Evergreen Solar Q2 2010 Earnings Call Transcript

Aug. 3.10 | About: Evergreen Solar (ESLRQ)

Evergreen Solar (ESLR) Q2 2010 Earnings Call August 3, 2010 8:30 AM ET

Executives

Michael McCarthy - Director of Investor Relations

Michael El-Hillow - Chief Operations Officer, Chief Financial Officer, Principal Accounting Officer and Secretary

Richard Feldt - Executive Chairman, Chief Executive Officer and President

Scott Gish - Vice President of Sales & Marketing

Analysts

Hari Chandra - Deutsche Bank

Smittipon Srethapramote - Morgan Stanley

Josh Baribeau - Canaccord Adams

Jake Greenblatt - Barclays Capital

Pavel Molchanov - Raymond James & Associates

Timothy Arcuri - Citigroup Inc

Benedict Pang - Caris & Company

Adam Krop - Ardour Capital

Matthew Farwell

Christopher Blansett - JP Morgan Chase & Co

Michael McCarthy

Thank you, and good morning. I'm joined today by Rick Feldt, Chairman, President and CEO; and Mike El-Hillow, our Chief Operating Officer and Chief Financial Officer. Both of them will share some prepared remarks prior to taking questions.

Before we begin today's call, we'd like to remind everyone that statements made in this conference call will include forward-looking statements made pursuant to the Safe Harbor provisions of Section 21E of the Securities Exchange Act of 1934. Management will be discussing expectations, beliefs, strategies, goals, outlook and other non-historical matters. In particular, statements will be made that address the company's ability to cost-effectively manufacture products; to improve operations in Devens, Massachusetts; ramp its Wuhan, China, factory; to transition panel assembly operations to China and otherwise expand production rapidly; as well as expectations regarding product demand and pricing and the company's cash requirements. These and other forward-looking statements are neither promises nor guarantees and are subject to a number of risks and uncertainties that will cause actual results to differ. Such risks and uncertainties include those described in the filings that the company makes from time to time with the Securities and Exchange Commission. Forward-looking statements speak only as of the date they are made. The company undertakes no obligation to update any forward-looking statements.

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

Richard Feldt

Thanks, Mike, and good morning, everyone. During this morning's call, I will focus on the three strategically critical areas vital to Evergreen's future success: our Devens performance; our progress in ramping the Wuhan facility; and an update on our key technology programs. Mike El-Hillow will then provide you with a comprehensive financial update.

During the first quarter, we shipped a record 39.8 megawatts, up from 35.4 megawatts shipped in the first quarter. Our cost per watt at the panel level was down about 5% to $1.94. Silicon consumption was just over 3.7 grams per watt, reflecting the strength of our Quad furnaces and their ability to produce wafers that are cost competitive with our larger China-based competitors today.

Improvements from our current cost of $1.94 per watt will come through further operating efficiencies, additional reductions in material costs, including silicon, and the transition of our Devens panel assembly to China. The continuous improvements in our performance at Devens are consistent with our expectations of achieving a cost of about $1.20 per watt by the end of 2011 with a hybrid Devens/China model.

As a brief reminder, the transition of our panel fab operation is being managed in conjunction with the ramp of our first 100 megawatt of capacity now coming online in China. During the second quarter, small quantities of cells produced in Devens were shipped to China to begin fabricating panels. We expect to gradually increase the number of cells sent to China through the rest of this year and into next year and complete the transition of Devens’ panel fab to China by mid-2011.

Turning to Wuhan, I think it is important to understand that the speed and efficiency with which we ramp our new facilities in China are the culmination of all that we have learned by opening factories in both Germany and the U.S. We know how to quickly and efficiently build and ramp manufacturing facilities. The same processes that we are improving on every day in Devens are a proxy for the sub-$1 per watt cost target set for Wuhan to achieve by the end of 2012.

Today, performance at our Wuhan factory is farther ahead than where we were when we opened in Devens in the fourth quarter of 2008. As our capital overhead labor costs are materially lower in China, the cost reduction path ahead of us is quite clear. The low cost of manufacturing resources China, combined with our increasing proficiency in the manufacture of our String Ribbon wafers, is positioning Evergreen to win continued customer support.

During the quarter, we installed 53 Quad furnaces and are now operating 25 of them. Over the next few months, we expect to bring up about 10 furnaces per week, until the site is outfitted with about 150 furnaces in early October. Our subcontractor, Jiawei, has matched our progress in silent panel processing, and we are pleased that this partnership is functioning as we anticipated. First panels have been built and successfully passed Evergreen's rigorous testing programs. We expect to commence shipments from Wuhan to strategic customers later this month or early next, and an official grand opening ceremony is scheduled for mid-September. Production for the third quarter in Wuhan should be between 2 to 2.5 megawatts.

As the facility reaches its full 25 megawatts per quarter capacity by mid-2011, we expect to produce wafers in Wuhan for about $0.40 per watt and have total panel costs of about $1.25 per watt. Beyond that, there will be further cost improvements at the wafer, cell and panel levels, and we believe we will achieve total cost at the panel of about $0.90 per watt by the end of 2012, including a wafer cost of about $0.25 per watt.

Discussions with our strategic partners for our 400-megawatt expansion in China have been initiated and are in the early stages. From our standpoint, our immediate focus must be on the smooth ramp of the first 100 megawatts of production. By performing to plan, we truly enhance our credibility with our partners to support additional investment and funding in China. We hope to begin this next expansion in early 2011 and commence production in early 2012. We will update you accordingly as details become available.

Turning to our technology initiatives. I'd like to start with an introduction of our BOOST technology. At the Intersolar show in Munich, we launched our new panel line based on BOOST Cell Technology. The reception we received was excellent, and interest has since continued to grow. A cell produced using BOOST utilizes different metallization and interconnect technology that we refer to as multi-wire, internally. Developed by our R&D team in Marlboro, BOOST will increase panel power by about 5% relative from current levels and add to the aesthetics of an Evergreen panel. The BOOST cells in our own pilot production were a further improvement to manufacturability are being worked on. A full release into volume production is expected to take place early next year. By the end of 2011, we expect that all of our panels will use this technology.

Now on to our standard-size wafers. Last quarter, I talked about having retrofitted one of our Quad furnaces to grow industry standard-size wafers of 156 by 156 millimeters. Based on the parts we have made, we have placed orders for 10 prototype machines that are expected to arrive in Devens in January of next year. We can put our most experienced R&D and manufacturing engineers to work on these furnaces to optimize processes and yields. Based on their inputs, modifications will be made to the second tranche of furnaces that we will receive in the spring of next year. Our intention is to use this platform for our next expansions.

Beyond our own use of this technology, an industry-standard form factor and an undeniable cost-per-watt advantage may enable strategically important relationships for Evergreen as all the major panel manufacturers race towards their $1-per-watt cost target. However, as I have said the past, I must reiterate that we're still early on in the process. Our results are encouraging, and we look forward to providing you update in the quarters ahead.

Now I would like to share some brief observations about our near-term market outlook. As many of you following the solar industry have observed, sentiment coming out of the major trade shows in Europe this past June and in the U.S. early in July paint a picture of robust demand through the end of the year. We are even beginning to see certain customers from our borders for the early part of 2011. Selling prices, which came under pressure while the U.S. dollar strengthened against euro, have largely stabilized in line with the currency markets. Still, we believe it is appropriate for planning purposes to assume some modest declines through the end of this year, something in the range of 4% to 8%.

While Germany will continue to be the largest market through this near-term period, we are actively cultivating customer relationships in those markets where the incentive to build out solar-based power generating infrastructure are greatest. Because of the premium performance characteristics of our panels and our sales and marketing activities centering on those regions and market segments that command higher price points, our team is continually finding ways to leverage our brand with those customers where actual power produced is the higher

priority than simply quoting the lowest cost. As a result, our average selling price, at $2.4 per watt in the second quarter, continues to be above our Asian-based competitors.

In terms of total megawatts in -- to be produced in 2010, we are expecting to produce 175 megawatts, which is well above the 104 megawatts produced in 2009. During September, we were on a run rate to produce between 44 to 46 megawatts for the quarter.

In summary, our operational performance reached new record levels, and the ramp of our new Wuhan facility is under way. We are proving every day that our wafer manufacturing process is world class. It is the lowest cost, and it is extendable and expandable. While these achievements come with some satisfaction, they are still short of our ultimate goal, that being sustainable profitability. The investments we have made are moving us rapidly along that path, and everything we're doing is designed to accelerate our arrival to that point.

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

Michael El-Hillow

Thank you, Rick, and good morning again. I will discuss our second quarter results and update you on our financial position. Product sales for the second quarter of 2010 were $81.1 million as compared to $78.5 million for the first quarter of 2010. During the quarter, we shipped approximately 39.8 megawatts compared to 35.4 in the first quarter. Average selling price during the second quarter was $2.4 per watt, down from $2.21 per watt in the first quarter. The decrease in selling price is due mainly to a stronger U.S. dollar.

During the second quarter, approximately 84% of our product was sold in Europe and 16% in the United States, compared to first quarter sales of approximately 84% in Europe, 14% in the U.S. and 2% in Asia. Gross margin in the second quarter was 8.6%, up from 7.7% in the first quarter, and it increased sequentially due to the royalties from licensing of our furnace technology, offset somewhat by the lower average selling prices.

Our manufacturing cost was $1.94 per watt, a reduction of $0.10 per watt versus the first quarter. While total manufacturing costs were $1.94 per watt, our cash cost was approximately $1.60 per watt. Wafer costs were flat sequentially at about $0.65 per watt, as our wafer fab continues to perform at a high level. Costs in selling new panel improved by $0.10 per watt due to lower panel material costs, improved yields and better fixed cost absorption. We expect continued modest improvements in manufacturing costs at Devens over the next few quarters, until a substantial portion of panel assembly is transitioned to China. As Rick noted in his comments, we will drive manufacturing cost at Devens aggressively to about $1.20 per watt, as the panel assembly transition to China is complete and we are able to leverage other cost improvements as we source an increasing amount of our materials in China.

Our gap silicon costs were essentially flat sequentially at about $85 per kilogram, and our cash cost was about $50. Our target gap and cash cost for silicon is no more than $50 per kilogram and is a major assumption in our forecast for achieving panel costs of no higher than $0.90 per watt in China and $1.20 per watt at Devens.

R&D expense was $5.2 million for the second quarter of 2010, higher than the first quarter of $4.7 million. Ongoing investments in developing our Quad wafer technology, especially the industry-standard wafer and silicon conversion efficiency, will be a focal point of the organization. SG&A expense was $7.3 million compared with $7.7 million in the first quarter. These expenses decreased sequentially, mainly due to lower legal costs associated with our Sovello joint venture.

Facilities startup costs associated with our Midland high temperature filament plant and initial costs associated with China were approximately $5.2 million in the second quarter, up from the first quarter of $3.7 million as we ramped these sites. We expect that factory startup costs will increase slightly in the next few quarters during China's transition into full production. Total startup costs in 2010 relating to both of these locations are expected to be approximately $13 million to $15 million.

During the quarter, we incurred non-cash restructuring charges of $4.9 million comprised mainly of accelerated appreciation associated with the anticipated transition of Devens’ panel assembly to China. The complete write-down of panel fab assets in Devens should be completed by mid-2011.

Our operating loss, which includes all the startup, write-offs and restructuring expenses previously mentioned, was $15.5 million for the second quarter compared to $14.1 million in the first quarter. Other expenses in the second quarter consisted of a foreign exchange loss of $6.9 million and net industry expenses of $8.9 million. These were offset by a gain of $24.8 million on the buyback of a portion of our convertible notes at a 35% discount to par and an impairment recovery from our Sovello investment of $3.2 million, resulting in overall net other income of $12.1 million.

In the first quarter, other expenses were $9.8 million, which consisted of foreign exchange losses of $2.1 million and net interest expense of $7.6 million. Net loss for the second quarter was $3.3 million or $0.02 per share versus $23.9 million or $0.12 per share in the first quarter. Weighted average shares outstanding for the second quarter were 205 million, relatively unchanged from the first quarter.

Now I will briefly recap the financing transaction we completed on April 26. At that time, we closed on a new senior secured convertible note with financing resulting in net proceeds of approximately $158.6 million. As previously mentioned, a portion of these proceeds were used to repurchase about $124.5 million of principal amount of our existing 4% senior convertible notes due 2013, resulting in a net gain. The remaining proceeds increased our cash position by about $75 million. The new notes that are due in 2015 have a coupon of 13% and a conversion price of approximately $1.90.

At the end of the quarter, our total debt is $447 million. $249 million is related to the 4% notes due in 2013, $165 million relates to the 13% notes due in 2015 and $33 million is the loan due in 2014 to the Chinese government. On an annualized basis, our cash interest expense is now about $31.4 million.

At the end of the second quarter, we had approximately $115 million of unrestricted cash and cash equivalents and about $10 million of restricted cash. Our major requirements for the balance of 2010 are expected to be approximately $50 million, comprised of capital required to complete the build-out of our Wuhan facility of about $32 million; approximately $12 million for R&D, Devens and our String facility in Midland; and working capital needs of about $6 million.

We are continually monitoring selling prices, product demand and other changes to our current expectations, to the extent that they can have some potential impact on our liquidity. While we believe the new, newer [ph] (0:20:28) financing has addressed our liquidity needs for the next couple of years, we recognize that we must take advantage of opportunities to further streamline our balance sheet and strengthen our long-term financial position as they present themselves. We will continue to evaluate our capital structure so that we can address our longer-term liquidity issues as time warrants.

Going forward, we are striving to achieve our full potential by continuing our Devens improvements and executing swiftly on our expansion plans in China. In both cases, we are tracking well to an aggressive plan. 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. Operator, please open the lines.

Question-and-Answer Session

Operator

[Operator Instructions] Our first call will come from Chris Blansett with JPMorgan.

Christopher Blansett - JP Morgan Chase & Co

I wanted to get a kind of an idea of how should we be modeling output from Wuhan between now and the middle of 2011 when it comes fully online.

Michael El-Hillow

This is Mike. As Rick said, in the third quarter, about 2 to 2.5 megawatts. In the fourth quarter, say 10 to 12.5 megawatts. In the first quarter of next year, we should be approaching 20 megawatts, and by the second quarter of next year, we should be approaching 25 megawatts.

Christopher Blansett - JP Morgan Chase & Co

And then, in general, we should expect you to keep Devens fully operational and in only in the event of, say, a weakening of output, would you start reducing output out of Devens in favor of Wuhan?

Michael El-Hillow

Well, we want to make sure that 100-megawatt facility in Wuhan is operating to the best of its ability, so we have moderated the shift of our sales from Devens to China. A couple of things: As I said in the prepared remarks, our cash cost per watt is $1.60 right now. And through changes in some sourcing, we think we can get that down further. So in the near term, as long as Devens can generate cash, we will keep it open at the panel level. And then as the, I’ll say, the operation in China can handle the additional volume, we will start shifting the panel fab over to China. Devens has made significant improvements in the last nine to 12 months, allowing us to be a little more circumspect in how we reduce panel operations in the United States. We're also hoping, and we talked about this for a number of years, and of course, it may not happen, but maybe there will ultimately be a level playing field where all producers have to produce in all major geographies. And as we’ve said many times, if we had to bring -- if our competition had to come to the United States, they would not be able to meet our cost goal. So we'll talk in more detail as we go forward, but Devens' improvements have allowed as to, as I said earlier, be more circumspect in the panel transition to China.

Christopher Blansett - JP Morgan Chase & Co

And then should we kind of just model the cost basis for Wuhan to kind of go down linearly until we get to that submittal of next year?

Michael El-Hillow

Yes, I’ say linear -- probably although, I must admit in the first quarter, first and second quarters of next year, it'll be a little more aggressive. We'll give you more color on that for the September quarter, but you should see -- I think a linear first couple of quarters, and then a step function down in the first and second quarters of next year.

Christopher Blansett - JP Morgan Chase & Co

And then one last one for me. Just how should we model your overall interest expense going forward with the new convertible note? Just as an aggregate for -- on a quarterly basis?

Michael El-Hillow

Well, it’s $7.5 million a quarter.

Operator

Our next question will come from Timothy Arcuri with Citi.

Timothy Arcuri - Citigroup Inc

First of all, just on the timing on revenue development of standard wafer sizes. I wasn’t sure that I totally caught the timing on that. And when do you think that you would be able to license that technology? Is that kind of more of an end-of-next-year event?

Richard Feldt

Tim, this is Rick. So we've ordered 10 prototype furnaces, based on what we’ve learned by reconfiguring our Quad. Those will be here, as we said, in January. We're going to work at those, place a second order for another 10, and they'll be here later in the second quarter. We're hoping that based upon those two iterations, we'd be prepared to build large -- a production quantity of furnaces and enter into full production. But we need to be at that point before we: A, populate our factories with the 156 by 156; and then secondly, consider licensing or selling wafers.

Timothy Arcuri - Citigroup Inc

Okay, so is there some -- Rick, is there -- I mean, is there some sort of magic production level that you would need to have a potential customer come in and say, “Hey, I'll either purchase the technology from you or I'll purchase the wafers outright”?

Richard Feldt

Again, we're still playing a little bit hypothetical. But in general, the -- as you are well aware, many of the lines in China are 25 to 30 megawatts. So it probably wouldn’t make any sense unless it was at least on that order. Two megawatts per year wouldn’t make any sense. I would say 25, 30 megawatts as sort of a minimum order could make some sense.

Michael El-Hillow

And to give some more color to that, Tim, you look at the loan we got from the Chinese government. In a lot of ways, you can say the Chinese government is licensing our technology. They were committed to do that, and they came and viewed our Devens facility at the end of 2008 when we were at about 17 megawatts. And when we closed the deal, we were about 25, 27 megawatts. So that’ll give a sense to how people get comfortable, so just further reinforcing Rick’s point.

Timothy Arcuri - Citigroup Inc

And then just last thing from me. In the event that you would need money next year, again, what's your sort of confidence level or the potential that the Chinese government steps in and provides you with cheap financing now that you're embedded there?

Michael El-Hillow

Well, all along, the agreement was that we would work with Jiawei and the Chinese government to get the 500 megawatts. That's the frame agreement. We talk to the government constantly. They are asking us when we're prepared to go forward. We know that when you have to negotiate a loan, they're going to want to see some progress, so from our sense, as we said on an earlier question from Chris, we expect in the fourth quarter to be at 10 to 12.5 megawatts. That's good volume. We'll talk to the Chinese government. They’ll see the significant improvement we’re making there, plus in Devens. So we're very confident we should be able to get these funds early next year and begin production. Discussions have started now, preliminarily. We will accelerate those over the next couple months. But as we’ve said many times, we are the solar company for Wuhan City and Hubei Province, and that continues. And our factory so far, even though it’s in the early stages there, is operating well. So we are very confident, because the funds appear to be available, as you see from other companies in China getting these low-cost loans.

Operator

We'll hear next from Vishal Shah with Barclays Capital.

Jake Greenblatt - Barclays Capital

Hey, guys, this is Jake Greenblatt from Shah. Just wanted to ask a quick question on ASPs for the back half of the year. I know the demand environment has been pretty strong for everybody, so I wanted to see how you guys saw ASPs trending in Q3 and Q4, and then if you have any invisibility [ph] (0:28:38) into what pricing looks like next year?

Scott Gish

Well, this is Scott Gish from Sales and Marketing. The demand environment today is pretty good. We have a strong order book at the moment, plus strong visibility through the end of the year. So we don't see pricing trending down hard, as Rick said in his remarks, maybe 4% to 8% through the balance of the year. In part, some of that is predicated by what happens to the euro, which unfortunately has been strengthening recently. But we have very good visibility now with our contract customers, our strong demand, because everyone wants to stay ahead of the January season tariff changes. So I don't necessarily see any strong pressure -- even in the second quarter, we didn’t see strong pressure down on pricing. As Mike said, the change in ASP for us was really more currency-related.

Jake Greenblatt - Barclays Capital

And anything on 2011, or is it a little too early still?

Scott Gish

It's a little bit early for 2011. Most people have a very foggy outlook about that. What we've been doing on the sales side is to make sure that we are expanding our customer base and expanding our regional coverage. So we’re not just beholding to one or two particular regions to get all of our sales from. I think there'll be enough variance in fees and tariff changes between countries and between regions that we’ll be able to mitigate that a little bit. Fortunately for Evergreen, our contract customers will have higher volumes coming, tiering up in the first quarter of next year, so that will help offset maybe a little bit of softening in demand.

Jake Greenblatt - Barclays Capital

I know you guys have mentioned it before, but if you could just give a little more clarity on the long-term plan for Devens? I know that you're shifting panel production middle of 2011. Is the plan to still have wafer and cell production there full time and have no panel production in Devens? Or does it really depend on what the demand environment and the pricing environment and whether Devens can be cash positive?

Richard Feldt

It's probably all of the above. We've concluded and talked about moving panel assembly because we know we can substantially reduce our panel costs by moving them to China. But our wafer costs are already quite low in Devens, and we’ve already paid for all the equipment. Likewise, our cell conversion costs are pretty good at Devens. So everyone's crystal ball is a little bit hazy going forward, but broadly, we see ourselves remaining firmly ensconced in wafers, likely with cells, and panels, as Mike has said, it somewhat depends on whether there becomes a stronger requirement for made in the U.S. And if so, then we could resurrect panel operations to Devens, and if not, we probably would not.

Operator

We'll hear next from Matt Farwell with Imperial Capital.

Matthew Farwell

I'm wondering if you can provide some context for how profits will flow out of the Wuhan subsidiary back into the holding company once it starts to generate revenue? Is there a default plan to use transfer pricing techniques or dividends?

Michael El-Hillow

It’ll be a transfer pricing protocol, Matt. We basically have to, obviously, have some profits in China. The facility, the wafer facility will be profitable. They will sell their wafers to Jiawei, and Jiawei will convert them into panels, and then our U.S. operation, or potentially a subsidiary outside of China, will buy the panels from Jiawei. And then the profits from that would be outside of the United States. But yes, it would be a transfer pricing protocol on a subcontractor basis, which allows us to, in a lot of ways, minimize the profits captured in China and maximize the flow of funds back to the United States, where, quite frankly, our biggest investments are, especially in R&D.

Matthew Farwell

Will there be any taxes associated with those transfers?

Michael El-Hillow

There shouldn't be any taxes associated with the transfer. There’ll be taxes associated with profits that are generated from the Wuhan facility of about 15% of net income.

Matthew Farwell

You've also loaned some money to Jiawei, $13 million, and then it looks like there's another $10 million installment. And I'm curious how much additional funds do you expect to send over there. How much does Jiawei plan to spend in total?

Michael El-Hillow

I'm not exactly sure where you got the additional $10 million. We have given Jiawei about $12.5 million to $13 million. It’s a commitment we made earlier this year. There is no plan to advance funds to them. But quite frankly, they're a smaller company. We’re a smaller company. They’re a little bit smaller than we are. And as Rick has said many times, two companies with one goal, and so we will make sure that Jiawei is able to meet its working capital needs in order to make sure that we can maintain our production levels. But as of right now, we don't see the need to advance a significant amount of funds in the near term to Jiawei.

Matthew Farwell

And then lastly, on the reverse stock split that was approved by shareholders, do you have any timing for that?

Michael El-Hillow

No, we’ll basically look at our operating results. The fact is we wanted that in place, especially given the situation with the NASDAQ situation. You have a reverse stock split in effect, you make the numbers work, but the basis for the operations have been changed. We have till the end of the year, the first 180 days, and then -- and quite frankly, you get another 180-day extension beyond that. We’d rather be able to show the world that we will continue to execute on our operating plan, as we have done for the last three years, and then see if we can have a shift in how the investment community views our stock, and then get above the $1 that way and move from there. So I wouldn’t expect anything in the near term.

Operator

We'll go next to Smitti Srethapramote from Morgan Stanley.

Smittipon Srethapramote - Morgan Stanley

First is, can you give us an update on your progress in negotiating silicon contracts with your suppliers?

Michael El-Hillow

Well, they've gone well. The price of silicon has come down a little. Recently, we’re seeing a stabilization, maybe a bit of an uptick. So our main suppliers that work with us very closely, and that's why we've been able to have a cash cost of about $50 per kilogram, which is basically where the industry has been. In fact, maybe even a little bit lower. So we've been successful so far. There's no activity going on right now. We have enough silicon in place. We’ll resume discussions with them early next year as, let’s say, next year’s demand requirements come into view, and also we'll see how the supply is. But I will tell you that I think our suppliers view us as partners, and they are willing to work with us.

Smittipon Srethapramote - Morgan Stanley

And on Sovello, or the former Sovello, have you received any feedback from Ventizz and their partners in terms of whether there's any possibility that they will look to expand that plant and potentially you guys could get more ROT [ph] (0:36:30) revenues?

Richard Feldt

No, we haven't. The short answer is no. I think Ventizz was going to probably get things stabilized, get the factory operating the way they wanted it to. So the short answer is no. It remains to be seen.

Operator

We'll go next to Ben Pang with Caris & Company

Benedict Pang - Caris & Company

Just a couple of follow-ups on the previous questions. First, on your standard-size wafers, how would you really characterize like what the risk is that you are not able to have full production by the middle of next year? What are kind of the hurdles that we would look for?

Richard Feldt

Well, on any development project, there are always a number of obstacles to overcome. The way we try to assess risk in our R&D function is to, on some just kind of gray scale, look at how much absolute invention is required versus, let’s say, engineering. And so invention, as you're probably aware of, is very, very hard to schedule and is very indeterminate. Engineering, we're [indiscernible] (0:37:45) tough problem to be solved, but the basic tools for solving it are pretty much understood. It’s just that you have to go through a number of iterations to figure out which ones to apply when to get the darned things solved. Those are more straightforward, so at this point, without getting too far ahead of ourselves, we really think we have more of an engineering issue than an invention issue. And so we don't see any major hurdles to overcome, other than a lot of problems to solve with stresses as the wafer grows, because it’s much wider. And so the stresses grow geometrically with the width, not linearly. So we have a number of what we think are engineering issues to overcome. We believe we can overcome them, but that's why we have to go through at least a couple of iterations. And we think in those couple of furnace iterations, we will likely get most of them fixed. Can't tell exactly, but it’s -- to us, it seems more like just engineering problems to be solved, not invention problems.

Benedict Pang - Caris & Company

Fair enough. And the second question, kind of as a follow-up earlier on the royalty revenues. So that's all done. There's no more stream of royalty?

Michael El-Hillow

No, there is a minor stream going forward. We should get another $1 million later this year and then four payments over the next two years, so over $1.5 million a quarter. So [indiscernible] (0:39:09), but it’s a little bit.

Operator

[Operator Instructions] Our next question will come from Pavel Molchanov with Raymond James.

Pavel Molchanov - Raymond James & Associates

I know historically you have avoided engaging in currency hedges, but with the volatility in the euro that you guys referenced, are you looking at perhaps starting to do that in the future?

Michael El-Hillow

Pavel, we have not avoided it. Unfortunately, because of our financial position, we didn’t have the flexibility. Historically, companies like ours who get a good-sized working capital line of credit based upon -- and with really high-quality receivables and inventory. Given the current lending environment in the United States, that has not been possible. And typically, you would take some of that working capital line of credit and allocate it to buy some foreign exchange contracts. We have not been able to do that. So basically, we have not done it because of lack of ability. Now that being said, I mean, some of our peer companies in the space, we know that they were doing some hedging, and they still had big foreign exchange gains or losses, because at the end of the day, it's all triggered on the certainty that your customers will pay you on time. If they don’t pay you on time, then you’ve got to access the market. So we would like to be able to do it. We’ve talked to numerous banks in the United States over the last three years. Unable to tap that market.

Operator

We have a follow-up question from Chris Blansett with JPMorgan.

Christopher Blansett - JP Morgan Chase & Co

One quick question about the standard industry-size wafers. Is there any cost benefit to Evergreen by moving to this larger wafer size in the future?

Richard Feldt

Yes, we think there is. So a couple of things: The very straightforward one is we’ll use less string, half the amount of string; also, it will simplify our material handling and allow us to purchase more off-the-shelf cell equipment, either us or our partner, off-the-shelf cell equipment and panel equipment. So yes, we think that there are cost benefits to us explicitly and then the possibility that others may find it desirable also is there. But for us, yes, we do think we’ll save at least a few cents a watt.

Christopher Blansett - JP Morgan Chase & Co

And then the second question I had is related to the BOOST technology. Is this getting rolled out initially at Wuhan for the first panels or would it be cut in at a later time?

Michael El-Hillow

It’ll be cut in early next year. The initial panels out of Wuhan will be using that standard 2-busbar technology.

Christopher Blansett - JP Morgan Chase & Co

And I guess, has this technology been qualified by your end customers? Or are you still in that process?

Michael El-Hillow

They've had not been qualified yet, but they have seen it, and they, as Rick said, they're very excited about it.

Christopher Blansett - JP Morgan Chase & Co

And then kind of just related to that, when you look at your cost-reduction roadmap, when you look at yield, is that included into the yield improvement breakdown?

Michael El-Hillow

You mean the multi-wire?

Christopher Blansett - JP Morgan Chase & Co

Yes.

Michael El-Hillow

No, it’s included -- I guess efficiency of it’s on that sheet. I’ve got to dig it up. That's an improvement in efficiency.

Christopher Blansett - JP Morgan Chase & Co

So that's baked into that number for your cost-reduction roadmap.

Michael El-Hillow

Yes.

Operator

We'll hear next from Adam Krop with Ardour Capital.

Adam Krop - Ardour Capital

Just two quick ones on Wuhan. Can you specifically comment on how you’re addressing sort of quality control as the Wuhan JV ramps up? And if you could, the second question is, can you comment on an update on how you’re thinking about your ASP premium as you ship modules out of that facility?

Michael El-Hillow

Well, I'll take the first part. Rick’ll take the second part. There’s close contact between our Devens people and our Wuhan people. And in fact, the individual who was in charge of quality at Devens is now in charge of subcontractor relationships in China. So he’s in China two, maybe two weeks a month. That’s number one. I mean, number two, obviously Jiawei had a history of dealing with SunPower in GE, and they are known for building a quality product. So from the standpoint of the ultimate panel, we're very comfortable. And we're working very closely with them in the cell area, so quality will not be an issue. We’ve told our customers that ultimately, when we put a two-panel side-by-side one made at Devens, one made in China, they will not be able to tell the difference.

Richard Feldt

So regarding, then, pricing out of China, really if you listen carefully to what Mike said, the issue with our customers is can they be confident that the product produced, whether it be Devens or Wuhan, will look the same, perform the same, have the same quality characteristics. And if the answer is yes, then pricing out of China will be the same as it is out of Devens. If the answer is no, then there would be at a discount. And so not only do we have a strong quality focus at Devens, we're likewise starting up China with that same focus and likewise helping Jiawei improve upon their quantity systems and for the startup phase, we'll also be doing some source inspection, even though they’re the building just next door. So the real issue is, as long as we can produce the same quality, it’ll be transparent to our customer pricing and it will be the same. And that's we intend to do.

Scott Gish

This is Scott. If I can add one more piece to that. We’re also going to launch some new products from China early next year. So our position in the marketplace is going to be more about the product and less about where it’s built. We’ll have some products that are tailored towards the commercial market and also tailored towards the residential market. So take a little bit of focus off where produced, more focus on what the product’s really about.

Operator

We'll go next to Hari Chandra with Deutsche Bank.

Hari Chandra - Deutsche Bank

My question was on -- based on the improvements that you have seen in Devens, how high do you think the production capacity can go versus the rated capacity burden of 160 megawatts? I'm also asking -- including the 5% boost that you would be receiving from the BOOST Technology once it gets implemented.

Michael El-Hillow

Well, we think we can get Devens to about 42.5 megawatts a quarter without making any more capital investments in Devens. This quarter, Devens will be around 41. The BOOST Technology is a little bit different. Given where it is right now, it must be made in China. There’s a high labor costs that are associated with it. It would not be cost effective in the United States. However, we are looking at trying to find a way to automate the BOOST Technology, such that if we wanted to retrofit the facility at Devens, we might be able to bring that back over the next couple of years. Within the next, I would say, six months, by making additional improvements in Devens, we think we might be able to get it up to, say, 43 to 45 megawatts per quarter, with maybe some modest investment, also, but very modest. I mean, right now, our position is that we will keep improving Devens, but we do not want to invest further capital in Devens other than sustaining capital. So that’ll give you a sense. So you’re 42.5 per quarter now, with some upside over the next year or so to maybe 44 to 45.

Hari Chandra - Deutsche Bank

And as a follow-on, do you have an outlook in terms of the gross margin for the second half of this year and going into next year? And further, in addition to that, assuming all new cost benchmarks stick, what is the timeline in terms of an EPS breakeven?

Michael El-Hillow

We’re really not going to move forward -- we’re not giving guidance at the financial level. What we have said is that our cost for watt at Devens was $1.94 this past quarter. We expect to see some improvements going forward. We didn't quantify it, but since the question’s been asked, maybe down to the high $1.80s, mid $1.80s, if you will. I’ll leave it to you to decide what you think selling price might be, but that’ll give you a sense as to what margins would be. Wuhan, in answer to an earlier question, we think our cost per watt, initially for the first couple of quarters, will be in the same range as Devens, quite frankly, but with a step function improvement in the first two quarters of next year and beyond. So that should give a little bit of color. I didn't quite pick up the second part of your question, though.

Hari Chandra - Deutsche Bank

That was the timeline for EPS breakeven.

Michael El-Hillow

The real critical situation we face is capacity. Our technology works, and we continue to meet the operational goals that we set. We’re just capacity constrained. The agreement that we signed with the Wuhan government to get to 500 megawatts two years ago, combined with Devens -- at the time, we were hoping to be profitable earlier, but obviously, selling prices have been under a lot of pressure. You can decide where selling prices are going, but assuming that what most pundits are thinking, that it could go down to $1.25 per watt, you pick the timeframe, but at $1.25 per watt, it’s 650 megawatts of capacity. That's when we become profitable.

Operator

We'll go next to Jed Dorsheimer with Canaccord.

Josh Baribeau - Canaccord Adams

It’s Josh Baribeau for Jed. And I apologize if I missed this, but the cash cost versus the carrying cost of the silicon, of course, related to the share payment from OCI. Is at any point that going to come down to cash cost, somehow writing off that value on the balance sheet? Or is that something we should be thinking of higher than cash cost for the foreseeable future?

Michael El-Hillow

You have to think of it as higher for the foreseeable future. Unless something dramatically happens with our supplier, OCI, like that [ph] (0:49:59) there’s a concern about their ability to fulfill the contract or selling prices go down so fast that we can’t generate gross margin, and then we'd have a net realizable value write-down on generally accepted accounting principles. That cost is here to stay.

Josh Baribeau - Canaccord Adams

And then just two quick housekeeping questions. How do we think about facility start-up costs and restructuring or write-offs in 2011?

Michael El-Hillow

There should be very little of write-off. The biggest issue for the first two quarters of 2011 will be the final depreciation related to the panel fab transition to China. And that's about $3.5 million to $4 million per quarter. But other than that, we see no other write-downs.

Operator

And that is all the time we have for questions. I would like to turn the conference back to Mr. Mike McCarthy for closing remarks.

Michael McCarthy

Thank you very much for joining us this morning. If you have any other follow-up questions, please feel free to reach me in my office at (508) 251-3261, and we look forward to speaking with you soon. Take care.

Operator

Thank you. That does conclude today's conference. We thank you all for your participation.

Operator

Good day, everyone, and welcome to the Evergreen Solar Second Quarter 2010 Conference Call. [Operator Instructions] At this time, for opening remarks, I would like to turn the call over to Director of Investor Relations, Mr. Michael McCarthy. Please go ahead.

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