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Executives

Mike McCarthy - Director Investor Relations

Rick Feldt - Chairman, President, and CEO

Mike El-Hillow - Chief Operating Officer and Chief Financial Officer

Analysts

Sanjay Shrestha – Lazard Capital

Paul Clegg – Jefferies & Co.

Jesse Pichel – Piper Jaffray

Rob Stone – Cowen & Co.

Kelly Dougherty – Macquarie

Adam Krop – Ardour Capital

Vishal Shah – Barclays Capital

Steve O’Rourke – Deutsche Bank

Stuart Bush – RBC Capital Markets

Jeff Davis - Waterstone Capital

[Henry Vaskavunik] - CRT Capital

Ben Pang – Caris & Company

Evergreen Solar, Inc. (ESLR) Q4 2009 Earnings Call February 9, 2010 8:30 AM ET

Operator

(Operator Instructions) Welcome to Evergreen Solar's Fourth Quarter 2009 Conference Call. At this time for opening remarks I would like to turn the call over to Mr. Mike McCarthy, Director of Investor Relations.

Mike McCarthy

I'm joined this morning by Rick Feldt, Chairman, President, and CEO, and Mike El-Hillow, our Chief Operating Officer and Chief Financial Officer, both of whom will share some brief prepared remarks prior to taking your questions.

Before we begin today's call I’d like to remind everyone that statements that are made in this conference call that are not historical facts such as those dealing with future financial performance, expected cost savings, expansion of our operations, potential costs associated with Sovello are forward looking statements under the Private Securities Litigation Reform Act of 1995.

Future operating 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 fourth quarter.

Rick Feldt

During today’s call I will discuss three main topics:

Our continued strong operational execution at Devens

Our progress to date with the Wuhan, China expansion

Our view of the near term market outlook

Mike will provide you with a comprehensive update regarding Sovello during his portion of our prepared remarks.

Over two years ago we established a cost target for our Devens facility of about $2.00 per watt. We are pleased to have effectively achieved that cost this quarter. In the fourth quarter we produced panels at $2.05 per watt, down from $2.24 per watt in the third quarter.

Leveraging the strength of our quad technology, we reduced our wafer costs to $0.69 per watt from $0.75 per watt in the third quarter, as we reduced silicon consumption to an industry leading 3.9 grams per watt. We achieved all this with a silicon cost of about $90 per kilogram. We believe that Devens is now producing wafers that are cost competitive with many of the larger Chinese manufacturers today. We also believe that we have not yet realized the full benefits of our quad technology which is still in the early stage of its lifecycle, nor have we obtained the benefits that larger scale manufacturing will bring.

Our track record of manufacturing excellence is even more critical as we relentlessly pursue additional operational efficiencies, further reduce our silicon and other material costs, and make progress on our technology roadmap to further reduce costs at Devens to about $1.50 per watt in 2011 as we transition panel assembly to China.

One point that I may not have emphasized sufficiently in the past is that Evergreen operates one of the largest and most advanced solar manufacturing facilities in the United States. While we will transition our panel fab to China over the next 12 to 18 months, our Massachusetts facilities will continue to serve as Evergreen Solar’s center for excellence for wafer and cell technology, process development, and advanced R&D.

Today we are working on two major wafer projects:

Optimizing the crystallization characteristics of the wafer to increase power performance.

Growing wider wafers in line with industry standard sizes.

We continue to believe that we are at the early stages of commercial development of the quad platform and that there was really substantial progress to be made with this technology. We’re also working on projects geared toward improving self conversion efficiency. Specifically, we have developed a multi-wire and tabbing technology that we will begin piloting in China that we expect will increase our panel power by about 5%. We’ll provide more details in the coming months.

Now I would like to turn to Wuhan, China expansion. Our wafer fab building is mostly complete and we will soon be installing quad furnaces. We have a strong management team in place and we are hiring experienced engineers and other essential support staff needed for the initial 100 megawatt facility. I believe we are in a good position to ship first product by this summer. Our contract manufacturing partner Jiawei has made similar progress on their cell and panel fabs.

As the first phase of our investment in China reaches 20 to 25 megawatts of capacity per quarter in early 2011, we expect to produce a wafer for about $0.45 per watt and with Jiawei’s low cost cell and panel manufacturing capabilities a panel for around $1.25 per watt. As we continue to advance the technology, make improvements in factory operations and add scale, we expect that we will be producing Evergreen branded solar panels for no more than $1.00 per watt by the end of 2012, including an all in wafer cost of about $0.30 per watt.

Now turning to the marketplace, generally speaking, demand was robust throughout the fourth quarter and has continued in the first quarter of 2010. Our customers in Germany are taking advantage of current feed-in tariff incentives before the proposed rate decreased take effect. While the impacts of those proposed changes are uncertain, we still expect Germany to be the biggest market in the world. That said, we are maintaining our US relationships and broadening our relationship in EME, specifically Italy, France, Spain and the Middle East.

We will continue to focus on market segments that have typically had higher price points in the large utility scale projects. Historically we have experienced a price premium of up to 10% for our product due to our strong brand. Our panels are globally recognized for high quality and industry leading power performance. However, given the realities of today’s market dynamics, our ability to maintain such a price premium will likely erode during the year.

We expect our production capacity will be about 175 megawatts in 2010, up from the 104 in 2009, an increase of almost 70%. Overall, demand appears to be strong for the second quarter and as we look into the second half of the year we remain pretty optimistic and we’ll be monitoring developments in the markets closely so that we can appropriately match our production to end market demand.

In summary, the fourth quarter was a solid quarter operationally for Evergreen. The things that we’re able to control, we executed well. The progress in Devens has been outstanding we’re meeting all timelines in China. We are well positioned to prove again that our wafer manufacturing technology will scale quickly and successfully, this time in the low cost manufacturing region of Wuhan.

I will now turn the call over to Mike El-Hillow, our COO and CFO.

Mike El-Hillow

Today I will discuss our fourth quarter 2009 financial results, provide updates on the economic of Devens, the current Sovello situation, and our liquidity outlook.

Product sales for the fourth quarter 2009 was $74.5 million that’s compared to $75.5 million for the third quarter 2009. During the quarter we produced about 34 megawatts and shipped approximately 31.9 megawatts, compared to 31.3 megawatts in the third quarter 2009. The sequential decrease in product revenue was due mainly to a 3.7% decline in our average selling prices. Average selling price during the fourth quarter was $2.32 per watt down from $2.41 per watt in the third quarter 2009.

During the fourth quarter approximately 68% of our product was sold in Europe and 32% in the United States, compared to approximately 73% of products in Europe, 24% in the US and 3% in Asia during the third quarter 2009.

Total gross margin in the fourth quarter was 11.9% up from 9.7% in the third quarter. The third quarter gross margin includes $2.3 million technology fees from Sovello. As for the fourth quarter, we no longer recognize revenue associated with these fees from Sovello due to the impairment of our investment which I will review shortly. Therefore, product gross margin increased sequentially from 7.1% in the third quarter to 11.9% in the fourth quarter due to lower manufacturing costs at our Devens facility, offset by the decline in selling prices.

As Rick said, our manufacturing costs decreased to $2.05 per watt from $2.24 per watt in the third quarter, driven mainly by improved yields and labor productivity and lower materials and overhead costs. We have made substantial progress at our Devens facility over the past six months, focusing on getting the factory to a steady state and continuing the momentum of operational improvements. As Rick mentioned, we believe that our proven track record of manufacturing excellence will enable us to reduce our costs at Devens to about $1.50 per watt over the next 12 to 18 months.

Our GAAP silicon costs for the fourth quarter was about $90 per kilogram. Included in this cost, the non-cash charges associated with the fair value of common stock we granted OCI in 2007 in lieu of a cash down payment and pre-payment draw downs on other contracts. These total about $30 per kilogram. As a result, our cash costs for silicon was about $60 per kilogram in the fourth quarter. For 2010 we expect our GAAP silicon costs will be about $80 per kilogram and our cash costs will be about $60 per kilogram.

Our target GAAP and cash costs for 2011 is no higher than $50 per kilogram and is a major assumption in our forward cash for achieving $1.00 per watt in China and $1.50 per watt at Devens.

R&D expense was $4.75 million for the fourth quarter of 2009 slightly higher than the third quarter $4.4 million. We will continue to invest in our quad wafer technology and improving self conversion efficiency, both of which will contribute to our goal of achieving the total manufacturing costs we spoke about earlier.

SG&A expense was $7.3 million compared with $5.9 million in the third quarter 2009. The sequential increase in SG&A expense was driven primarily by costs associated with attending major trade shows during the quarter and year end true up and compensation costs. Facility startup costs associated with our Midland High Temperature Filament Plant and initial costs associated with China were approximately $3.5 million in the fourth quarter, higher than the third quarter of $2.5 million.

Activities associated with our China expansion have increased substantially in the past couple of months. We expect that factory startup costs will increase in the next few quarters as our China facility continues to ramp. Total startup costs in 2010 related to our Midland and China plants are expected to be approximately $15 to $20 million in total.

During the quarter we incurred equipment write offs and mostly non-cash restructuring charges of $14.6 million, comprised mainly of approximately $8.5 million associated with the anticipated Devens transition of panel assembly to China and $6 million associated with other development of equipment write offs. We expect restructuring costs to be approximately $4 to $5 million per quarter in 2010 consisting mainly of non-cash accelerated appreciation charges associated with transitioning panel assembly to China.

Our operating loss, which includes all the startup, equipment write offs, and restructuring expenses previously mentioned, was $21.1 million compared to $6 million in the third quarter. Devens is now producing at about 35 megawatts per quarter and generating positive cash flow. While total manufacturing costs of $2.05 per watt, cash costs were about $1.70 per watt. Driving our manufacturing costs lower as well as strong working capital management were the primary reasons why we generated $16.9 million in cash from operations for the fourth quarter, up from $11.3 million in the third quarter.

Other expense was $7.4 million in the fourth quarter which consisted of foreign exchange losses of $810,000 and net interest expense of $6.6 million. Other expense in the third quarter 2009 was $4.8 million which consisted of foreign exchange gains of $2.5 million and net interest of $7.3 million. Non-cash interest expense of approximately $3 million associated with the amortization of debt discount of our senior convertible notes is included in net interest expense recorded in both the third and fourth quarters.

We reported an equity loss of $13.5 million and an impairment charge in our investment in Sovello of $56.1 million in the fourth quarter compared to an equity loss of $9.7 million and an impairment charge in our investment of $61.9 million which includes $7.8 million of a tax benefit in the third quarter 2009. I will discuss the impairment charge in more detail shortly.

Net loss for the fourth quarter was $98.1 million or $0.48 per share versus $82.4 million or $0.40 per share in the third quarter 2009. Weighted average shares outstanding for the fourth quarter and third quarter 2009 were 204.9 million and 204.8 million respectively.

Now on to Sovello. As previously disclosed, Sovello has been in default under its bank loan agreements at the end of 2008. Throughout 2009 it operated under waivers from its bank syndicate of certain loan covenant violations. Late in December 2009 the partners collectively paid 12.9 million Euros of the 30 million Euro loan guarantee previously established and which we have discussed in many earlier conference calls.

In exchange for this payment, the banks extended the negotiation period to the end of January. On January 28, 2010, Sovello’s bank syndicate terminated their loan agreement but did not demand repayment of the outstanding loan. Yesterday the shareholders of Sovello paid the remaining portion of their guarantees of $17.5 million Euros to Sovello’s bank syndicate in exchange for additional forbearance on Sovello’s remaining loan outstanding. Discussions continue in this very fluid and uncertain situation.

Further, in light of a recent European Commission decision, the details of which we disclosed in an 8-K filing on February 4th, Sovello may be required to return a portion of the grants it’s received from the German government totaling about 12 million Euros. If all of these matters are not resolved satisfactorily, Sovello may need to declare insolvency which could result in further financial obligations for us.

As such, we have recorded a non-cash charge of approximately $40.9 million plus in the write off of our remaining investment of Sovello. Additionally, we recorded a charge totaling approximately $15 million for the remaining guarantee payment of $8 million that was made yesterday for certain undertakings with Sovello’s bank and for other expected costs.

Combined with the $6 million we paid at the end of 2009 our total exposure for Sovello appears to be in the range of $20 million, the amount we have spoken about again in numerous conference calls over the last year. As of today, discussions continue among the banks, partners, Sovello management, the government and other interested parties.

Now I will discuss our cash situation and capital needs for the next several months. At December 31, 2009, we had approximately $112.4 million of cash and cash equivalents. Due to our strong execution at Devens and improved working capital management, we generated $28.2 million in cash from operations in the second half of 2009. With a cash cost of about $1.70 per watt or lower as we continue to make improvements, we expect to continue to generate cash from operations in 2010.

Our major cash requirements in 2010 are expected to be approximately $97 million comprised of capital required for our Wuhan, China expansion of about $50 million, final acceptance payments on equipment at Devens of about $7 million, continuation of the first phase of our Midland filament factory of about $3 million, sustaining capital of about $7 million, estimated payments of Sovello matters of $15 million that I spoke about earlier, and debt service of about $15 million.

As we have discussed in the past, we will continually monitor selling prices and other changes to our current expectations for 2010 and the potential impact on our liquidity.

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

Question-and-Answer Session

Operator

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

Sanjay Shrestha – Lazard Capital

With the Devens costs expected to be $1.15 ’11 and in China expected to be $1.25, is there any thinking that you guys have as to not just the module but even take the cell assembly or the cell line as well to China or do you want to kind of keep that $0.25 higher cost but keep tweaking the cell efficiency, is that the logic behind why you’re keeping cell line here in Devens at this point?

Rick Feldt

Let me start with wafers because as we said our wafer costs with a GAAP silicon price at $90 per kilo were $0.69. Our cash costs, our wafer costs are $50 a kilo, our wafer costs are like right now $0.53 and getting better. We think we’re extremely competitive making wafers anyplace in the world. We have this fixed investment in cell manufacturing so again it comes down a little bit to cash versus GAAP accounting depreciation, amortization.

If we continue to make improvements that we plan, its not at all clear to us, we’ll monitor this, it’s not all clear to us that we’d be better off by buying whole new set of equipment in the salvaging operations in China and scrapping the equipment that we have here. As you know, these cell lines are not easy just to pick up and move, of course it’s possible, so we’ll have to play that one by ear. We think that we will continue to reduce wafer and cell costs efficiently that would make sense given our fixed investment here. Of course if it doesn’t we would take other action.

Sanjay Shrestha – Lazard Capital

The ASPs in the quarter were pretty impressive and I understand you guys certainly get the premium versus some of the Asian players if you would. Did you actually see, even in the broader market there was a stabilizing impact, stabilizing ASPs in Q4, are you seeing that trend in the first half of the year 2010 as well or is this more Evergreen specific issue because of long term contracts and things like that.

Rick Feldt

From our vantage point, remember we’re one of the smaller providers but I think from our vantage point there was a stabilization in the fourth quarter, as you know. Many of the large Chinese silicon companies announced that they had sold out in the fourth quarter, the first and second quarters of 2010. We think there was just broadly speaking, stabilization.

As the German Parliament has now announced that its highly likely that there will be a substantial reduction in the feed-in tariff sometime late spring, early summer, timing and amount to be determined. I think everyone believes there will be something substantial in the next three to five months. We think that will return some of the pricing pressure that we saw earlier last year, we don’t think its going to be as severe as it was over 2009 but nonetheless we think prices will probably decline another 15% this year.

Sanjay Shrestha – Lazard Capital

In this prepaid cost inventory balance which still stays about $147 million, it sounds to me like that should also continue to really help you cash flow and really virtually almost no risk to having to write that down because of the price points we’re talking about for ’10 and ’11.

Mike El-Hillow

As long as we’re able to sell our product we make there would be no write down but you’re absolutely right, its a non-cash charge, its just a point that we have it. It is all about cash running a business. Its there, just consider it accounting; its amazing when we issued the stock several years ago, the value associated with this was over $100 million. The world has changed but the accountants never do.

Operator

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

Paul Clegg – Jefferies & Co.

On your hedging strategy the dollar/Euro relationship, you mentioned 68% of sales in Europe. Is that the right figure we should think of in terms of what percentage of your overall sales are in Euros? If you could address the currency hedging position or strategy given the weaker Euro recently.

Mike El-Hillow

That’s a good number to focus on. As Rick said earlier with the situation in Germany we are going to focus maybe a bit more in the United States. From the standpoint of hedging we have the contracts, any hedging can also be expensive and quite frankly we don’t have a lot of flexibility, we don’t have a strong capital line of credit. Quite frankly we don’t hedge and yet the dollar’s gotten stronger over the last week or so from $1.47 to $1.34. It’s going back and forth.

We also buy in Euros; we have suppliers out of Europe so in a lot of ways we have a natural hedge. The long and short of it is we don’t have what I’ll call an incredibly detailed and sophisticated hedging strategy. Some other companies do it, I’ve done this for a lot of years, at the end of the day unless there so much volatility and where your demand is coming from, its not a strong practice. We’re comfortable where we are.

Paul Clegg – Jefferies & Co.

In terms of the cost structure then in Euros are we talking some of the polysilicon?

Mike El-Hillow

Historically we have bought glass from China, from Europe and some other things. I must admit, we are moving some of that to China. We do have some Euro costs.

Paul Clegg – Jefferies & Co.

You talked about the Germany and the feed-in tariff and of course there’s some possibility that it could actually be enacted, I don’t think it’s likely but there’s some possibility it could actually be enacted early in the second quarter. Have you had discussions there with customers in Germany thus far about how you would address that if it were enacted early? How much of your overall expected 2Q sales are actually from Germany?

Rick Feldt

It’s hard to speculate; of course we’re having discussions with customers. Our head of European sales has actually met with the Economic Minister, Environmental Minister who’s pushing hard for deep cut earlier. It’s still very, very much unknown. Our customers are also taking a little bit of wait and see. We, in this coming year just like this past year, will probably sell 65% or so of our product into Europe broadly; Germany, Italy, Belgium, France, Czechoslovakia. Of course we have to wait and see.

One of the things that really hard to handicap is the fact that prices have dropped substantially more than the feed-in tariff last year and even over the last 18 months, with declines of about 50% one could actually absorb another 10% to 15% of feed-in tariff decline without having to drop prices another 10% to 15%. It really depends on what the large Chinese producers plan to do. They’ve said that they’re sold out in the first half, if they truly are there’s no economic reason why prices have to decline immediately. After saying that, we still really do not know.

Operator

Your next question comes from Jesse Pichel – Piper Jaffray

Jesse Pichel – Piper Jaffray

Are you selling any non-ribbon modules today and would you, and if no, why not?

Rick Feldt

No we are not selling any non-ribbon modules today. We have contemplated adding maybe for select markets maybe non-ribbon if it served a different market segment. If you just stand back broadly we do believe that we will become the cost leader. Just buying standard stock wafers from standard companies and turning them into standard panels at price points that we don’t think will be any better than we can achieve has not been terribly appealing to us.

After saying that, higher power mono-crystalline wafers might have appeal to certainly different segments. We do think that we will soon become one of the low cost producers and therefore our strategy of moving to China, having very lost cost wafers, in this tolling process which is a little bit of a proxy for what you’re talking about. We think is a better way to go than just broadly speaking OEM products.

Jesse Pichel – Piper Jaffray

Common wisdom says go to China and save money but your technology is very different, yield is much more of an issue and you do have twice as many sells per module than a standard sell, twice as many sells per module. Can you give us some ideas of how is your technology really transferable to Jiawei and have you really costed it out so that these cost road map targets are realistic?

Rick Feldt

Our yield is surprisingly good. We do still, end to end, in the factory suffer a few percent yield penalty as compared to conventional cells. We very reduce that substantially. Going to China actually helps that, we’ve had some experience with manual handling that we can have breakage rates that are better than or less than some automated handling devices are able to achieve. Actually going to China helps us.

Our non-standard size is more of an issue if you have an existing line and you require conversion. We go through the same manufacturing process steps and in the large diffusion machine or poggle diffusion or large anti-reflective coating device, once the wafer’s inside it doesn’t matter really what its size is but getting it to it requires a different means of handling, different conveyance.

The real issue for us is not starting a new facility geared towards a smaller wafer size but going and retrofitting one, there’s some expense and some issue associated with retrofitting in the existing facility. There’s not a big issue in a newer facility. Yes, of course we have looked at the costs of going to China and we looked at them hundreds of times and we keep reevaluating them as we get more information. We think that we’re providing accurate estimates.

Also, as I mentioned earlier in my prepared remarks, now that Devens is up and going we are actually growing industry standard sized wafers in the lab. We do think for a variety of reasons both to help ourselves in being able to use off the shelf material and handling systems as well as the question we get asked regularly as well as the potential for either licensing and/or selling wafers, all those opportunities will be greatly improved if we had an industry standard sized wafer, so we’re working on that right now. We’re making relatively good progress.

Mike El-Hillow

When we talked about moving to quad several years ago we talked about the technology associated with the laser cutting, etc. and getting better. You may recall at the time we said that we thought we’d be able to get our yield to the mid 80’s. On the fourth quarter our yield factory wide, wafer, cell and panel, all three was just north of 86% and we continue to improve in the first month of this year we’re in excess of 87%. With 300 quad machines running here at Devens and the live cell lines that we have we are getting better every day.

In the past people have talked about other suppliers being north of 90%. None of them really make wafers per se so we are factory wide north of 86% for the fourth quarter, north of 87% in the first quarter and we have ways of getting it even higher. As Rick said, going to manual handling in China will even improve that. Once and for all let us debunk the theory that our wafers are harder to handle and the yield is going to be difficult, we are mainstream.

Jesse Pichel – Piper Jaffray

This cash polysilicon cost is kind of a new concept here in the solar industry. Do you still have $172 million of prepayments with suppliers? Can you remind us who the suppliers are, and is it in cash or is in kind?

Mike El-Hillow

The number is still above the $170 million range. The largest part of that is with OCI. OCI we have two contracts, one we made a stock prepayment and that number is probably around $90 to $100 million in total. We have a cash prepayment also to OCI, we have one with Mitol, and we have one with Bacher. Those are our cash and non-cash prepayments totaling in the neighborhood of about $170 million. The biggest part being the stock prepayment at OCI.

Jesse Pichel – Piper Jaffray

Do you think you can your prepayment back from Mitols and really nothing is going on there?

Mike El-Hillow

We’re receiving product from them, they’re moving forward.

Jesse Pichel – Piper Jaffray

They have one reactor right?

Mike El-Hillow

It’s going to us so we’re happy. Quite frankly that may come down to the fact that we started talking to them right at the very beginning. I think we have a good relationship with them. I have met with them, Rick has met with them and our main contact is Rich Chleboski. We think we have a good relationship there.

Rick Feldt

I actually visited Siberia in February.

Operator

Your next question comes from Rob Stone – Cowen & Co.

Rob Stone – Cowen & Co.

To follow up on the poly cash cost and GAAP costs item a little bit more. I think in the prepared remarks you suggested that GAAP costs and cash costs were going to be the same by 2012 does that mean that the working off of the stock prepayment is happening first and your cash prepayments will go beyond that?

Mike El-Hillow

We’re talking about is that more than likely the world is changing for all of us, especially the silicon producers; we’re going to look to renegotiate our contracts. Part of the renegotiation we think we’d be able to get rid of this non-cash charge once and for all, we’re working that now.

Rob Stone – Cowen & Co.

That assumes renegotiation. You talked about the outlook on a full year basis for pricing. The feed-in tariff did come down pre the current EEG in Q1 and I think in the past you had talked about maintaining more or less the same run rate somewhere in the 30 to 35 megawatts per quarter. Can you say where you think you come out on volume and ASPs in Q1 more or less?

Mike El-Hillow

In the first quarter we’re going to produce and sell around 35 megawatts plus or minus a little bit. The pricing right now is holding fairly strong, its a little bit north of $2.25 and $2.30. I must admit the ‘x’ factor here is the continuing strength of the dollar. From the standpoint above local currency base pricing is holding pretty solid. We would assume that all things being equal we should be north of about $2.20 unless the dollar becomes incredibly strong in the quarter.

Rob Stone – Cowen & Co.

Related to that, was there some other item in product revenue in Q4 because when I use 31.9% and $2.32 it doesn’t quite foot.

Mike El-Hillow

There’s a small amount of selling fees from the governments of about $20,000 and maybe some little bit of a rounding but that should get you close enough.

Rob Stone – Cowen & Co.

That was a separate line, it didn’t seem to match. I’ll follow up with you later.

Mike El-Hillow

I’m going to guess there could be some rounding; I don’t know the $2.32 could be $2.31. The other thing is we also, for whatever its worth, I’ve just been told we sell cells directly, not much but a little bit just scrap cells, I think its usually less than $500,000 a quarter, that accounts for it.

Operator

Your next question comes from Kelly Dougherty – Macquarie

Kelly Dougherty – Macquarie

Just trying to get an understanding, given the strong demand in the fourth quarter, was wasn’t Devens running at full capacity or is the 40 megawatt number not actually a number that it can reach right now?

Rick Feldt

We can produce now around 35 or so megawatts a quarter. Back in the summer of this past year when we were starting to bring on phase two of Devens, when demand was so soft and prices were plummeting, we made a conscious decision to not spend the last $4 or $5 million to get Devens up to not just name plate but in fact capacity of 40 megawatts. We stopped at around the 35 or 36 megawatt rate in terms of real ability.

With the improvements that Mike has mentioned, we can probably increase capacity up to that 40 megawatts per quarter, 160 for the facility for as little as $3 to as much as $5 million. We’re considering that but now that we’re going to move panel assembly to China it becomes a little bit more complex set of equations. I think you should think in terms of capacity, real effective capacity in the 35, maybe 36 megawatt range.

Mike El-Hillow

To give you a little bit more detail on that. Panels have to be level loaded. In the wafer and cell area we can do 38 to 39 megawatts a quarter right now and actually wafers even a little bit higher than cell. It’s in the panel area that it really cuts us back and since we had transitioning panel fab to China and maybe not in the next month or so but we have cut back. The factory in the areas that really give us our competitive advantage quite frankly we could be at 40 megawatts today but we have no place to turn them into panels.

Kelly Dougherty – Macquarie

Going forward if we were to theoretically use that 40 megawatt because you’ll just be doing wafers and cells in Devens that’s probably still a good number?

Mike El-Hillow

I think that not in this quarter but as we get through the year absolutely.

Kelly Dougherty – Macquarie

Can you help us think about your operating expenses as you move some of the production to China? What kind of run rate number should we assume for OpEx going forward?

Mike El-Hillow

R&D over the next year or so should be about $5 to $5.25 million a quarter. We are starting to hire engineers in China; as a matter of fact we’ve got about eight already on staff. In the SG&A area in the fourth quarter we had total of about $7.2 million, that’s going to go up slight but by the end of 2010 that’s going to be close to $9 million mostly because of additional administrative costs associated with China. R&D between $5 and $5.5 million and I’d gradually scale up SG&A to $9 million over the next four quarters.

Kelly Dougherty – Macquarie

As you previously talked about $1.35 to $1.45 and your own panel costs in China by the end of this year, the first question is, is that still a good number? It could be argued that depending on what happens in Germany some of the Chinese companies might not be selling for much higher than that. How do you think about where you can sell relative to some of the Chinese companies?

Mike El-Hillow

This is a tough situation. We, the largest US based silicon manufacturer, we’re competing with the Chinese. There’s a lot of stuff happening at the macro level whether it’s the President going over and criticizing the Chinese and the Chinese pushing back. The fact is if the Chinese are going to continue to sell near marginal costs because they get the support of the Chinese government, that’s just the way the world is. Either you get the Germany Ministers talking about, you get the United States talking about it, all we can hope for is this: that the US government will not let the Chinese replace the Middle East for access to solar energy, Rick has been saying that for a year.

Short of that, all we can do is this, make our operations as streamline as they can be, getting our costs as low as they can be, getting to China as fast as we can, and just execute and focus on what we can focus on. Beyond that there’s nothing else we can. We’ve tossed internally about becoming more aggressive in Washington, trying to get them to understand the situation that we face as a solar manufacturer and leveraging our wafer technology. There’s no silver bullet here, it’s an incredibly tough situation.

Two years ago we had an analyst day here in Massachusetts and we told you we would be at $2.00 per watt at Devens and many people they thought we were being too aggressive, we got there. No one ever thought the price would get down. For us it’s a marathon, its not a sprint. I can give you no more color than that.

Rick Feldt

We’ve actually been to Washington, I’ve been down there, I’ve met with Energy Secretary Chu, I’ve met with Commerce Secretary, Gary Locke, I met with state and local politicians. It’s not quite the understanding that we think is necessary about what’s actually happening in this industry.

A little bit more to Mike’s point, we’re going to China as quickly as we can. We do believe that given our wafer costs which will be the lowest, we believe, by far of any wafer producer in that given the discussion we had with Jesse that our cell and panel costs should be on par with other Chinese manufacturers. We should really become one of the world’s low cost producers. The issue for us is just how long does it take to get there, we’ve got the China operations underway as we speak. Of course anything is possible.

Remember too that although the Chinese are formidable and they are getting lots of help from the government and they are, we believe, often times pricing at marginal costs. They don’t have sufficient capacity for the entire world. There’s been some stabilization in pricing because as they’ve sold out prices have stabilized. They don’t have today 8 to 10 gigawatts of capacity. Not all products will be sold at the absolute lowest utility power plant pricing.

Kelly Dougherty – Macquarie

How do you think about selling your product relative to where they’re going to sell theirs? $1.45 isn’t marginal costs and in the not too distant future for a lot of these Chinese companies. What kind of premium are you thinking that you can continue to command relative to them?

Rick Feldt

Its not just premium, it’s also a little bit of channel. Those very low costs really tend to be in the large commercial projects as well as the big utility projects. The smaller distributors don’t have the same pricing power as the big utilities have. Again, you may disagree, we just don’t think all solar next year is going to be sold at $1.45.

Kelly Dougherty – Macquarie

That’s not what I’m saying but I’m just thinking about how you think about. Where do you panels end up? Rooftop versus larger scale so we can try to get a better idea of what the mix is?

Rick Feldt

We go more to rooftop and smaller distributors and installers. Clearly at those prices those are the leading edge prices that the large utilities and very large commercial companies can command. The smaller don’t.

Operator

Your next question comes from Adam Krop – Ardour Capital

Adam Krop – Ardour Capital

On volumes, it sounds like for the first half 30 to 35 megawatts is going to be a good run rate. As the Wuhan facility starts to ramp how do you look at the back half in terms of volumes in 3Q and 4Q?

Mike El-Hillow

We said earlier we think our total volume for the year will be around 170 to 175 megawatts. Let me talk about the first quarter. We expect to be much closer to 35 than 30. First couple of quarters 35 to 37.5, back half of the year gets us up to the 165 to 175 range. The fourth quarter more than likely should be a little bit north of 50 megawatts.

Adam Krop – Ardour Capital

On 2009 in terms of your geographic breakdown can you help me out with that? How do you expect that to trend for 2010?

Rick Feldt

As we’ve been saying, 2009 we sold 65% to 70% of our product in Europe, 15% to 20% in the US and 5% rest of world. That won’t change a whole lot going forward in 2010 although we think that the mix between Germany and some of the other European countries will shift, not as much to Germany, other quantities to Italy, Belgium, France, Czech, etc.

Operator

Your next question comes from Vishal Shah – Barclays Capital

Vishal Shah – Barclays Capital

Can you talk about the timing of cash usage; you mentioned $97 million of usage for this year. Can you talk about the split between the first half and second half? What cash you have on hand as of end of January?

Mike El-Hillow

Cash in January was about $90 million. We’ll use about two thirds of the cash in the first six months. We talked about the $97 million, one third in the second half.

Vishal Shah – Barclays Capital

Can you also talk about your cash costs trends? You mentioned your cash costs were $1.70, how should we think about the cash costs exiting Q1, Q2, can you give us some framework?

Mike El-Hillow

I think we can probably say the cash cost down a couple of cents a quarter, say $0.01 to $0.02 a quarter in Devens as the year goes on, mainly through improved yield. We have started sourcing some product from China, specifically frames and glass but we have to work off some inventory there in say the first few months of this year. If you start with $1.70 figure we’ll finish the year $1.64, $1.65.

Vishal Shah – Barclays Capital

You obviously talked about your wafer cost is very impressive, if you look at some of the competitors their wafer manufacturing costs are significantly higher than yours. Are you able to attract some new customers to buy wafers?

Rick Feldt

We actually were having some relatively significant serious discussions about that prior to the collapse of the worldwide economies and the reduction of demand in the solar space. We’re expecting as our wafers are getting lower costs and as we start working on an industry standard wafer that we will generate interest again. We had a lot of interest 18 months ago then the world changed.

Vishal Shah – Barclays Capital

That seems to be a much more sustainable competitive advantage based on what you’re talking about versus going out and competing with the Chinese solar module manufacturers because you are non-silicon processing costs is higher than what some of the companies claim they can get. Why not just follow a wafering strategy?

Rick Feldt

We talk about this all the time. As our wafers become more industry standard, the opportunity to do that is greater. Plus in our move to China if you appreciate the fact that we’ll have very, very low wafer costs and we get good Chinese manufacturers to convert those wafers into cells and panels we will be getting China conversion costs with a very low cost wafer. We have a brand. Yes it cold evolve over time where we focus more and more on wafers only, license the technology and make wafers only.

Once more, as we reduce those costs and we get China conversion costs for selling panels its not clear that we should just abandon our brand and abandon the tolling opportunity that we have in converting our wafers into panels.

Vishal Shah – Barclays Capital

You don’t have any ongoing discussions with any potential wafer customers.

Rick Feldt

That’s all I’m going to say about this.

Operator

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

Steve O’Rourke – Deutsche Bank

Have you had requests or increased interest in licensing your string ribbon technology? Is that really dependant upon getting to standard sized wafers? You talked about a 5% increase in output power from a new tabbing process, when would that be implemented and will the China facility begin production with this process?

Rick Feldt

To your first question, I really covered that as thoroughly as I can with the last questioner. We have an opportunity longer term but right now we aren’t licensing the technology other than to Sovello. In regards to the new metallization, yes we will be starting that up in our China, Wuhan facility.

Mike El-Hillow

The fact it’s going into pilot soon but the fact is that we will product non, the new multi-wire panels, we’ll do our standard panels there also, and we’re not going to wait for multi-wire in China.

Operator

Your next question comes from Stuart Bush – RBC Capital Markets

Stuart Bush – RBC Capital Markets

Can you clarify what your efficiency on your cells were in the quarter, and how many grams were watt of silicon you used?

Mike El-Hillow

Efficiency was around 15% and we used about 3.9 grams per watt.

Stuart Bush – RBC Capital Markets

Can you help me understand, I understand all the structural headwinds going on in the marketplace right now. Given you cash situation, why are you continuing to grow your R&D and your SG&A, are you looking at any opportunities to actually cut costs here in the short term?

Mike El-Hillow

In the area of R&D, one of the things we talked about earlier was that we are starting to hire engineers in China, which will help us reduce costs. We have unique technology, unique technology requires investments, and we really can’t take off the shelf development. It’s the cost of us doing business. If you stop investing in it then gradually you need to pave the way. This has been, quite frankly, the mantra Rick has had since he became CEO in late 2003. You can assume we’re going to continue investment in R&D.

In the SG&A the additions are all in China. Basically we have a headcount freeze in the United States, maybe doing onesies and twosies but we’re cutting way back. It all comes down to scale. We have got to scale that at the top line of the capacity and that’s what we’re driving to, that’s the drive to China. We’ll control costs as best we can but this isn’t a cyclical industry for us right now, we’re in a growth phase and we have to treat it as such.

Stuart Bush – RBC Capital Markets

Can you remind us about your string factory progress and the strategy there and what sort of cost savings you’ll get once that’s up and running and when you expect that to be up and running?

Mike El-Hillow

We are building the facility in Midland, Michigan. The reason for the strategy is this, obviously the string/filament is critical to string ribbon and we only had one supplier, a small supplier based in Lowell, Massachusetts, a great supplier but again one supplier, one location. We were at risk so we looked for an alternative supplier, we could not find one so we decided to be our own capital supplier. We will continue to buy significant string from our merchant supplier. That was number one, to protect ourselves at the flame.

We are producing string right now; maybe say enough to do 2 or 3 megawatts a year we’re still bringing up reactors. The intention is at full capacity, which we could achieve by early 2011 we would be able to cut our string costs by about 70%.

Operator

Your next question comes from Jeff Davis - Waterstone Capital

Jeff Davis - Waterstone Capital

Can you tell me what working capital benefit was in the quarter, it looks like it was around $33 million based on my numbers?

Mike El-Hillow

We have about $11.4 million the impact of working capital per se in the quarter. Then we had some other non-cash that did get into that but about $11.4 million.

Jeff Davis - Waterstone Capital

What are your thoughts here on capital raise or other forms continue to improve the balance sheet for equity swaps, those types of things.

Mike El-Hillow

The one things we really are trying to do and this may be hope against hope is that the US banking community will start going back to historic ways of supporting companies. By the end of the year we’re talking, we said earlier we could be at about 50 megawatts of sales at the end of the year. We’d have receivables of about $82 to $83 million, have inventory of $30 million. We can’t get a penny lent against that, this is absurd. We keep trying, we talked also to banks and it gets back to the earlier situation in Washington.

The regulators have got to understand what they’re putting in place here. We’re going to go down that road first and foremost. Second of all we are looking for other maybe small infusions of capital; we’re talking to the Commonwealth of Massachusetts for some support. Finally we’ll look outside whether its secondary offering, looking at some kind of convertible swap, etc. those things are all in place so we obviously had our shareholders approve a significant increase in our shares outstanding. I think it’s safe to say that sometime over the next few months there’ll be significant dialogue going on with the capital markets.

Operator

Your next question comes from [Henry Vaskavunik] - CRT Capital

[Henry Vaskavunik] - CRT Capital

The situation in Germany, how much demand pull in do you think you guys experienced in Q4 in the early part of this quarter before the change in feed in tariffs?

Rick Feldt

There’s always in the fourth quarter some increase in demand prior to the start of the winter season. We’ve seen that every year, we saw some of that. For us that tends to end in early November because you’ve got to get product into Germany, end of October, early November because you’ve got to get product into Germany so it can be installed before the snows begin. We had some of that but no more or less than historically. What I would say, the first quarter is a little bit stronger than it has been the last couple of years on a relative basis.

[Henry Vaskavunik] - CRT Capital

Do you think that’s due to the changing in the tariffs and sponsorship? I’m trying to get any quantitative response as to how much really demand is lowered from Q2 into Q1?

Rick Feldt

Very hard to say. You ask 10 companies, you get 10 different answers. I’ve told you as much as I can. We know that people are waiting and seeing what’s going to happen with the fit in the second quarter whether its in April, whether it’s in June. It’s still a situation in flux. I’m not sure I can add more color than what we’ve talked about the last hour.

[Henry Vaskavunik] - CRT Capital

When would you expect your revenue as well as product in terms of want to cross over in terms of China versus US production? Meaning when do you expect product from China to account for more than 50% of your dollars?

Mike El-Hillow

Let me clarify that a little bit. When we transition panel fab the fact is Devens combination wafer, cell from here which will remain strong in the United States in panel. That’s still going to be a 40, quite frankly as we de-bottleneck we could probably get that to north of 40 megawatts per quarter in 2011. As of today, we’re building this 100 megawatt facility, its going to be a few years.

The bottom line is this; we think we have an incredibly strong franchise with our wafer costs. We would love to have had capital to really ramp capacity substantially in these low cost regions, we’re ready. We did Devens, we got to the $2.00, we’re getting wafer costs down, we’re going to go on and tell our story. If that’s the case we are poised to significantly increase production anywhere in the world.

One last thing about the United States facility, this is critically important. We have a great facility here, it’s doing tremendous things. The United States keeps talking about keeping jobs. You go to the President’s State of the Union Address, he said, “I want to keep jobs in the United States.” It’s easy if you say it but you’ve got to do something to do that. The bottom line is this, we sit down at the senior leadership team and with the Board and decide how do handle those, we want to keep Devens open, it’s a great facility, we’ll take the manly handling stuff to China.

We’re assuming that to sell in the United States you’re going to have to make something in the United States. It doesn’t mean bringing some laminates in, slapping on the frame and say Made In the U.S.A. its got to be more than that because we are monitoring that. It gets back to what we said, we’ve got to get to Washington, we’re not saying it’s all got to be done here but there should be a reasonable concept being done here. Let us keep in mind that the United States facility this is still the centerpiece of our organization.

[Henry Vaskavunik] - CRT Capital

Before going to Washington let’s let some of your local folks in Massachusetts just curious about this press release on Nexim getting in $20 million stimulus contract. Can you guys talk a bit about that, how did that come about and where do you guys fit in, in that supply chain there?

Rick Feldt

We’ll check it out. Michael will check it out and get back to you.

Operator

Your last question comes from Ben Pang – Caris & Company

Ben Pang – Caris & Company

In terms of the pricing premium that you guys are getting, does that change with the mix inside Europe?

Mike El-Hillow

No it’s the same.

Ben Pang – Caris & Company

On Sovello, what is the outcome that you expect right now?

Rick Feldt

It’s very, very hard to handicap. I do think that whatever the outcome is its going to happen over the next few weeks. Probably only two, one it goes insolvent, two someone ends up coming in and acquiring the assets at far sell prices.

Ben Pang – Caris & Company

The $13 or $15 million that you’re accounting for in terms of your cash requirements for 2010, that accounts for everything that you would look at for Sovello?

Mike El-Hillow

As of today. We said it’s a fluid situation but we’ve monitored this for well over a year, not only us but our partners. We have estimates. We are comfortable that that’s where it is but anything’s possible as things change. We looked at every possible area we think that the regulators could look as more and the banks.

Thank you all for being on the call today. We look forward to talking to you in the future. Please call in later on directly, we’ll answer your questions if you have any.

Operator

That concludes today’s conference. Thank you for your participation.

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Source: Evergreen Solar, Inc. Q4 2009 Earnings Call Transcript
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