Energy Conversion Devices F1Q08 (Qtr End 9/30/07) Earnings Call Transcript

Nov. 8.07 | About: Energy Conversion (ENER)

Energy Conversion Devices, Inc. (NASDAQ:ENER)

F1Q08 (Qtr End 9/30/07) EarningsCall

November 08, 2007 10:00 am ET

Executives

Ghazaleh Koefod - IR

Mark Morelli- President and CEO

Sanjeev Kumar - VP and CFO

Analysts

Sanjay Shrestha - Lazard CapitalMarkets

Jesse Pichel - Piper Jaffray

Paul Clegg - Jefferies

Steve O'Rourke - Deutsche Bank

Patrick Forkin - Tejas Securities

Mark Manley - Natixis

Bob Stone - Cowen and Company

Michael Molnar - Goldman Sachs

Colin Rusch - Broadpoint Capital

Maxwell Vanderwal - UBS

Operator

Good morning. Welcome to theEnergy Conversion Devices Conference Call to discus the financial results ofthe company's Fiscal 2008 First Quarter ended September 30, 2007. (OperatorInstructions)

I would now like to turn the callover to Mrs. Ghazaleh Koefod, ECD, Investor Relations. Please go ahead.

Ghazaleh Koefod

Thank you, Audrey. Good morningand welcome to our call. The members of ECD's management team participatingtoday include Mark Morelli, our new President and CEO and Sanjeev Kumar, ECD's VicePresident and CFO. This morning's presentation will also include the use ofseveral slides, which we will be advancing. Following the call, a copy of ourslide presentation will be available on our website. Also, today's call will bearchived on our website.

A special note for thoseparticipating via conference call today, we ask that you please select the "NoAudio-Slides Only" link, when prompted during your webcast registration.This will allow conference call participants to view slides in sync with theaudio. During the Q&A period, as a courtesy to those individuals seeking toask questions, we ask that you limit yourself to one question and one follow-upquestion.

As is our custom, I would like toremind you that the following discussion may contain forward-looking statementswithin the meaning of SEC's Safe Harbor provision. Suchstatements are based on assumptions which ECD, as of the date of this call,believes to be reasonable and appropriate. We caution you that the facts andconditions that may exist in the future could vary materially from those uponwhich the statements were based. Please review the risk factors identified inthe ECD filings with the SEC, including our most recent 10-Q which will befiled later today.

And now, I would like tointroduce Mark Morelli. Mark?

Mark Morelli

Thank you, Ghazaleh. Goodmorning, and thank you for joining today's call. As most of you know, this ismy first Investor Call as President and CEO of ECD. Since I joined the Company asCEO on September 1st, I've been meeting with customers, understanding ouroperations and focusing the team on our top priorities. I am now moreoptimistic than ever about the tremendous potential of our business.

Before we discuss our first quarterresults, I'd like to take a few minutes to tell you a bit about my first 60days and how it's driving my short-term initiatives.

First, I have learned that ourcustomers are enthusiastic about our product. As you can see from Slide 3,despite what some may say, not also our products were the same, because ourlaminates are flexible, durable, light weight and can be easily integrateddirectly into building materials, they are ideal for large and growing marketsegments, in particular, rooftop applications. What also sets us apart fromcrystalline and other thin-film products is that we generate more electricityper rated watt. This last point is a key. So let's explain how it works becausethere is some confusion about his measurement.

Solar panels are sold on a basisof their peak output measured in watts under standard lab conditions. Thisapproach allows solar panels to be compared on a consistent basis but it's notthe best measure of how products perform in real-world application, givingvarying light and temperature.

As you can see from Slide 4, in areal-world setting, our PV laminates produce more electricity per rated powerthan our competitors. They wake up earlier, stay awake longer and performbetter in both sunny and cloudy days.

The result is that our laminatesgenerate 15% to 20% more electricity than conventional modules. So ourcustomers are actually getting more electricity for the same rated output andin many cases, at lower total installed costing crystalline products and abetter ROI.

Speaking of our customers, I'vespent time in my first few weeks, talking to customers and walking on rooftops.Our customers are our best spokespeople. They love our solar laminates andparticularly for rooftops. One example of this is our relationship with GeneralMotors, which is off to a promising start.

Uni-Solar laminates are currentlyin the process of being installed on one of the world's largest commercialsolar systems on the roof of GM's Fontana, California facility. GM, a repeatcustomer like Solar laminates because they do not require roof penetrations orstructural modifications. They are light weight, easy to install and rugged. Inshort, they perform great in real world conditions.

Systems like these demonstratewhile our laminates are ideal for commercial rooftops and it's our primaryfocus in the near-term. My first initiative has been selling laminates alongthe lines of the differentiator that we've just discussed.

Today, I am pleased to reportthat we have a growing sales pipeline with supply agreements and commitments inplace for our volume for the balance of fiscal year 2008. The momentum wasbuilding before I joined the company and with the additional focus, we areaccelerating.

Second, I learned that as good asour laminates are we can improve how we market our advantages to our customersand our operations. We've already made some changes to reposition our companyaround the rooftop market and I believe we will help end users understand ourlaminates better. We are focusing on the global rooftop market, where we cansell at relatively high average selling prices, because of our differentiatedvalue proposition. And this market is huge.

As an example, I have decided weare phasing out our frame module product line, where we sell at low grossmargins, which was originally introduced so that our product would look likeconventional solar modules but really ended up masking our key productdifferentiators. We are also reorganizing our marketing function to focus onmarkets and customers, best served by our products.

Third, I learned that we have alot of opportunities to enhance our competitiveness through operationalimprovements. As you may know, I spent most of my professional career withUnited Technologies were I had significant general management responsibilitywith functional marketing experiences, product development and operations jobthroughout North America, Europe and Asia.United Technologies concepts of operational excellence, performance-drivencultural and accountability are the norm. This is a typical part of the CEOplay book but it's new for ECD, which is transforming from its roots in R&D.

I am instilling these conceptshere in everything we do. I personally assume day-to-day over site of ourUni-Solar business and attracting daily operating metrics and costs information,something that's not been done here before. Daily visibility and accountabilityare changing the way we do business. For example, in Q1, we experiencedmanufacturing variances at Auburn Hills 1 facility related to maintenance issues.

As you may know, this is ourfirst large scale machine and has been in constant operations since it was commissionedin June 2002. By having the right information, we have been able to identify andaddress the underlying causes of these variances in real time. In other words whatgets measured gets done.

I am also focused on making surewe meet our ramp-up schedule for the 90 megawatts of additional installed capacityslated for fiscal year 2008. We are focusing on this issue through building ametric-driven culture reallocating resources to focus better on critical issuesand improving processes such as preventive maintenance.

To sum it up, I believe we have agreat product and one that is differentiated in the marketplace. I see tremendousopportunity for us to accelerate our growth and improve our financial results throughbetter execution.

Before I turn the call over toSanjeev for a review of the quarter, let me take a moment to address our jointventures, Cobasys and Ovonyx.

As you are no doubt aware, wehave a Cobasys' joint venture with Chevron. Interest in demand for hybridelectric vehicles has never been higher, and Cobasys is the only North Americansupplier of nickel metal hydride batteries, which remain the preferred powersolution for hybrid electric vehicles.

Now, you'll see in our 10-Q, thatwe and Chevron have some differences regarding operations and funding atCobasys, and that Chevron has initiated an arbitration proceeding.Unfortunately, this arbitration somewhat limits what we can say about Cobasysat this time. However, I can say that we believe the right approach for Cobasysis self-funding and a sustainable business model in which revenues from salesand other customer support are sufficient to fund operations and capitalexpansions at Cobasys. We intend to work with Chevron to achieve this goal bythe end of this calendar year, if we are unsuccessful, then Cobasys maybe atrisk as a going concern.

Our other principle joint ventureOvonyx, it's commercializing a new type of digital memory technology for use ina variety of applications from cell phones, digital cameras to personalcomputers. Ovonyx has the top memory companies in the world under license,including Samsung, Intel, ST Microelectronics, Elpida and Qimonda.

Last month, Ovonyx announced anew license agreement with Hynix Semiconductor. We are hopeful that theseagreements will translate into significant revenue streams in future years, asthe leading semiconductor companies begin selling products containing ourmemory technology.

At this point, I would like toturn the call over to our CFO, Sanjeev Kumar, for a discussion of our firstquarter financial results and guidance for Q2 and fiscal year 2008. Sanjeev?

Sanjeev Kumar

Thank you, Mark. For our firstfiscal quarter, EDC reported a 73% increase in revenues to $47 million from theprior year's first quarter. Revenue from our Solar Business, which represented89% of the total, was up 76%. We won significant new business in Germany, Italyand the US.

As indicated in the pie-chart onSlide 6, 96% of our Uni-Solar product sales were for rooftop application,further validating the ideal value proposition for our solar laminate. Weexpect to build on this momentum and have added sales staff in Europe and other staff for expansion activity. As aresult, selling, general and administrative costs were higher.

Other revenues in the quarterwere about $5 million from our Ovonic material segment. We continue to makeprogress on further cost reductions in this business segment, which reported anoperating loss of $700,000 in Q1, down from $2.7 million in the prior fiscal Q4'07. I want to reiterate management's position that we will make this abreakeven business segment in the near-term.

So, while EDC's consolidated netloss was lower than the fourth quarter, we still have plenty of runway toimprove our margins and reduce our cost structure. To highlight this further,let's look at our next slide. With regard to our non-solar G&A cost structure,we continue to execute the restructuring plan we announced earlier in the year.

The plan we announced had twophases, the total savings were projected to be about $23 million, withapproximately $17 million coming in the first phase and the other $6 millioncoming in the second phase. Today, we have executed the first phase of the planinline with our expectations. We are now working on an even more aggressiveplan for Phase 2 cost reduction. They are on the previously planned $6 million.Obviously, with the more aggressive Phase 2 cost reduction plan, we may need totake additional restructuring charges above and beyond, the $3 million to $5million for fiscal 2008 as previously guided.

We look to keep you updated onour progress. We fully expect the savings to more than offset any incrementalrestructuring costs. We incurred pre-production costs of $2.5 million in fiscalQ1 associated with a new Greenville Michigan facility and the expansion of our Tijuana, Mexicooperations. These pre-production costs are primarily related to employee trainingand other costs for the new manufacturing facilities in advance of thecommencement of manufacturing. We currently estimate that fiscal 2008 pre-productioncosts will be within the range of $6 million to $9 million, as we previouslyguided.

Now, let me provide some color onour ramp-up on Slide 8. We have received numerous questions on our ramp-upschedule, how it impacts margins and our expectations for adding our newcapacity.

I would like to give you as muchclarity as possible, by walking you through our expansion schedule. Lookingback, our first facility at Michigan,Auburn Hills 1 took 37 months to ramp-up. With each ensuing line, we areimproving our ramp time and we expect that acceleration to continue. Greenville 1a, our thirdline, which commenced production on November 1, is actually a month ahead ofschedule and the estimated ramp time is down to nine months.

We are successfully applying theknowledge we gain from each successive installation. This is a critical area whereMark's operating expertise will have an immediate impact on helping improve ourperformance.

Our goal is to achieve a materialacceleration in the time it takes to ramp a new line. As with any manufacturingcompany, there is a normal penalty that hits the gross margin when we ramp-up anew line. At present, we feel it more because each 30 megawatt line we have isa significant addition to our current capacity, but that impact on the combinedgross margin will decrease overtime as our total capacity increases.

Based on this schedule, we expectto have 148 megawatts of nameplate capacity by the end of June 2008, 178megawatts by the end of December 2008 and at least 300 megawatts by the end ofDecember 2010.

As you look at Slide 8, you cansee that Auburn Hills 1 has been in production since Q3 of fiscal 2003. It took37 months to fully ramp our first slide. As an aside, when we talk about ramp,we are talking about the moment the manufacturing line is placed in production.

Further as a rule of thumb, oncea 30 megawatts line starts to ramp we expect to produce two to three megawattsin the first quarter, three to five megawatts in the second quarter, five to sevenmegawatts in the third, with a line targeted to produce at a rate of 7.5megawatts per quarter at the end of nine-month ramp.

Greenville 1a, which just went intoproduction on November 1 will take about nine months to ramp-up, compared toabout 13 months at Auburn Hills 2. Greenville1b is expected to go into production in Q3 of fiscal 2008. Greenville2a, which is expected to start production in Q4 of fiscal 2008 is expected tosee ramp time drop to 8 months, and we anticipate that Greenville 2b will have a ramp time of just sevenmonths.

In terms of capital cost perline, we remain on-track for a 5% to 10% reduction for each Greenville line. Clearly, we haveopportunities to improve our capital costs further.

Now, let me spend a few minuteson our gross margins. While we expect both, Auburn Hills 1 and Auburn Hills 2to maintain margins above 20% in the second quarter, we expect our totalblended gross margin to be in the 15% to 16% range in the second quarter, dueto several factors.

First, as I just explained, theramp-up of Greenville1a will begin to hit gross margins. Second, Auburn Hills 2 is in the finalmonths of its 13-month ramp-up. From an operations standpoint, ramp-ups are notlinear as most efficiencies come towards the end. Finally, the fiscal secondquarter normally has one less week of production, due to routine year-endmaintenance.

While we plan to bring anadditional 60 megawatts on line in fiscal Q3 and Q4, we plan to offset themargin impact with a cost reduction and operations improvement initiatives.This will allow us to reach 21% to 23% gross margin in fiscal Q4, and 25%longer term.

As you can see in Slide 9, we aregoing from a 15% to 16% gross margin to 25% gross margin, roughly through one-thirdimprovement in yield and throughput, one-third through raw material and laborcost savings, with the remaining one-third through higher production efficiencyand other initiatives.

These cost reduction initiativesare expected to mitigate the impact of future ramp-up. Strong customer demandsfrom both new and repeat USand global customers reinforces the confidence we have in our previous guidancefor fiscal 2008.

We expect total revenues of $220million to $245 million, but the full year sales of Solar products to be $205million to $225 million. For the second quarter, we expect total company revenuesto be $50 million to $55 million, and solar products sales of approximately $45million to $49 million.

Now, let me turn the call over toMark. Mark?

Mark Morelli

Thank you, Sanjeev. Before wetake some questions, I want to follow-up on some earlier comments by providing someclarity on our actions looking forward.

First, we will achieveprofitability by June 2008, the end of this fiscal year. This is a veryimportant milestone for the Company and I am engaging the team everyday, at alllevels, to ensure that we get there and we stay there. We've already discussedon this call, some of the key activities that are underway, like acceleratingour topline growth, improving manufacturing operations and reducing expenses. Putsimply, we have to sell more and spend less and we're making significantprogress in both areas.

Next, achieving 300 megawatts of nameplatecapacity in 2010 is important milestone, but it's not our end goal. Theimportant takeaway is that we are on-track to hit previously set targets. We'realso evaluating a more aggressive ramp. Strong demand is validating the proven advantagesof our products. We want to grow to meet the needs of this rapidly expanding rooftopmarket.

Part of the foundation for thisgrowth will be creating the operational excellence that I discussed earlier andI have assumed responsibility for Uni-Solar operations to ensure that weperform better matching the yield, throughput and cost metrics we haveestablished. Combining these activities with our cost reduction initiatives inour new strategic marketing efforts creates the right mix for a broaderexpansion.

Finally, our solar laminates willbe part of a system that achieves greater parity. Our laminates are attractivenow, especially in rooftop applications, our target market. But theopportunities for laminates are near limitless as we bring the costs down to apoint where electricity competes better with grid pricing. That's our goal.

I am excited about ouropportunities for this fiscal year and beyond. We are making the right steps toaccurately manage the business to reach near-term profitability and product coursefor longer term success. I hope you share my enthusiasm and we appreciate yourinterest in ECD.

We are happy to take yourquestions, operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions)Your first question comes from the line of Sanjay Shrestha with Lazard CapitalMarkets.

Sanjay Shrestha - Lazard Capital Markets

Great. Thank you. Good morningguys. First of all, thank you for a lot of detail here. Just first question,Mark, you talked about how you are taking over the operational aspects ofUni-Solar, and obviously, with your UTC experience from an operationalstandpoint, can you get into some more detail in terms of what are some of thesteps that you are taking on the near-term basis as well as some of the plansthat you have laid out on a long-term basis to, sort of, get to that point thatyou really reiterated about getting to that profitability by Q4 of '08 fiscalyear and maintaining it, and growing it from there?

Mark Morelli

Absolutely, we're transformingthis company from R&D company to a manufacturing and performances orientedcompany. And there is lot of low hanging fruit, I can tell you. In particular,there is really two areas that we've moved very quickly on.

The first was establishing metricdriven culture; really measuring the right things in the factory and we'reseeing pretty good progress on that. We quickly diagnosed some of the issuesthat we had. And I am happy to report, in October we see some pretty goodnumbers coming out of the factory. And it's just really generating the rightsense of urgency and the right visibility.

The second issue is reallyputting the right people on the right jobs. We've got fantastic talents here inECD, but it's interesting because folks had been gravitating towards reallynon-critical areas. And by really putting this right talent in the right areas,we have also seen some pretty good traction. In fact, that's how we addressedour problems that we had, that we spoke about in Auburn Hills 1 and thatmachine is also running quite well as of October.

In terms of looking forward andgetting to that part of your question, Sanjay, we see really opportunities tooutsource a little bit better than what we've done. As an example, we have airscrubber which is typical part of the factory that really makes sure you don'temit any particulate and it's interesting because part of our cultural here isnot invented here culture. So folks were actually developing their own productto scrub the air. Obviously, that's not where we want to put our criticaltalent. We can outsource that better and deploy those folks to that criticaltechnologies expertise on running our plants better and that's in fact, what wehave done.

Sanjay Shrestha - Lazard Capital Markets

Got it. That's great. And just aquick follow-up then. Guys, you talked about getting to that gross margin bythe June '08 timeframe of 21% to 23%, and longer term on 25%. But I have got toimagine, that's based on today's plan, and the second thing on that is, I takeit that in that Q4 guidance or the range that will provide it, that doesinclude the ramp-up costs. So to get to that 25%, it's not like you got toreinvent the wheel here. If you were to continue to execute on your cost-outstrategy and outsourcing strategy, you have a potential to actually get higherthan that.

Mark Morelli

Absolutely, 25% is a goodstarting point for us. Now, this is a company where we really have to establishsome credibility. Let's set our targets, let's hit those targets. We have allthe right technology, the people, the process in place. We have pretty goodvisibility on how we get there. And once we get there, then we'll readjust accordingly.

Sanjay Shrestha - Lazard Capital Markets

Got it. And one last question,then I will hop back in the queue. The comment that you mentioned aboutCobasys, so obviously, you guys are in negotiation with Chevron technologyventures at this point in time and we are, sort of, at the November, almost atmiddle of November and that's something that by the end of -- is that by theend of this calendar year or end of fiscal year that something has to happen?

Mark Morelli

Well, we are pushing for a very near-termresolution to this in a matter of weeks. This is not something that we want tosee drag on.

Sanjay Shrestha - Lazard Capital Markets

Okay.

Mark Morelli

We are committed for aself-funding model here and we're optimistic we can achieve it.

Sanjay Shrestha - Lazard Capital Markets

Terrific. That's great. Thanks alot guys.

Operator

Your next question comes from theline of Jesse Pichel with Piper Jaffray.

Jesse Pichel - Piper Jaffray

Hi. Good afternoon. Congratulationson the ramp. Just conceptually, First Solar last night announced its intentionto adjust the utility market as a solution for our past quarters. Have youthought about becoming a solution for utilities with perhaps a rooftop solutionfor utility customers? Could you comment on that?

Mark Morelli

Part of our marketing strategy toaddress the rooftop market is to really look at the countries where we've got alot of rooftop market growth. That is, Italy, France, South Korea andCalifornia, and hopefully, Spain going forward, as they get more out of theground now and we see that more of a better next step.

To address your question morespecifically, there, we've brought on board a gentleman with a marketingbackground. He has worked with McKenzie in the energy practice and for utilities.We see this as a really good opportunity going forward.

Jesse Pichel - Piper Jaffray

That's great. And could youdiscuss what you think is the critical factor there for cost reductions on ago-forward basis. Is there something that we can look out there, like stainlesssteel or encapsulins or CapEx is being the biggest driver there, for apotential upside to your gross margin targets?

Mark Morelli

Yeah. I mean that's a goodquestion, because as we look at our aggressive goals to get the grid parity,you can think about this as about a $6 per watt selling price and the biggest-- half of that will come out of the channel or downstream costs, both theinstallation, the balance of sales, the invertors.

And the other half is essentiallyour selling price, and the biggest piece of that getting the grid parity isreally for us to reduce our laminate pricing and to get down to our targets forthe laminate pricing, about half of that is going to come through materials. Andthat half through materials is really both efficiency improvement, to get ourconversion efficiency up and we're happy to report some traction on that.

You may remember in the lastphone call, we were talking about launching a 144 watt laminate. That actuallymeans a conversion efficiency of 8% to 8.5%. And we're happy to report thatwe've launched that product line. So we see some traction on the conversion andefficiency side.

So to answer your questionspecifically, we see some runway on the conversion efficiency with existing technologyto go from 8.5% to 10% is our goal and we think that's achievable. And then,the other aspect is the material costs side too, which I think you directly alludedto. And in that case, we are outsourcing to a number of other sheet metalsuppliers.

There is also a fairly expensivecomponent, essentially it's our grid wire which is a silver-plated grid wirethat we have as a single source right now. And we are currently getting othersuppliers online for the grid wire. And believe it or not, we use a lot ofpolymers in our technology and we use fairly sophisticated distribution channelto obtain our polymers. And we are currently breaking that down by sourcingmore directly on that.

So we're spending a lot of timein this effort, we've really invigorated our focus on how we get to grid parity.And I think we'll just have to update you on how we go.

Jesse Pichel - Piper Jaffray

Thanks for that answer, and if Icould just hit in one more. As you said, you are thinking about capacityexpansion beyond what's been announced and I think you have alluded to that onthis call. Do you suspect that the liquidation activities of Cobasys and Ovonyxplus margin improvement could allow you to self-fund further expansion or is ita little too early to tell?

Mark Morelli

Well, it's little early to makecomments on that directly, but let me speak to what I think is a reallyimportant issue for us. And that is, how we further bring down our investedcapital cost. We need to increase our return on invested capital and we arelooking at all activities to do that. One, by either selling other assets mightbe ways that we would fund that expansion but also by trimming back on how muchour capital costs are effectively, in bringing that down, we simply can alsoimprove our return on invested capital.

Operator

Your next question comes from theline of Paul Clegg with Jefferies.

Paul Clegg - Jefferies

Thanks guys for all of the detailthis quarter. I reiterate everybody else's comment on that. I was wondering ifyou could talk a little bit about the directional moves in ASPs, since we haven'treally given the same level of detail that we gave this quarter. Can you talk alittle bit about how they moved over this quarter and maybe give some color onwhere you expect to see the move over the next couple of quarters?

Mark Morelli

We're happy to report that areASPs are holding strong. They have actually increased a little bit recently andwe expect that they will actually go down very slightly, maybe 3% in the futureand let explain why. It's not really because we're selling at lower grossmargins, it's because we're dropping our frame product line that we spoke abouta little bit earlier. This is a higher average selling price but much lowergross margin product line. So as we drop that product line, we'll actuallyenhance our gross margins.

Paul Clegg - Jefferies

Okay. And on the Solar side ofthe business, just a detail question, what percentage of your installationswould you say require a light weight module versus those where you are sellingmore against the crystalline, silicon or other thin-film module just based onmore of a kilowatt hour equation?

Mark Morelli

Well, the folks do value lightweight and our product from an ease of installation perspective, as well asmany of the roofs that may go in, folks don't want to add to the structure ofthat roof as well. It's a hard answer for us to understand exactly but we canspeak to it, maybe more in terms of an opportunity. And we know that about athird of the very large rooftop market is a low, low baring roof marketplace. Sothat's a very significant part of the market.

Operator

Your next question comes from theline of Steve O'Rourke with Deutsche Bank.

Steve O'Rourke - Deutsche Bank

Thank you, good morning. Mark youmentioned that metrics are already beginning to look better in October. Can youspeak a bit about what you've implemented very quickly here, and can you helpus quantify, kind of, how much better they look month-over-month and how weshould expect that to trend?

Mark Morelli

Sure. I'll give you very easyanswer to that question. It's about yield and our throughput and there is amany breakdown metrics that you can see by line. But obviously, if you hitthose two a lot goes in to that. In particular in Auburn Hills 1 themaintenance problems that we are having, is really related to our yield issue. Andspecifically there, we've doubled the yield in Auburn Hills 1 from September toOctober. And this is really by getting the right folks to put in place theright preventive maintenance program there and it seems to be working quitewell.

Steve O'Rourke - Deutsche Bank

Fair enough. And you spoke also aboutgoing to a 10% conversion efficiency products as a longer term kind of goal. Doesthat require a significant change to the sales structure of the product?

Mark Morelli

No, it doesn't. It really involvesno technology invention there whatsoever. It's doing more of what we did as anexample this quarter to improve our conversion efficiency.

Operator

The next question comes from theline of Patrick Forkin with Tejas Securities.

Patrick Forkin - Tejas Securities

Good morning. Mark, I want to goback to your comment about exploring a more aggressive ramp and I assume that'sbased on two things your competitive assessment of Uni-Solar's place in therooftop market and the various gaining factors associated with production. Iwonder if you could weigh, I would really like to hear your assessment ofUni-Solar's competitive place in that rooftop market and balance that againstthe hurdles that you may have in on the production side.

Mark Morelli

Absolutely, it's important for meto start off by saying that we are not taking our eye of the ball when we thinkabout ramp. We are very seriously committed to making sure that both ourday-to-day operations and our commitment out to ramps of 178 megawattsabsolutely stay on force. So there is no distraction there.

However, at the same time, wecan't ignore the fact that we are in a very large market opportunity with anexcellent product which has a very differentiated place for selling ontorooftops.

Why can we say that? Well, we'reselling out our pipeline at pretty good average selling prices, so I think thefacts speak for themselves. In terms of how we get there, we just arere-formulating what is really the right approach to be able to capitalize onthis opportunity.

Patrick Forkin - Tejas Securities

Okay. Very good. And then,Sanjeev, on Cobasys, it's my recollection that you really don't have anythingon the balance sheet so we don't have any balance sheet exposure there?

Sanjeev Kumar

That's correct, Pat. Ourinvestment at Cobasys is recorded as zero since they contributed our technology.So we do not have any significant exposure to as such impairment or write-down.

Operator

The next question comes from theline of Mark Manley with Natixis.

Mark Manley - Natixis

Hi. Just on the production,having production growth faster, can you give me a sense of what the factorsare, that go into that decision? You alluded that you might be able to get to300 megawatts or beyond that quicker?

Mark Morelli

Absolutely. One of those is yourcapital spend. How much do we think we need to spend for every additionalmegawatt, we may think about, how we leverage government subsidies there, both,not only in Michigan but obviously beyond and how we can get them, othergovernments to help buy down our capital costs?

Another factor into thosedecisions is who are we going to look at as major outsourcing partners for moreturn key solutions? And this is what I am talking about, perhaps, more abovethe 300 megawatts.

I think other folks have shownthat the models here worked quite well. We have a bit of a non-invented here syndrome.And I think we can manage ourselves the way we've got organized to that 300megawatt point. But going beyond that, to take advantage of this valueproposition we have, we really have to do some more formulation and a littlebit more serious planning to do that.

Mark Manley - Natixis

And then, what would drive that,those decisions I mean, obviously it's a market but any other factors?

Mark Morelli

Yeah. Return on invested capitalwill drive that and obviously shareholder value.

Operator

(Operator Instructions) Your nextquestion comes from the line of Bob Stone with Cowen and Company.

Bob Stone - Cowen and Company

Hi, guys. I know everyone elsesaid it but let me repeat, great job on the improved disclosures.

Mark Morelli

Thank you.

Bob Stone - Cowen and Company

A question on the pricing, whendo you expect to sell out of the remaining frames materials?

Mark Morelli

We do have some inventory onframe materials and we'll hang onto those, but obviously, the way to do this isto raise price. And there will be some customers that buy at higher prices andI have no problem selling our inventory at higher prices. So I am not reallyconcerned about that inventory.

Bob Stone - Cowen and Company

I am just trying to get a senseof, sort of, how much inventory you have?

Mark Morelli

It's not significant. Just as anexample, our sales last quarter we had about 10% of our overall sales. And we'veseen actually, this frame module go down in the past several months. And Ithink this is a real turning point for our company because if you think aboutit we really have to be recognized by folks as a Solar Company. So we have tolook like a solar module.

And a real turning point here isthat now, by getting rid of this product line, it actually turns the page to saypeople are interested in buying PV laminates and its doesn't have to look likea module, and take advantages of those are unique differentiators.

Operator

Your next question comes from theline of Michael Molnar with Goldman Sachs.

Michael Molnar - Goldman Sachs

Hi. Good morning, everyone.

Mark Morelli

Good morning

Michael Molnar - Goldman Sachs

Just a quick question on costs. Notto be a broken record, but thanks again for the disclosure. Obviously, you havesome goals out there. I am wondering if you can give some comments on goals,longer term goals on where you think costs per watt could go. I guess my mathis correct you had about 249, I know that number bounces around a bit. But wherecould you see that, when you talk about grid parity where do you see cost perwatt going?

Mark Morelli

We see our cost per watt gettingdown to about $1.10 by 2012 and we see that primarily due to some of the thingsthat we just spoke about with Jesse. We got to take about half of that out ofour material costs and including into that is our efficiency about anotherquarter to burden and the other according to labor.

Michael Molnar - Goldman Sachs

Got it. And when you talk aboutbetter ROI to your end customers due to the technology capturing more of the lightspectrum, I just want to make sure I understand, if you had to compare that,are you talking about that advantage over crystalline or crystalline and otherthin-films like cadmium telluride as well?

Mark Morelli

It is both over crystalline. Whatwe showed you in the chart today what based on crystalline so that 15% to 20%.We do have an advantage over other thin-films such as cadmium telluride as well.And more importantly, we have to do this on a case-by-case basis.

There is actually situationswhere we can get above that 20% and obviously, situations maybe down at 10%,but in aggregate we see about 15% to 20% advantage depending on where you are,the light conditions, that where we can take advantage of our uniqueproprietary technology.

Operator

Your next question comes from theline of Colin Rusch with Broadpoint Capital.

Colin Rusch - Broadpoint Capital

Good morning. Broadpoint Capitalused to be First Albany Capital. And my question is about customer mix. Are youseeing that change over the next couple of years as you bring more productiononline and how so?

Mark Morelli

I am sorry. I didn't hear thefirst part of your sentence.

Colin Rusch - Broadpoint Capital

Okay. Your customer mix, do yousee that shift in at all? Are you expecting to add new customers little deeperinto with couple of roofing customers? Could you just comment on that?

Mark Morelli

Yeah. We do see some changesthere happening to our customer mix. So we have very good traction with acouple roofing companies right now. We expect that that will probably continue.We also have some very good traction with some national account pay customersthat we just spoke about with GM. And we also hope to see better traction withutilities.

Colin Rusch - Broadpoint Capital

Great. And could you talk alittle bit about capturing the value of the actual roofing process, are youguys going to be able to capture any of that, with the roofing material if youtake any of that value with you, in your sales?

Mark Morelli

Well, we see our product as areal game changer working with the roofing market, because we are really theonly proven reliable product on the market right now that can seamlesslyintegrate with the roof. So we are exploring all opportunities to enjoy channelopportunities there appropriately.

Operator

Your next question comes from theline of Mark Manley with Natixis.

Mark Manley - Natixis

Sorry, just one follow-up on yourbuilding integrated product in Californiamarket. You are waiting for UL approval on that. Are you still pursuing that?

Mark Morelli

Yes, we are. It's something thatwe think is a great opportunity longer term, as a residential market. However,we are really, primarily focused selling right now on our commercial rooftopapplication because its out there in the marketplace. And when we get thatfully to the pipeline, we'll launch it accordingly.

Mark Manley - Natixis

Okay. Thank you.

Operator

Your next question comes from theline of Jesse Pichel with Piper Jaffray. Mr. Pichel, your line is open.

Jesse Pichel - Piper Jaffray

My questions have been answered. Thankyou.

Operator

Your next question comes from theline of Bob Stone with Cowen and Company.

Bob Stone - Cowen and Company

Hi. A couple of follow-ups, if Imay. You mentioned, if I heard you correctly, the yield doubled followingresolutions and maintenance issues of Auburn Hills 1. Could you clarify exactlyhow that's measured, doubling seems like an extraordinarily large change?

Mark Morelli

Also, one way to look at that Robis that yield wasn't very good out of Auburn Hills 1. So the issue that wemeasure is that the yield is measured on a percentage of really very goodproducts to the percentage of not so good products. So we were producingproducts but not at the tight grade that is really important there.

So specifically, what's happenedand I can describe to you more of the soft-line, but the short answer to thisproblem is that Auburn Hills 1 has gas nozzles that are part of the chamberthat were really a first generation design.

When we redesigned Auburn Hills 2and Greenville,which are essentially clones of each other, they reposition these gas nozzlesdifferently. And so, through by working on that machine, we've been able tocome out the appropriate preventive maintenance schedules for these gas nozzles,which with some testing immediately improve that yield.

What we are going to do aboutthat is we are babysitting the machine to make sure it produces the yield thatwe need out of it, which is doing pretty well at the moment. And we have a planto go back and retrofit those gas nozzles to look like Auburn Hills 2 andwhat's going in the Greenvillemachines now, and that's going to happen in the regularly scheduled maintenancedown time this quarter.

Bob Stone - Cowen and Company

Okay. So could you breakout wherethe megawatts of productions split between Auburn Hills 1 and 2, roughly?

Mark Morelli

Yes, sure. Sanjeev?

Sanjeev Kumar

Yes, Rob, Auburn Hills 1 producedat about five to six megawatts that have been coming from Auburn Hills 2.

Operator

Your next question comes from theline of Steve O'Rourke with Deutsche Bank.

Steve O'Rourke - Deutsche Bank

Thank you. Just a follow-up. Can yougive us an idea of the milestones you are looking for over the next severalquarters to gauge the success of your Ovonyx memory business?

Mark Morelli

In Ovonyx, we are cautiouslyoptimistic about Ovonyx. The real activity is in hands of our licensed partnersand they are actively developing products. It's tough for us to comment on thatbecause they obviously keep whatever progress is going on there quite close tothemselves. So, I think it's very difficult to answer.

What we do measure, obviously, ishow much activity we have with them and how much patents they actually release?Obviously, patents are public information but they don't come visible to about18 months after they have been filed for. So it's tough for folks on theoutside to gauge that. So the milestones that we're currently looking at is, isjust working actively with our licensed partners as they bring their productsto market.

Steve O'Rourke - Deutsche Bank

If I can ask you slightlydifferently. Two of your licensees, particularly, Intel and Samsung have madecomments over the past several quarters about when they anticipate some sort ofpilot production. Have you seen activity levels from your prospected increasein that regard or will you not see that?

Mark Morelli

Well, we see activity by workingwith them. We have engineers that that's what they are under license agreementto do to work with these channel partners. And I can tell you that they arevery busy working with our licensing. So there is a tremendous amount ofactivity there.

Operator

(Operator Instructions) Your nextquestion comes from the line of James Williams.

Mark Morelli

Next question please.

Operator

Your next question comes from theline of [Maxwell Vanderwal] with UBS.

Maxwell Vanderwal - UBS

Good morning. My question is justa little more clarification, in the residential single-product, where you aretalking about being able to produce it by the end of '07. I am just wondering,is that still on line, who are you planning to use distribute it and do youhave any data, yet as to wind tolerance?

Mark Morelli

Yeah. Residential product, Iwould say is still in a development phase. We are currently going under UL testingof that product line and at the moment, we are focused on getting that productout, I can't really elaborate further. But part of the issue too, is reallydeveloping a sound distribution strategy for our residential product as well.

And at the moment we are verycaptivated off the strong demand of the commercial, which is essentially toturnout our product line. So we're going to come forward I think with furtherplans and details on the residential product line when we have it.

Maxwell Vanderwal - UBS

All right. Just as business sideI can tell you, the client constantly keep trying to find out what's going onthe residential. So there is few junctures in that product I am sure you areaware.

Mark Morelli

Yeah. We appreciate that. Thank you.

Operator

Your next question comes from theline of Bob Stone with Cowen and Company.

Bob Stone - Cowen and Company

Hi. One last question on theaccelerating ramps schedule, can you provide any color details in terms ofwhat's changing, what are you doing differently that gives you confidence andshortening the ramp interval?

Mark Morelli

Part of our shortening the rampinterval really goes after understanding the mistakes that we have made in someof the earlier designs. What the team tracks very carefully is some of theissues that have been barriers to obtain some of our earlier ramp targets. And keepin mind, there has been a tremendous amount of learning in Auburn Hills 1. And outof that, we have dramatically shortened a ramp time out of Auburn Hills 2, butit's not nearly where we need to be.

So every learning cycle that wehave the team is studying that obviously, through metrics, [pareto's], what's reallydriven the time, but it's very important to channel this learning into thisramps schedule. And I have a lot more confidence because I have spent time withthis team. I am confident that they understand some of the issues that they runup again, example is this nozzle that I described to you, just one minorexample.

And I would say that probably themost important part of this is the Auburn Hills 2, excuse me the Greenville machines are amodified clone of the Auburn Hills 2 based on our learning's.

Sanjeev Kumar

Bob, let me also clarify a pointI made earlier on the production on Auburn Hills 1 and 2. We really look atAuburn Hills 1 and 2 as one campus and as such we try to utilize efficiencieson both of the plants depending upon what's happening on the ramp-up. And theproduction number that I gave earlier, I wanted to put it in that context, weclearly have issues in Auburn Hills 1 that Mark alluded to, but internally, welook at the production at Auburn Hills 1 and 2 as one single campus. So, wegenerally don't provide the breakdown of the two plants.

Operator

At this time, there are nofurther questions.

Mark Morelli

Well, thank you for joining thecall today. Hopefully, you now have a better understanding at what we're doingto capture this tremendous opportunity that I see at ECD. We thank you for yourinterest and good day.

Operator

Thank you. This concludes today'sconference call. You may now disconnect.

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