 megawatts. In general, demand is holding firm in the face of challenging macroeconomic conditions around the world. Activity in Germany and other markets is fairly robust as customers move to take full advantage of current feed and tariff incentives before anticipated rate decreases.

While demand continues to be solid in the quarter, we expect demand to moderate somewhat during the latter part of the fourth quarter and well into the first, reflecting industry seasonality. Focusing on what we can control, our manufacturing costs at Devens have improved substantially as well. Manufacturing costs were $2.24 per watt for the third quarter versus $2.70 for the second quarter, representing a 17% improvement.

Today we consume silicone at just over 4 grams per watt. Our wafer cost for the third quarter was about $0.75 per watt versus $0.85 per watt for the second quarter. We believe our wafer cost is among the lowest in the industry, even at relatively small volumes currently produced at Devens and silicon at about $95 per kilogram, proving our competitive advantage in waver manufacturing. By comparison, we expect to reduce our wafer costs about $0.55 per watt when our China wafer's facility at full capacity leveraging the overall lower cost structure in China.

Our Devens facility has continuously met its key operational goals of rapid sequential production increase and significantly reduced manufacturing costs since opening in mid 2008. In particular we are especially pleased with the success of our quality wafer production performance which has met or exceeded our expectations to date.

However, panel prices have fallen over 30% since mid 2008, making it very difficult for manufactures located in high-cost regions to remain price competitive. Therefore we are accelerating our strategic initiative of focusing on our unique manufacturing technology and will transition our Devens based channel assembly to China beginning in mid 2010. We expect that by moving panel assembly to China we'll be able to save about $0.35 per watt almost immediately with significant additional cost materials as we source key materials from low-cost regions.

Until we begin this transition we expect to produce approximately 30-35 megawatts each quarter at our Devens facility. After the transition is complete we will continue to produce wafers and cells at Devens and may increase capacity if market demand warrants. We do not expect there will be any significant near-term impact to our sales volume from Devens during this transition.

If long-term demand for panels manufactured in the US significantly increases, we will be well positioned to quickly reintroduce panel assembly once again at Devens.

In summary, we had a good quarter operationally as demonstrated by the progress we made so far with Devens and in China. However, due to the continued issues that our Sovello joint venture has experienced this year we will require to recognize an impairment charge on the carrying value of our investment in Sovello of about $70 million, substantially impacting our bottom line. Mike will discuss this in more detail in a few moments.

Turning to our Wuhan, China expansion, the strategic nature of the Chinese market and our expanding position there places Evergreen solidly as it promises to be one of the larger solar markets in the world. Our subcontract partner Jiawei continues to make progress on the building shell for our wafer fabs which we will lease from them. We expect to begin our build out later this year and are on schedule to produce the first wafers by the spring of 2010.

We have also hired our Chinese executive team including Henry Ng, former general manager of Suntech Power Limited's factory in Wuxi, China. Henry brings with him a wealth of knowledge and experience in building and operating solar cell and panel manufacturing plants, and has already contributed greatly to our expansion projects. We've also hired several key mangers including operations manager, process engineers, as well as equipment engineers. They are spending about three months in the US to learn and understand our product platform and technology. Our progress has been steady and we are in line with our timetable to commence pilot production in the second quarter of 2010. I expect we'll reach full capacity of 25 megawatts per quarter as we exit 2010. The support from the Wuhan government has been outstanding and we are greatly appreciative for their confidence in the long-term investment they have committed to Evergreen's future success.

When our China facility reaches full capacity of 25 megawatts per quarter, we expect production costs for completed panels will be in the $1.35-$1.45 range and a silicon price of around $75 per kilo. Looking out toward late 2010 we believe that as additional efficiencies are realized and the price of silicon moves towards $50 per kilo, we can produce panels at about $1 per watt.

The Evergreen Solar team has done a real solid job in bringing our Devens facility up and pulling together important strategic relationships in China that are critical to our success in the future. I am confident that we will finish 2009 with the momentum we need to position us well for the exciting opportunities ahead in 2010. With that I'll now turn the discussion over to Mike.

Michael El-Hillow

Thank you Rick and good morning again. I will discuss our third quarter 2009 financial results in detail, provide updates on the economics of Devens, Sovello, and our capital spending plan. Product sales for the third quarter of 2009 were $75.5 million, an increase of about 20% from the second quarter of 2009 at $52.7 million. During the quarter we shipped approximately 31.3 megawatts compared to 23.2 megawatts in the second quarter of 2009.

The sequential increase in product revenue was due to the approximately 35% increase in volume from our Devens facility offset significantly by a 10.7% decline in our average selling price. Average selling prices during the third quarter decreased to $2.41 per watt from $2.70 per watt in the second quarter.

During the quarter, approximately 73% of our product was sold in Europe, 24% in the United States, and 3% in Asia, compared to approximately 61% of product in Europe, 24% in the US, and 15% in Asia during the second quarter.

Fees from Sovello, our joint venture with REC and Q-Cells were $2.2 million in the third quarter of 2009 compared to $1.1 million for the second quarter. Higher fees were driven by increased sales volume, somewhat offset by lower selling prices. Gross margin was 9.7% in the third quarter, up from 1.9% in the second quarter of 2009.

Margin increased sequentially due mainly to the improved overhead absorption and improved yield resulting from increased production in our Devens facility which, as Rick noted, continues to ramp in line with our expectations.

Our manufacturing costs were $2.24 per watt comparable to $2.70 in the second quarter as we continue to see the benefits of manufacturing improvements and higher throughput.

R&D expense was 4.4 (inaudible) in the third quarter, similar to the second quarter. We will continue to invest in our R&D, primarily in our core wafer technology and improving cell conversion efficiency with programs aimed at achieving our 2012 target of total manufacturing cost of about $1 per watt in China and $1.35 in Devens, including the benefit of the panel transition to China.

SG&A expense was $5.9 million compared with $6.7 million in the second quarter. The sequential decrease in expense was driven primarily by costs associated with attending major trade shows during the second quarter.

Facility startup costs associated with our midland filament plant and initial costs associated with China were approximately $2.5 million in the third quarter, higher than the second quarter startup costs of $687,000. Activities associated with our China expansion have increased substantially in the past couple of months as we make the progress that Rick alluded to earlier.

Startup costs will increase in the fourth quarter as we continue to ramp our midland filament facility and increase build out activities associated with our expansion into China.

During the quarter we incurred $777,000 of costs related to the Marlboro facility shutdown, most of which relates to costs of moving equipment out of the facility, occupancy expenses, and depreciation expense. We expect to incur these costs until the lease on the facility expires in mid 2010.

Our operating loss which includes all the startup expenses previously mentioned was $6 million, a significant improvement compared to the $11.5 million in the second quarter. We generated $6.3 million of EBITDA for the third quarter compared with $1.4 million for the second quarter. Devens is now operating at about 30 megawatt per quarter or about 75% of expected capacity and generating positive cash flow as we've said on recent calls. While total manufacturing costs was $2.24 per watt, Devens cash cost is now about $1.90 per watt.

Other expenses were $4.8 million in the third quarter which consisted of foreign exchange gains of $2.5 million and net interest expense of $7.3 million. Other expenses in the second quarter of 2009 were $3.5 million which consisted of foreign exchange gains of $1.7 million and net interest expense of $5.2 million.

Non-cash interest expense of approximately $3 million associated with our senior convertible notes is included in the $7.3 million of net interest expense recorded in the third quarter, related to the amortization of debt discount associated with our outstanding convertible notes, an accounting change was required of all companies that had similar types of notes earlier this year.

We reported an equity loss and an impairment charge, net of tax benefits, in Sovello for the third quarter of $71.6 million compared to a $5.3 million loss in the second quarter of 2009. I will discuss the impairment charge in more detail shortly.

Net loss to the third quarter was $82.4 million or $0.40 per share versus $20.3 million or $0.11 per share in the second quarter. Weighted average shares for the third quarter of 2009 were $204.8 million compared to $180.7 million in the second quarter. The increase during the quarter was due to our successful common stock offering completed during May 2009 in which we issued 42.6 million shares for total net proceeds of $72.4 million.

Regarding Sovello, their transition to a standalone company has proven to be very difficult and has directly contributed to lower than expected sales and financial performance. Given their performance, we have determined that our investment in Sovello is impaired and requires a write down of our investment of approximately $120 million to approximately $50 million, representing the current estimated fair value of our investment in Sovello.

We have also discussed in the past that Sovello has been in violation of its bank covenants. Sovello management and the shareholders have continued negotiations with the bank syndicate led by Deutsche Bank to restructure Sovello's obligations under their loan agreement. As a reminder, during this process each shareholder has agreed to the following; guarantee of up to 10 million EUR of Sovello's repayment obligations under their loan agreement, and this is per shareholder, and providing a liquidity insurance to Deutsche Bank on behalf of Sovello through November 30^th, 2009 other than for payments that might be required pursuant to their loan agreement, in other words, working capital financing. Based on the current business plan for Sovello, we do not expect that this liquidity assurance will require the shareholders to advance significant additional funding to Sovello through November 30^th.

Now I will discuss our cash situation and capital needs for the next few months. At the close of the third quarter we had approximately $91 million of cash and cash equivalents which includes approximately $14 million received from the Chinese government as part of its funding obligation for our Wuhan China factory expansion.

Early in the fourth quarter we will receive the remaining $19 million due from the Chinese government. We also expect to receive a loan of approximately $5 million from the Commonwealth of Massachusetts during the fourth quarter of 2009. This will bring our total available cash balance to fund our operations to $115 million before we exit the fourth quarter.

Through late 2010, the completion of our Devens and midland factories, the substantial build out of our wafer factory in Wuhan, China to production, and debt service will require approximately $69 million as follows: capital required for China expansion is about $43 million, completion of our Devens facility is about $13 million, the first phase of our filament factory is about $2 million, sustaining capital (inaudible) our operation is about $5 million, and debt service is about $7 million.

So as you can see we have significant cash to meet our operating needs, and you may recall on earlier calls we have said that with our current operating model and Devens at about 30 megawatts of capacity per quarter, our operating cash flow break even is about $2 per watt at an average selling price level.

We recently filed a proxy to hold a special shareholders meeting to increase a number of authorized shares of our common stock. We have done this since we have only about 5.5 million shares of stock available for future capital raises and issuances under our stock equity compensation plans or any other needs you might have for our stock. As part of our strategy of maximizing our near and long-term liquidity we believe it is prudent at this time to seek the increase in authorized shares.

This completes our prepared remarks, I will now turn the call over to the operator so Rick and I can respond to any questions you might have. Operator, please open the lines.

Question-and-Answer Session

Operator

(Operator's Instructions) We'll go first to Jesse Pichel with Piper Jaffray.

Jesse Pichel - Piper Jaffray

Hi, good morning. I think you said that about a quarter of your sales were in the US and after you transfer production to China is there enough demand in the US with Devens full, and I'm just wondering why you would have to spend another $13 million in Devens as you indicated, wouldn’t you want to reduce your capacity there in Devens? And I have a followup.

Michael El-Hillow

Jesse, let me answer the second part of that question and Rick can answer the first part. The $13 million remaining is really final acceptance testing on equipment that is already installed. There's no intention currently of us putting additional dollars within the factory. Although we've said all along that we believe that the Devens facility in the US market will be very important to us and so it's very possible, as Rick said earlier, if demand is there we would probably put additional investments in this facility in the wafer and cell areas.

Jesse Pichel - Piper Jaffray

Is there enough demand in the US to keep that facility full just for the US?

Richard M. Feldt

Is there enough demand? Well remember, Jesse, we don't earmark the product from this facility for just the US market. We're hoping that there will be a demand for some made in US content, but the US market this past year was maybe about 300 megawatts, Devens is 160, so we won't have 50% market share in the US so we're really targeting worldwide demand and a piece of that demand is the US and we hope to satisfy that out of this facility, but there's probably not enough demand in the US right now to take 150-160 megawatts from Devens. No.

Jesse Pichel - Piper Jaffray

I think I'm really referring to the future, and if you thought that, why wouldn’t you close Devens?

Michael El-Hillow

Well, one of the things, Jesse — we'll just speak for Evergreen. We're really assuming that China is not going to be the only location that these things are made. I mean, our competition has talked about coming to the United States, that's number one. Number two, try as any other countries can, the United States is still the technology center of the world, and what we're leaving here, wafer and cell requires high technology, and so there's a place here no doubt. If ultimately China is the only place that panels are made, you're right. We'll close, VerSolar will close, SunPower will close, and everyone will close. We don't see that happening.

Unfortunately, as we all know, in the United States there doesn't seem to be the traction we had hoped form the new federal government from President Obama on alternative energy. We were hoping, that was number two on his platform, but they're focused on health care. Not a day doesn't go by where the administration is not talking about the need to support alternative energy, so it's possible that hopefully in the next 12 months there will be this significant startup in the United States requiring projects that want to support government supported programs must provide products that have a significant amount of their (inaudible) made in the US. So far that has not happened, but we believe it should happen.

And if you go back 15-20 years ago it's the same thing that happened in the semi industry. Japan tried to take over that industry and the US wouldn't allow it. Unfortunately it's going a little bit slower on the US because of the economic depression and other factors the states and the federal government are facing. So we're in it for the long haul here. We still believe this is going to be a vibrant market, and I think we all believe that if the US doesn't become a 4, 6, 8, 10 gigawatt annual market, two or three times the size of Germany, then none of us are going anywhere. This is about the US and China. It's about Brazil. It's about Russia. It's not about to see if the German (inaudible) tabs are going to kick in a little bit lower so next year Germany goes up another 200-300 kilowatts. It's the long haul. It's a marathon. It's not a sprint.

Jesse Pichel - Piper Jaffray

Thanks for that comment, if I could just put one more in. I think you said your poly costs are $95 if I’m not mistaken, how will that cost trend in the first and second half? When will it get to that $55 number you quoted yielding a low dollar sum-odd cost?

Michael El-Hillow

Right, so right now in that $95 it's about $65 of ongoing cash costs going forward and about $30 of amortization of our prepaid payment, both the stock prepayment and the cash prepayment. We are talking to suppliers constantly. As soon as we see there's going to be a steady supply of silicon in the $50-$55 range, long-term significant quantities, that is what will drive it down. But right now we're talking to companies, and what's out there is it's going there, but it's not there yet.

Our cash cost right now at $63 is better than what the long-term cash cost contracts are right now on substantial volume. There's no doubt there’s a lot of anecdotal information out there. This company got $50, this company got $49, it's anecdotal, it's spot, and it’s not sustained. But as we all knew, beginning late 2011 the additional capacity coming on would result to a return to a balance of supply versus demand.

So from our perspective, I would say, Jesse, sometime mid-next year at the latest.

Operator

We'll take our next question from Mark Bachman with Pacific Crest Securities.

Mark Bachman - Pacific Crest Securities

Yes, good morning, gentlemen. You talked about demand moderating in Q4 and Q1, and I'm just wondering, are you signalling that you're going to hold back in production at Devens? In other words, do you expect to be able to sell everything that it produces or are you going to build inventory through that time?

Richard M. Feldt

No. We're not signalling we're expecting to pull back, but we don’t' think demand's going to grow. So as I said on my earlier comments we expect to be producing in the 30-35 megawatt rate. Plus or minus we think we can sell about that amount of product, but we don't expect any major increases in the next Q4 or Q1.

We think things are going to be relatively steady. There is some seasonality as I'm sure you know in December-January, installations slow down in February because there's snow on the ground in many parts of the world, particularly Germany. So we do expect to see some seasonality, but we also believe and are seeing signs that demand has been strengthening over the last three or four months especially, so no signal one way or the other. We expect to be producing at about the same rate the next couple of quarters.

Mark Bachman - Pacific Crest Securities

Okay. Mike, can you walk us through, give us a pro forma EPS without the write down for Sovello and specifically can you tell us what the offsetting charge and corresponding tax adjustment would be?

Michael El-Hillow

Yeah. So if you go to the press release we put out there, Mark, we showed that we had a $79 million equity income and impairment loss. Of that it's about a $70 million impairment loss and it's about a $9 million quarterly loss. Our one-third share of Sovello is a $27 million loss for the quarter. There was a $7.8 million tax benefit. So the net impact, if you would adjust for that, our $0.40 loss is about a $0.08 loss.

Mark Bachman - Pacific Crest Securities

Perfect. Okay, and then lastly, Mike you talked about you got $3 million in a non-cash expense right now related to your debt, is this a one-time adjustment you had to take or do we need to budget for this going forward?

Michael El-Hillow

No, you have to do it. It will go. All companies had a similar type of convertible debt offering. It's about $3 million a quarter until our debt matures which is the middle of 2013.

Mark Bachman - Pacific Crest Securities

Thank you.

Operator

We'll take our next question from Steve O'Rourke with Deutsche Bank.

Steve O'Rourke - Deutsche Bank

Thank you, good morning. A couple of questions, first, can you talk a bit about how you think ASPs might trend out through 2010 at the module level, and secondly, talk a bit about how gross margins may trend as China wraps out in 2010?

Richard M. Feldt

Well, ASPs again are anyone's guess. We've experienced a 30% decline over the last four quarters, actually probably closer to 40%. We do think ASP erosion is moderating, but we are seeing signs that prices can be as low as $1.75 to $2.25 a watt. So really I think it's going to depend on just what happens to the demand for product in the next 3-6 months and it is really anyone's guess. So you can ask 100 people, you get 100 variations of that answer.

Steve O'Rourke - Deutsche Bank

Is there an ASP decline that you plan for in 2010?

Richard M. Feldt

I can't say there's an ASP that we really plan for. We do multiple scenarios, Steve. But to get to your earlier question, in 2009 for the whole year our ASP is going to be in the 255-260 range for the whole year. Now, take a 15%-20% additional decrease next year, many people think that's not enough, but we do know that some of our competition has mentioned that they were selling for less than cost, admittedly they said they were misquoted, but the fact is, if you saw it a couple of times you're probably not misquoted. But put that aside and we know what's happening in China, the Chinese government is looking at this slowly, so maybe there will be some moderation, but if you take another 15%-20% off next year, as we exit next year we could have gross margins in the 15%-20% range with the impact of China so that will give you a frame of reference. If you think prices are going to go down a lot more than that, it's a different situation.

But when you look at the returns that the end customers are getting at the current pricing and you take it down another 20% which is well above what, and maybe these FITs are going down, maybe eventually reach some stabilization. So that's how we look at it. We're hoping that there's going to be some return to normalcy, by the same token we can't count on that and that's one of the reasons of driving this change to take panels to China. We've got to do it. We just can't assume normalcy. But if you take another 20% year over year decrease we'll exit next year at about a 15%-20% gross margin.

Steve O'Rourke - Deutsche Bank

Fair enough, that's very helpful. And one last follow if I might, wafer costs, I think you mentioned $0.55 per watt in China (inaudible), how does that compare to Devens?

Richard M. Feldt

Devens today is about $0.75.

Steve O'Rourke - Deutsche Bank

And when fully ramped when you things like things are pretty sorted out, how will China compare to Devens?

Michael El-Hillow

Well let's go out a few years so let's go out to both locations being fully ramped and let's go back to Jesse's earlier question. We think that by 2011 or so we'll be fully ramped obviously in both locations and we think silicon will be selling at about $50 a kilogram or less. Our wafer costs in China will be at about the $0.30 per watt range and our wafer costs in the US will be about $0.40 so it's about a $0.10 delta.

Steve O'Rourke - Deutsche Bank

Thank you. That's helpful.

Operator

We'll take our next question from Burt Chao with Simmons & Company.

Burt Chao - Simmons & Company

Good evening, guys. Just a couple of quick questions, if I look at your ASPs as we back into this quarter with the information you've provided on the call, it looks like you have a premium as has been the case to other people's products, specifically the Chinese that we've talked to. Going forward as you manufacture in China as you still have a differentiated product, how much of this premium do you think you'll be able to continue to maintain and capture in Europe and US, but also what does that look like in China where we've noticed that other companies have said the margins on projects and IRs might be significantly lower similar to the wind industry and what happened with Chinese wind industry where you make a lot of revenue, but on the earnings side you don't make it that much?

Richard M. Feldt

So one of the things we're being very careful about — first of all as we said, we're going to make the transition not overnight, but over quite a long period. I mean, we'll begin this, but we're focused now on the build out of our own facilities and Jiawei on their facilities, to make our wafers into cells and panels. So moving panel assembly won't occur until middle of next year as we said.

We'll be very careful to ensure that the product meets all the quality requirements and all the certification agencies and labs that we subject our product to here. We're going to market it the same way and so it remains to be seen, but we do believe that given the design of our products, its reputation for quality, we'll be able to maintain a modest premium over other manufacturers.

Burt Chao - Simmons & Company

Great, and so the second follow up question is; NDRC last month and the month before has come out and they said they're going to limit new construction of facilities to build wind turbines. Obviously wind's been a very big domestic industry for China, but there's also European manufacturers coming into China. With the limitation from NDRC anybody can guess what their motivation is, but do you see a similar type trend happening within solar over say the next two to five to 10 years where the Chinese government will start limiting new entrants into the manufacturing space in China or are you confident that you're able to grow out your capacity as you'd like in (inaudible) JV?

Richard M. Feldt

What we're finding in China is that the provinces or states are fairly autonomous and they're very competitive. So at least in Wuhan with the government whose encouraging us to grow as far as we can to 500 megawatts and want to support that growth through low-cost loans, there is a movement afoot in China to limit the manufacture of poly-silicon. A lot of factories were started up and I know the Chinese government broadly is concerned about that, but given worldwide demand for electricity, we're not seeing any trend in the country at large and specifically within Wuhan just the opposite. We're seeing a strong desire to build out capacity ASAP.

Burt Chao - Simmons & Company

Okay great. And I guess just last, when you look at the industry, do you see other people — I mean First Solar announced an agreement with China about a project and eventually potentially production there. Do you see a meaningful amount of western producers coming and following in your footsteps on going into China right now or is it somewhat your spearhead that nobody else has been following thus far?

Richard M. Feldt

Well, I'm not sure I would say no one else is following. There is a lot of capacity going in the ground in Asia, but I think as companies do their own homework and do cost comparisons, it is compelling that the costs in China are low; low capital costs, low labor costs, low overhead costs, and so I think it'll be difficult to be a worldwide supplier of scale and not have some operations in China.

Michael El-Hillow

I want to give a little bit more color to that also and then we'll move on. Yes, First Solar's doing it and we're doing it. There haven't been many other announcements. I mean, people really have to understand the Chinese market. They're trying to put jobs in, but it's not easy to get the funds that we get. I mean, we went through a rigorous process and the fact that they are willing to pay for two-thirds of our factories says a lot about what I think of the rest of the company. And what I'd say is this, is that they like our technology. They like our wafer technology.

They're investing in the wafer technology. They like First Solar's technology. They're not just trying to bring companies there and jobs there, they're trying to get winners there. And their agreement to support us is a reaffirmation that they like our technologies. So I think you'll see companies have differentiated technology going over there getting support from the government, it doesn't mean that other companies wont' go over there. But our thought process, they will not get the type of support that companies like us and First Solar have gotten.

Burt Chao - Simmons & Company

Great. And then one quick followup, (inaudible) had provided a shipping cost on a per watt basis from China, has that changed at all or can you provide an updated figure for what —

Richard M. Feldt

I think it cot about $0.03 a watt last quarter year.

Burt Chao - Simmons & Company

Okay great. Thanks so much, guys.

Operator

We'll take our next question with Sanjay Shrestha with Lazard Capital Markets.

Sanjay Shrestha - Lazard Capital Markets

Great, good morning guys. A lot of my questions have been answered so just a quick one. Do you guys still seem to be commanding the premium ASP versus several of your peers, and can you talk about that as to is it because of the fact that you guys have around for a lot longer than most of these guys and there is a bit of that brand value that's giving you that higher ASP. Can you talk to that a little bit as to, is it a mix issue? Most of your stuff is going to rooftop, what is it that actually allowed you guys in these crazy times to sort of have pretty substantial premium versus some of the Asian players?

Michael El-Hillow

Well, Sanjay again, we've talked about this in some length in other calls, but even though we’re a small company, we've really gone out of our way to provide lots of value to our customers. So a quick repeat, we are very judicious about who we certify power, minus zero plus a couple percent on the panel basis and to our reflective on the glass which absorbs more energy throughout the day, beefed up frames, good customer support, and also some of our (inaudible) pay contracts which we've talked about also in the past where we're not immune to changes in market pricing, but that offers a little bit of a break. Things don't go down quite as fast, they might not go up as fast if there was a big reversal, but prices don’t' go down quite as fast either.

People do like the product; that is all I can tell you. They like the product and they also like that we have differentiating technology and if you talk to our customers, even though it's a difficult time right now, most believe that because of our advanced technology, we will become one of the large players in the industry.

Sanjay Shrestha - Lazard Capital Markets

Okay. That is kind of what I was trying to get at, so do your downstream players on the turnkey system basis, given all the things we talked about, do they end up getting lower cost of borrowing versus a competing module coming out of Asia? Do they get a lower cost of debt when they go for the project financing with using your module, versus using a module coming out of China?

Michael El-Hillow

I guess I don't really know the answer to that, Sanjay. I do know that they are able to get lower pricing on modules coming out of China, but I don’t know how that affects their debt structure.

Sanjay Shrestha - Lazard Capital Markets

Got it. One other quick one then guys, I kind of know the answer to this, but I just want to make sure that we're all clear on it. So the recent acquisition of SunEdison by MEMC, do you see that having any impact to your downstream partnership structure and can you talk about that a little bit?

Richard M. Feldt

Right now in the short term and the intermediate term we see no effect so that is probably all I can really say. We believe our current strategy makes sense. We think going to China, reducing our cost, makes a lot of sense. Dealing with the partners that we got we think makes a lot of sense so we don't see any short-term effect on the MEMC effect of SunEdison.

Sanjay Shrestha - Lazard Capital Markets

So talking about China then, Rick, how do you —

Richard M. Feldt

Sanjay I am sorry, we try to go to one, you have had four questions, we got to —

Sanjay Shrestha - Lazard Capital Markets

Fair enough. I will hop back into queue. Thanks, guys.

Operator

We'll take our next question from Chris Blansett with JP Morgan.

Chris Blansett - JP Morgan

Hi, guys. I had two simple questions. One was related to your view on pricing for the fourth quarter and then secondly your thoughts on visibility for US-government based solar projects that would require US-made content for the modules?

Michael El-Hillow

I mean the selling price we're seeing, Chris, demand is there right now, prices have stabilized as Rick said. Who knows what happens at the end of the year when you get to the last two weeks, but so far so good. Regarding the second situation, we haven't seen it. We've talked about it and I tell you, Rick and I have talked to many government officials. They're all sympathetic, but then of course they come back and say but of course you know we have procurement rules that we have to follow. So it really is a conundrum that we face here. People want American product, but they're afraid to buy American product and be criticized for spending more than what they could have received elsewhere.

So this is why getting back to the earlier comment I made, there has to be a statement out of Washington that this is going to be the national energy policy for the United States of America and states must follow it. I mean, it's not unlike what happened in the '70s in the gas shortage where there was a mandate to go to 55 miles an hour on the highways. If you didn't do that as some states out west did because if you ever tried to drive through Wyoming at 55 miles an hour you'd want to kill yourself, but the fact is this that if you decided not to do it, you didn't get federal matching funds for your highway.

So that was the state's decision to make. We need that at the federal level. We haven't seen it yet, but we know it has to happen because we really do not believe that we're going to let one country dominate this industry. This is too much of a growth industry for the world at large, but we haven’t seen it. But I will tell you, I think you people go to a lot of these conferences where government officials are there, they just don't seem to get how to get out of their own way and provide these funds that are so critically needed for companies that are based in the United States to compete.

Chris Blansett - JP Morgan

All right, thank you, guys. I appreciate it.

Operator

(Operator's Instructions) We'll take our next question from Henry Vaskavunik (ph) with CRT Capital.

Henry Vaskavunik - CRT Capital

Yes. Good morning, thanks for taking my call. First question, you guys had a pretty decent reduction in cost per watt in the quarter, 17%. Can you give us a little more color as to exactly where that came out of in terms of raw materials or how exactly was that achieved?

Michael El-Hillow

The biggest part came through higher volume, the impact on higher volume and our overhead absorption and also our labor pool. The fact is that while many customers say direct labor is variable, it isn't just that direct variable in the short term. So it was mostly better overhead absorption, better capital absorption, and a little bit in direct —

Richard M. Feldt

Yield.

Michael El-Hillow

Yield which would help in material costs, but the fact is that during the quarter with the weaker dollar, while we had a positive impact on our selling price with the weaker dollar, we had a little bit of a negative hit on some of our raw material supplies.

Henry Vaskavunik - CRT Capital

Okay. Is there any guidance for what you can do on the cost reduction next quarter?

Michael El-Hillow

The only area that we’d probably see some improvement is continued yield improvements. As Rick said we're pretty much going to keep reductions in the same level in the 30-35 megawatt range. So it would have to come through yield and maybe a little bit more debottlenecking. So I wouldn’t expect to see a substantial improvement in cost per watt, but the one thing we do want to point out right now is that two years ago when we announced the Devens facility, we said that our goal was to reach a cost per watt, fully loaded, silicon all the way through putting the panel together of $2 per watt. And as you know that our goal was to reach 40 megawatts a quarter of production. We've scaled that back now given what we're doing with the China initiative also, the midyear slowdown in the demand, but if we today were at 40 megawatts of capacity and we had just focused on making the facility a pure factory as opposed to continuing to do some (inaudible) on the shop floor, our cost per watt would be between $2-$2.05.

So as Rick said earlier, we set some very aggressive goals two years ago. We opened up this 450,000 square foot facility in a year. We tell you what our ramp would be from an education standpoint. We met that ramp every quarter and we tell you what our cost per watt would be by the end of 2009. And if the market demand were there we would be there. So as we get to next quarter we'll be able to give you more color on additional cost savings not just at Devens, but we'll give you more color in China. But for right now you could expect it to be essentially flat quarter over quarter.

Henry Vaskavunik - CRT Capital

Thanks. And two quick followups on the financial side, Michael, the loan that you received in China in the second part of this coming month, is there any security on it? Is there any encumbrance upon that? And then also on the tax benefit, did you guys receive any cash proceeds from that in the current quarter that is already incorporated in the cash number? And lastly on the prepaid cost of inventory, how do you value that and how do you market that on your books? You have $155 million I think in the prepaid cost of inventory; can you walk us through the math behind that? Thanks.

Michael El-Hillow

All right. So you said you had two so I will pick which two I am going to answer — no. All right so the first thing is — well, let me go to the last thing. On the silicon it has to do with we have the contracts and we just amortize it as we take down the silicon associated with that contract. That's it. So, as a good rule of thumb, if you used about $30 a kilogram you'd get the non-cash cost.

The second one you asked was on the tax benefit, no, there's no cash associated with it. It's a pure accounting mechanism as we did the impairment.

And your first question on the debt, that debt is fully secured by the factory in China.

Henry Vaskavunik - CRT Capital

Thank you.

Operator

We'll take our next question from Kelly Dougherty with Macquarie Research Equities.

Kelly Dougherty - Macquarie Research Equities

Hi. Thanks for taking my question. I'm just wondering if there’s been any change to the Jiawei relationship as a result of the recent acquisition by ReneSola? And then maybe they do wafering, so I'm wondering if there's any plan to expand the use of String Ribbon to what ReneSola might be doing? Could this be a licensing opportunity that we could think of?

Richard M. Feldt

We think just generally the acquisition by Rene of Jiawei is a good thing. Rene has some additional capital capabilities. They have additional production capabilities. They make some poly-silicon also, and they've got management bandwidth. So we think that there will be lots of opportunities. We had discussions around a broad range of ways of taking advantage of a closer working relationship, but until the final deal is done and the acquisition actually occurs we can't go much farther than just explore different opportunities.

I do think there will be opportunities for us and we're looking forward to having more substantive discussions, but we have to actually have that acquisition become finalized.

Kelly Dougherty - Macquarie Research Equities

Okay, fair enough. And then just one quick followup, a housekeeping question, when you have to repay interest or pay interest on the $33 million Chinese loan, is that quarterly or do you just repay the whole amount when it's due in 2014?

Michael El-Hillow

We pay the whole amount in 2014, Kelly.

Kelly Dougherty - Macquarie Research Equities

Okay great. Thanks.

Operator

We'll take our next question from Amar Zaman with UBS.

Amar Zaman - UBS

Hi, Rick. Hi, Mike. Thanks for taking my question. Most of my questions have already been asked. I just wanted to get an idea from you about what we are hearing out of Germany. Do you have any insight as to when you expect the German government to do the extraordinary cut to the (inaudible)?

Richard M. Feldt

Yeah. We don't have any particular insight, of course. With our few cells connection we get updates from what people think might occur, but trying to predict what politicians will really do is difficult in Germany as it is here in the states. So the answer is no. My own belief is that there may be some adjustments in the middle of next year, but no one really knows.

Amar Zaman - UBS

And then just as a follow up to that, Mike, you mentioned the 15%-20% reduction in ASPs for next year, year over year, does that incorporate an extra judicial cut in the German tariff?

Michael El-Hillow

No Amir, it doesn't incorporate anything in general. As I was saying, how long can an industry just keep going down 10%-12% a quarter and be an industry? Even eventually the Chinese government is going to say wait a minute you got to make some money here. And trust me, when the announcement came out, the interview hit the New York Times on Suntech, the Chinese government reacted to this at several different levels. Obviously they don't want the US government going after them for dumping in the US, but also the Chinese government, I mean they're making big bets on these companies.

You can't sell for less than cost. So that's basically it. But who knows where this will go? I mean we've seen the moderation now, but we're not going to be — I was going to say soft as we would say with stock, but you just think it would slow down, but that's our guess. Your guess would be as good as ours, but I will tell you that there's not enough money even in China to keep funding these companies if they're selling for less than cost.

Amar Zaman - UBS

All right, thanks Mike. And then if I may just one quick followup, you mentioned to basically expect flat cost per watt in the fourth quarter at about the 30-35 megawatt run rate and you're maintaining that run rate for the next few quarters, should we assume flat costs per watt into the first half of '10 into you start ramping China?

Michael El-Hillow

I mean for modeling purposes that might be the easiest way, but I will tell you that we will continue to drive yield improvements in the facility and other debottlenecking activities that we believe us to show some improvement there, but I'll just say for simplicity's sake because we don't want to go down and give guidance even this quarter, not even beyond this quarter, but we'll tell you what we're doing. Yield improvements, further debottlenecking, more focus on throughput, we believe that will allow us to make improvements, but I think for modeling sake I would probably keep it in that range.

Amar Zaman - UBS

Thank you.

Operator

We'll take our next question from Aaron Husock with Lanexa Global.

Aaron Husock - Lanexa Global

Great, thanks for taking my question. Can you just talk a little bit about the restructuring savings you expect to get by shutting down the module assembly piece of Devens and are there going to be any restructuring costs associated with that?

Michael El-Hillow

We expect that our panel costs will go down about $0.35 a watt, a combination of lower overhead, lower direct labor, and lower capital in general in China. The costs themselves, we will probably have an accelerated equipment write off of about $40 million and that would be at about $10 million a quarter between now and say the third quarter of next year. So if you are modeling this thing that is how I would model it. Increase depreciation expense by about $10 million a quarter.

The cash costs associated with the transaction are probably going to be in the $1.5-$3 million range, most of which will occur towards the middle of next year. We do plan to keep this facility running as is to the middle of next year as we transition this to China. We will make sure that we meet our customer commitments and we have a very good model on how to make sure to get this done in a timely fashion and make sure there is minimal disruption to our Devens facility and also maximum supply to our customers. So does that answer your question?

Aaron Husock - Lanexa Global

Well, I guess I was thinking a little bit more from a people-cost standpoint. As you reduce staff in Devens, should we think of your quarterly OpEx run rate as stepping down at some point?

Michael El-Hillow

Well, the OpEx run rate is not going to step down. I think the best way of looking at it is let's go back to the earlier statement about cost to watt at Devens which is $2.24. On an apples to apples basis, a year from now we would expect that number to be $0.35 lower. And then as we said earlier we expect to have yield and other improvements, but that'll give you a frame of reference. That $2.24 would go down to about $1.90.

Aaron Husock - Lanexa Global

Okay great. And then maybe just lastly, is there a limit to the number of jobs you can cut in Devens before you run into issues with some of the support you've gotten form the Massachusetts government, and do you come anywhere near that level as you shift down the module assemblies?

Michael El-Hillow

There is a limit, but we're confident we'll be fine being able to meet the continued government employment levels. One thing we want to point out is that we have received $23.5 million of direct support from the Commonwealth of Massachusetts to do what is ultimately half of Devens. We received no support for the second half, so we should be in good shape. Plus, as Rick said earlier, as market demand warrants, we would put more wafer and cell capacity here which would also add more jobs so we should be fine.

Aaron Husock - Lanexa Global

Great, thank you.

Operator

We'll take our next question from Robert W. Stone with Cowen & Co.

Robert W. Stone - Cowen & Co.

Hi, guys. A couple of questions related to Sovello. REC which is also a one-third owner seems to have taken a substantially larger impairment charge in their quarterly results. Was there anything that's changed in the meantime that caused you to put a different value on your investment in Sovello?

Richard M. Feldt

No. But you also have to understand that REC, although a one-third owner, came in at a later date and part of their cost of entry was at market not at cost of capital so that their one-third ownership costs them more. So they wrote down more to get to a number closer to ours. In fact, we actually are a little bit under them. I think the residual is about $70 million and were at about $50 million so we actually, if anything, are a little bit more conservative than REC was, but the write down was larger because their basis was larger.

Michael El-Hillow

Interesting though, Rob, both companies wrote down their investment about 60% and with different calculations. And while the partners did talk, we didn't share any detailed information.

Robert W. Stone - Cowen & Co.

Okay. There is still a bank deadline at the end of the month for Sovello, no change there?

Richard M. Feldt

Yes. November 30^th, yes.

Robert W. Stone - Cowen & Co.

Right, with respect to OpEx cost you indicated that the change in panel manufacturing strategy won't affect Devens' cost, how should we expect operating expenses to trend over the next several quarters as you start to ramp up Wuhan?

Michael El-Hillow

R&D should stay in about the $4.5 million range. The SG&A portion I would take up about $250,000 per quarter, so about a year from now it'll be about $1 million higher than it is today.

Robert W. Stone - Cowen & Co.

Thank you.

Operator

We'll take our next question with Seth Tenen (ph) of Citi.

Timothy Arcuri - Citi

Hi. It's Tim. I jumped on late here. Can you confirm the $0.55 wafer cost in China, that's about $0.20 more than I might have thought? Does that assume $90 poly per month?

Michael El-Hillow

That does assume $90 poly, Tim, and $50 would be at about $0.30, yeah.

Timothy Arcuri - Citi

Okay, $50 is $0.30. And what's the timing on that $0.30 per watt wafering target?

Michael El-Hillow

Well we said earlier — I know you just joined, but we're not sure when the prices are going to get down, but we are seeing rumblings that prices are good. We're going to see a step-function reduction of pricing in silicon so we'd expect by mid next year we will have been able to rework our contracts. We're paying about $50 a kilogram. Unless something changes dramatically in the demand-supply — but right now all the capacity that people thought was going to come on in 2009 that got delayed, I think is finally getting here.

Timothy Arcuri - Citi

Okay. So by 2011 you should pretty safely be near $0.30 a watt for a wafer?

Michael El-Hillow

In China, and about $0.40 a watt in the United States.

Timothy Arcuri - Citi

Okay. So last question, if you look out several years, ultimately why not just be a wafer company and why even screw around making cells or making modules and why not just be a wafer company and just sell wafers?

Richard M. Feldt

So we get asked this question basically every call and we continue to say our focus is on wafers and we're increasing that focus, but we're also establishing a brand and so depending on how things go we'll continue to have, on an OEM basis, cells and panels made for us. Over time if we make enough improvements in our wafers and they become industry standard like, that could happen.

Timothy Arcuri - Citi

Okay. So kind of could you walk through the process in terms of what has to happen for your foreign factor to become standard? Is there some sort of volume that you feel like you have to get to such that you can drive a standard through the industry?

Richard M. Feldt

Well, the biggest difference right now is that it's about half the width. And so we'd have an industry standard if it was twice as wide. And right now we’re still struggling with how to grow it twice as wide and not introduce a lot of stresses so that you have excessive yield loss. So the biggest issue is width.

Timothy Arcuri - Citi

Yeah, okay understood.

Operator

We'll take our next question from Vishal Shah with Barclays Capital.

Vishal Shah - Barclays Capital

Yeah, thanks for taking my question. Can you talk about your take or pay contracts that you had announced a couple of quarters back, where you stand there, and can you also talk about your efficiency right now? How does it compare to say, the middle of last year, and what are your plans for that over the next couple of quarters?

Richard M. Feldt

So in our take or pay contracts we've announced a number over the last couple of years and pretty much stayed the course. We still have the same customers we've had for the last year or so. They're buying and we're selling the volumes roughly that they said they wanted to take. The biggest issue we've had is with the collapse of pricing in the world we've had to reduce the price of some of those customers.

As I said we have a little bit of a braking mechanism, it doesn't happen maybe quite as quickly, but on balance our customer relations are good and the contracts are intact.

Regarding efficiency we've climbed from the 14% to the 15 range. We think we're working on a technology that we're getting close to talking more publicly about that will get us above 16% next year, and like many companies we're targeting trying to get to 17% efficiency in the 2011 timeframe.

Michael El-Hillow

And that improvement in efficiency is also going to be important in our ability to get our wafer costs down to where we talked about the $0.30-$0.40 range.

Vishal Shah - Barclays Capital

Have you introduced any new products with the 15% efficiency modules, over the last couple of quarters you said?

Richard M. Feldt

Our cell conversion efficiencies will be out in the 15% range, correct.

Vishal Shah - Barclays Capital

Okay. And in your poly price with DC Chemical and some of the other supplies was around $100 so it looks like you haven't been able to renegotiate your contract price down despite the (inaudible) change in poly pricing, is that a fair assumption?

Michael El-Hillow

Well we said even on the call in July that our cash price right now is $63 a kilo, average of our contracts. You really can't get substantial contracts above that. You can't get substantial contracts above that right now. I mean we said there’s a lot of anecdotal information. So once the price is lower and is sustainable and in volume, we believe our suppliers will be willing to move. There's no reason for them to move just yet.

Vishal Shah - Barclays Capital

Thank you.

Operator

That does conclude the question-and-answer session. At this time I'd like to turn the conference back to Mr. Mike McCarthy for any additional or closing remarks.

Michael McCarthy

Thank you very much, everyone. If you have any additional follow up questions please feel free to give us a call. Thanks.

Operator

Once again that does conclude today's call. We appreciate your participation.

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